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Canadian National Railway Co  (NYSE:CNI)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the CN Third Quarter 2018 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.

Paul Butcher -- Vice President, Investor Relations

All right. Thank you, Michael. Good afternoon, everyone, and thank you for joining us for CN's third quarter 2018 earnings call. I would like to remind you about the comments already made regarding forward-looking statements. With me today is J J Ruest, our President and Chief Executive Officer; Mike Cory, our Executive Vice President and Chief Operating Officer; and Ghislain Houle, our Executive Vice President and Chief Financial Officer. (Operator Instructions)

It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. J J Ruest.

Jean-Jacques Ruest -- President and Chief Executive Officer

Well, thank you, Paul, and good afternoon, everyone. Welcome to our earning call, and I'm honored to be here with my colleague Paul, Ghislain and Mike, presenting our third quarter result.

We produced adjusted diluted EPS growth of 15% with an operating ratio of 59.5%. We delivered solid top line growth with revenue up 14%. We generated nearly CAD1.9 billion of free cash after three quarters. We also made progress in our strategic agenda. We expanded our capacity to accommodate the pipeline of growth opportunities that we have already identified. We're building our safety culture and we are bringing pragmatic focus to the deployment of technology in our operation. We are also assessing our management team to ensure that the right people with the right skill sets are in the right job and that we do not have more layers in what we need all to drive our agenda forward with a nimble and transformative team. We had an acceptable July, a solid August and a challenging September as we were completing many construction projects under heavy demand on the very busy western mainline corridor.

I will now provide an update on our top line, followed by Mike's overview of our network operation, and Ghislain will follow with a review of our financial results and outlook.

Demand remain strong, and the outlook for the remaining of the year is solid and broad-based. Volume, as expressed in revenue ton mile, was up 4.4%. Same-store price in the third quarter was up a solid 4.5%, one of our best quarters in years. Core pricing from recent renewal concluded in the last 90 days, average about 4.6%. Our average length of haul was up 1% and both the cent per RTM and the revenue per carload were up low double-digit.

Same-store price, as you remember, is a backward-looking measure of price in the last quarter full book of business. Core pricing from recently completed renewal is a forward-looking measure of price trend from the mix of deals concluded in the last 90 days. Most of the revenue growth in our third quarter came in from our rail-centric supply chain, which include merchandise and bulk.

As frac sand and lumber volume declined in September, we took the opportunity to on-board more crude business, which crude revenue was up CAD80 million compared to last year. As the spread between world crude price and Western Canada Select has widened to a record level, more Canadian crude exporters are using the CN network.

Other refined products revenue was also up 16%. Our lumber and panel revenue grew by 17%, driven by US housing starts and by export demand. Grain revenue in total was up by CAD64 million or 14% and those carload grew by 9% versus last year. Canadian grain export tonnage at CN is ahead of last year, but September demand was disappointing due to snowfall during the harvest time.

US grain revenue was up 22% in Q3 with stronger US Gulf export. Overall coal revenue grew by 25%, mainly from Midwest thermal coal export to Europe via Louisiana.

Lastly, in our consumer products supply chain, the intermodal segment revenue grew by 8% versus the same period last year. It was mainly from stronger overseas traffic via the Port of Prince Rupert and via the Port of Montreal where we have a news service from Maersk. Domestic results were up 7%. It was up 70% from solid pricing across the customer base. Automotive are soft.

I'd like to conclude just my commercial comment review. On pricing, trend remains solid, reflecting high capacity. For the fourth quarter, we are aiming for improving length of haul, improving revenue per carload, and improving cent per RTM. On volume, as of October 22nd to-date, our revenue ton mile volume have improved to 9% and as market volatilities are shaking out, by that I mean lumber and sand being down, crude and coal being up, and as we complete our Western Canadian construction, Q4 volume should be solid versus last year.

I will now turn it to Mike. Mike will give you a sense of where we stand on our operation. Mike?

Mike Cory -- Executive Vice President and Chief Operating Officer

Thank you, J J. And I'd first, of course, like to start by thanking our entire operations team for the work they did this quarter and especially on our construction projects. Our dedicated team of railroaders have delivered over 80% of the capacity projects that we have planned for this year, and delivering these capital programs has been a significant challenge. The engineering team not only needed to deliver one of the biggest capital programs in history, but they also delivered the majority of our basic capital programs in the busiest part of our network. They did this with our transportation team, who gave them time to work despite having to deal with record volumes in those corridors. So, both John Orr and the transportation team and our new VP of Engineering, Raj Gupta, had a big task and their teams delivered.

They have 27 projects to deliver and 22 were completed. The majority of the projects are in our growing Western Canadian corridor. Our delivery of the project south of Winnipeg took place this summer due to an earlier start with more favorable weather. Our Western Canadian projects over the key Edmonton to Winnipeg corridor are just coming to a close with most of them being accomplished by the end of the first week of October. The five remaining projects are spread out to support coal in Northern BC and crude in our Southern region, as well as yard enhancements in both Winnipeg and Edmonton.

Let me also provide you with an update on the other components of our resource plan, including labor and equipment. Our employee training plan was in full gear again this quarter. We hired close to 700 new conductor trainees and as well we continue to train locomotive engineers. 480 more conductor trainees that were hired earlier this year qualified as conductors. Our run rate for hiring transportation employees is now normalizing. We also continued to hire for both mechanical and engineering employees in the quarter. Going forward, you would expect hiring to be normalize for this group as well.

On the locomotive front, we have brought on 30 of the 60 locomotives planned for this year with the balance scheduled for this quarter. We are returning 24 of the leased locomotives we've brought on. We will be receiving our order of 140 new locomotives for next year starting in January with over half of them expected in the first quarter of 2019.

Just to give you a sense of how this capacity is supporting volume growth, we've had all 10 of the top 10 workload days in CN's history take place in October of this year. Also, for the last seven days, we've seen both speed and train productivity come up 7% higher than in September over the Winnipeg to Edmonton corridor.

As I stated earlier, in describing the accomplishments of our capacity and maintenance programs, as this work was being completed we continued to move the highest historical volume levels on our network and especially in the portion within Western Canada. Gross ton miles in Q3 were essentially flat versus Q2, and that's when we handled large workload in our history. As you can appreciate, growth does not spread out equally across the network. It's most prevalent in Western Canada, and Q3 growth was more prevalent in one corridor, Edmonton to -- via Winnipeg to Chicago.

In the case of Q3 versus Q2, we saw volume mix and location shift as we temporarily depleted the backlog of commodities available, such as coal and grain from Q2, that are headed to West Coast ports. We also grew more volume from Edmonton going east. As a result of eastward crude growth, our workload expressed in GTMs increased 9% through the Winnipeg to Edmonton corridor, even with the reduction of grain from this corridor during the summer. We also experienced even higher growth in our Winnipeg to Chicago corridor, which saw a 16% increase in GTMs.

During the quarter, our service levels continue to follow Q2 standards. We met all Canadian grain orders each week, moved all available coal in Western Canada, and moved all available frac sand in Wisconsin.

Lastly, we achieved an average on-docked well below 4 days for Western Canadian ports, where we have faced some ongoing challenges in certain terminals.

Looking at the southern region, where we finished all of our targeted capacity projects in Wisconsin in the latter part of the summer, we were able to increase speed and locomotive utilization. We experienced a 6% increase in train velocity and a 5% increase in locomotive utilization in Q3 relative to Q2.

And looking at operations, our train speed was flat overall, as the increase in traffic in the Winnipeg to Edmonton corridor offset improvements we gained through our southern region. This was the primary driver of locomotive utilization and car velocity overall. As well, speed and locomotive productivity improvements in our BC corridors that we experienced during Q2 were temporarily reduced with less coal and grain leaving to the ports. Terminal dwell was essentially flat during the quarter, as we accomplished good work on servicing our customer demand, especially in the Southwest sand. Coal and grain will be a growth opportunity for us going to Prince Rupert, and we expect to see speed and productivity improvement as a result.

On the safety front, we saw a sequential improvement in both FRA injury and accident ratios. As we continue to on-board new employees entering the workforce, our focus is on ensuring we are targeting our safety interventions with them. We continue to see higher yard accidents as a result of these new employees, but over time and through experience gained, we will see improvements in their safety performance. Lastly, on the safety front, our injuries and severity ratio has also come down.

In closing, John and the team are working extremely hard to drive these results. And while we have lots of volume to move, the railroad experience in moving it was second to none. As we stated many times, our ongoing capacity improvement plan is in place to support a long term strategy of growth at low incremental cost. And we have a strong pipeline of opportunities across various segments. While we understand growth can be bumpy and not necessarily even spread, our network reach provides us these growth opportunities and they are clearly a large part of our strategy that we will deliver on.

So, thank you, and over to you, Ghislain.

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Thanks, Mike. I'm very pleased with our strong financial performance in the third quarter. Starting at page 10 of the presentation, I will summarize the key financial highlights of this performance. As J J previously pointed out, revenues for the quarter were up 14% versus last year and slightly under CAD3.7 billion and a new quarterly record for CN. Fuel lag on a year-over-year basis represented a tailwind of CAD13 million or CAD0.01 of EPS, mostly driven by an unfavorable lag last year.

Operating income was slightly under CAD1.5 billion, up CAD113 million or 8% versus last year. Our operating ratio came in at 59.5% or 230 basis points higher than last year. Higher fuel prices accounted for 30 basis point of this entry. Net income stood at CAD1,134 million or CAD176 million higher than last year, which reported diluted earnings per share of CAD1.54 versus CAD1.27 in 2017, up by 21%. Excluding the impact of non-core asset sales in the quarter and the impact of deferred income tax expense from the enactment of a higher state income tax rate in 2017, our adjusted diluted EPS for the quarter was up 15% versus last year. The impact of foreign currency was favorable by approximately CAD26 million on net income or CAD0.04 of EPS in the quarter.

Turning to expenses on page 11. Our operating expenses were up 19% versus last year or slightly CAD2.2 billion, impacted by higher fuel prices, higher labor costs, stronger volumes, and operating metrics that remain below last year's levels. Expressed on a constant currency basis, this represented a 16% increase.

At this point, I will refer to the variances in constant currency. Labor and fringe benefit expenses were CAD707 million, 15% higher than last year. This was mostly the result of higher wages, driven by increased headcount, training cost for new hires and increased pension expense and overtime costs, partly offset by higher capital credits. Purchased services and material expenses were CAD485 million, 12% higher than last year. This was mostly the result of higher repair and maintenance expenses and material costs, partly due to higher volumes.

Fuel expense came in at CAD437 million or 35% higher than last year. Higher fuel prices accounted for CAD83 million of the increase, while higher volumes were CAD11 million unfavorable variance versus 2017. Fuel productivity was unfavorable by 1.7% in the quarter versus last year. Depreciation stood at CAD330 million, 3% higher than last year. This was mostly a function of net asset additions, partly offset by the favorable impact of some depreciation studies. Equipment rents were up 14% versus last year, mostly driven by additional locomotive leases. Finally casualty and other costs were CAD110 million, which was 37% higher than last year, mostly due to higher incident costs.

Now moving to cash on page 12. We generated free cash flow of CAD1,881 million through the end of September. This is CAD440 million lower than 2017, and mostly the result of higher capital expenditures and cash taxes, partly offset by higher net income.

Finally, let me turn to our 2018 financial outlook on page 13. The demand environment remains solid in a number of different sectors, and we continue to see favorable economic conditions in North America, particularly as it relates to consumer confidence. Our resource plan is on track as we continue to on-board new conductors and receiving our order of 16 new locomotives for this year. In addition, we have essentially finalized construction of our infrastructure capacity investment plan. While we now expect RTM growth to be approximately 5% this year compared to our previous assumption of 5% to 7%, overall pricing remains solid backed by our 4.5% same-store price performance in Q3. With this in mind, we reiterate our 2018 financial outlook of delivering adjusted diluted EPS in the range of CAD5.30 to CAD5.45 versus 2017 adjusted diluted EPS of CAD4.99.

On the capital front, we are committed to investing in our business to support safety, service and organic growth. Our capital envelope of 2018 is still expected to be approximately CAD3.5 billion. Furthermore, we continue to reward our shareholders with consistent dividend return and we are completing our current CAD2 billion share buyback program on October 29. I am pleased to announce that our Board of Directors has just approved a new normal course issuer bid program for the repurchase of up to 5.5 million shares for the next three months to be completed by the end of January 2019. The reason for the shorter program is to synchronize the various elements of our guidance, including our shareholder distribution strategy that we will provide on our fourth quarter call next January.

In closing, we remain committed to our agenda and continue to manage the business to deliver sustainable value today and for the long-term. On this note, back to you J J.

Jean-Jacques Ruest -- President and Chief Executive Officer

Well, thank you, guys. And before I turn it over the Q&A, Michael, I would like to add a few wrap-up comments here. We recently ran an internal employee survey and our railroaders are very engaged and strongly behind what needs to get done at CN. We have a good pipeline of organic and inorganic growth opportunities to feed more volume in our network with more profitable rail business on our unit franchise over time. We are investing in the business. We are attracting and retaining crucial talent to execute and we are deploying technology with the aim to drive cost midterm, BOR, and should generate return on invested capital, the ROIC. CN is a supply chain service company with rail as the sacred component of everything we do to be a growth company. Operator, we can now turn it over to Q&A.

Questions and Answers:

Operator

Certainly. (Operator Instructions) And the first question is from Walter Spracklin at RBC. Please go ahead. Your line is now open.

Walter Spracklin -- RBC -- Analyst

Thank you very much. Good afternoon, everyone.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon.

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Good afternoon.

Walter Spracklin -- RBC -- Analyst

So looking at your guidance change, you've moved no to 5% on volume, which for the year -- which would imply a fairly significant increase in rolling the fourth quarter around 13% to get to 5% for the full year and when I add the 4.5% kind of pricing assuming that doesn't change going into the fourth quarter, you've got a nice revenue lift in the fourth quarter but you're holding your guidance constant so just to get to the top end of your EPS, your operating ratio really is not going to seemingly improve at all despite the very strong pricing and the solid volume. I'm just wondering where -- how would you explain the lack of any incremental margin there in terms of getting a better operating ratio on the back of the higher pricing, higher volume in the fourth quarter?

Jean-Jacques Ruest -- President and Chief Executive Officer

So Ghislain, do you want to take the question on the guidance?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah, Walter, thanks for the question. Listen, you're right. I mean, we are reiterating our guidance, where our guidance on volume is 5%. That implies volume growth to your point about 13% in the fourth quarter. I think, we're comfortable with that. I think, right now, as you look our capacity investments are coming online. Mike in his remarks has mentioned that he can see velocity coming in and our cost so far has been slightly higher than what we'd applied, so I think now that's coming online. I think that we started to return some locomotives, we'll continue to do that. And you can expect as we said to the market that our costs are naturally going to come down and you can expect to do that, and that's what's coming. I mean, remember that out of the 27 projects there is 22 that's coming in service. There is still five to go, so that will continue to help and we're comfortable that we're in a very good position to start the winter.

Walter Spracklin -- RBC -- Analyst

Okay. That's my one. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Steve Hansen at Raymond James. Please go ahead. Your line is now open.

Steve Hansen -- Raymond James -- Analyst

Yeah. Good afternoon, guys. Just quickly here on the crude side, which I'm sure be topical. You described a decent pump already in the quarter that you're taking on now in terms of volume. How should we expect that cadence to change through the winter period specifically, and then as we get into spring next year? Should we expect it to run flattish as we get into the deeper winter months or should we expect a ramp rate through winter? Thanks.

Jean-Jacques Ruest -- President and Chief Executive Officer

So Steven, the fourth quarter run rate will be sequentially up in the third quarter. I don't have a very specific guidance as to quarter-by-quarter for next year, but we think next year will be a very solid year for crude by rail, maybe to the point we're seeing there could be the leading railroad within total color for 2019. When it comes to winter, remember what we said in the past, we need -- we've been moving grain business since 1919 and we want to be sure that we do the right thing by those who have been using the railroad network for long, long time and then any available capacity that we would up to spare, we will do it -- offer those to the Canadian crude producers.

Steve Hansen -- Raymond James -- Analyst

Great. Helpful. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Ravi Shanker at Morgan Stanley. Please go ahead. Your line is now open.

Ravi Shanker -- Morgan Stanley -- Analyst

Thanks. Good afternoon, everyone. So we -- or clearly you guys are setting up for a pretty strong environment in 2019, but can you just take us through, maybe, some of the economic sensitivities or the assumptions you have in terms of the growth that comes into fill that pipeline, whether it's Prince Rupert or crude by rail or on the green side? Again, do you feel like this stuff is, again -- I usually regret using the storm, but do you feel like this stuff is in the bag or do you think it's going to depend on, kind of, global growth and US growth staying at current levels?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yes. So nothing is already always in the bag. Is everything -- we are in an industry whose volume is derived from the economy. So we need a strong economy in both in Canada and US, but that might now is look good. And we also need a good commodity market for natural resource like crude, grain, coal, et cetera, et cetera. So some of this strong driver that we have in the line of sight is, for example, Port of Prince Rupert, and I'm talking just not importing and export of container business but also the coal export via Rupert for both thermal coal and nut coal, the one that the new mine that we talked about. More export of wood pellet, wood pellet in two Asian countries and to the England is also on the growth, meaning it's -- we have more production coming online and that production will be going via the west coast mostly via Rupert.

Sand is taking a pause. We have customers -- who actually put his plans in the mothballed in Wisconsin, because of lack of pipeline capacity and some of the drilling area in the US to take out around our crude to market. So when these pipelines are being rebuilt with the current demand, we might see sand coming back sometime next year. We don't know though whether that will be winter time, spring or summer. That's all -- I mean, this is an unknown at this point.

So you have a series of puts and takes. Overall, the Canadian economies is also doing fairly good. So this year we put a big focus on pricing for domestic and global product. Next year with the capacity that we are adding currently as we speak in some of the new restackers, containers, or chassis coming into service in the fourth quarter. When it comes to 2019, we will have the ability to go back in the marketplace on the transcom business to compete more head to head with long-haul trucking. So, it's many, many different things and some are down, lumber right now is in the low, frac sand is actually a year-over-year negative, other things are positive, and what's really key for us is to replenish our capacity and regain our velocity, and basically keep up with our customers' velocity and customers' demand. We are supply chain, so we want to be part of our customer success in an environment where the economy still looks fairly strong.

Ravi Shanker -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Thank you. The next question is from Cherilyn Radbourne at TD Securities. Please go ahead. Your line is now open.

Cherilyn Radbourne -- TD Securities -- Analyst

Thanks very much. Good afternoon. In terms of the intense capital activity that was under way in the third quarter, I'm just curious to what extent the worst is behind us? So, maybe, you can give us a little bit more color on the five remaining projects and just how important they are to the total of 27?

Mike Cory -- Executive Vice President and Chief Operating Officer

Sure, Cherilyn. Hi. It's Mike here. So the five remaining rail and I stated earlier there is a two or three that are up on that BC north line to Rupert that are really there for the core growth and the intermodal growth. The other two are really in our two big yards in Western Canada, Winnipeg and Edmonton. And they have a big impact on how we process cars that are entering that area, that Winnipeg-Edmonton corridor, in such a way that they don't have to stop, they don't have to be staged, because at each end there's -- in Winnipeg, for instance, that's our facility that processes with a hum. And in Edmonton, they are more of a location that accepts a lot of petrochemical commodities outside of crude. So the goal between those two capacity enhancements was to make it so that we would do the work in Winnipeg and Edmonton would be able to not handle the traffic in their yard as much as they had to last winter with the growth, but take it directly into the customer. So that both very crucial for this corridor. And there's one other little piece of double track on that corridor that will be completed in the middle of November as well. That -- because of -- we had this -- some weather issues, J J referred to the snow that stopped or slowed down the harvest. We had the same issues with snow and then some serious rain that basically set us back a couple of weeks with the completion of our projects in the Manitoba and Alberta areas. So, the other -- to my point, the other two big construction projects, Winnipeg and Edmonton, they play a big role on the added capacity in the corridor and the other ones are for growth to BC north.

Cherilyn Radbourne -- TD Securities -- Analyst

Okay. That's my one. Thank you.

Mike Cory -- Executive Vice President and Chief Operating Officer

Yeah.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the Chris Wetherbee at Citi's. Please go ahead. Your line is now open.

Christian Wetherbee -- Citigroup -- Analyst

Hey. Thanks. Good afternoon. J J, I wanted to come back to some of your pricing comments, particularly about the renewals and maybe better understand how much of your book of business was repriced at that 4.6% rate, the renewal rate, in the third quarter? And then, maybe, how you think about, maybe, the next couple of quarters? I guess, I'm just trying to get a sense of the waiting of the quarters and the time of the year, we should think about that. Obviously, the trajectory is quite strong. I'm trying to get a sense of what maybe the outlook for 2019 could be?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yes. Chris, we renew contract all the time and we have a strategy of seeing to have the book of business at regular turns, so we can upgrade the new deal on the better and better basis. My comment about core pricing was really for the last 90 days and the last 90 days may not be the busiest renewal time, typically the biggest renewal time will be when you get to the end of the calendar year or bigger than the following years, so you need to keep going that into account. So I think -- just thinking some of our total book of business turn maybe on average every three years and then there's obviously some variances from quarter-to-quarter. I don't know, if that's help. That's (multiple speakers)

Christian Wetherbee -- Citigroup -- Analyst

It is helpful. Just one point of clarification, if I could. When you think about that, that pace of activity, do you feel confident in sort of the run rate of the renewals as you get into that busier period of time as that seem like there's enough demand in the markets to be able to generate good activity during that period?

Jean-Jacques Ruest -- President and Chief Executive Officer

I think the core pricing that we had in the last quarter was not so much. The key driver is, remember, the market was still very tight, less tight in the last quarter. We didn't have quite the capacity required in ourselves. The truck drivers capacity was still tight. I think, by and large, we're in the economy where demand is strong enough and transportation companies for a different reason, in the case of CN, because of our network was not be built. In a case of the over the road is, all you know -- the age old issues of driver capacity. That's really what creates the pricing environment. So whatever you're renewing, a lot of deal or few deal, what you're renewing is -- what even more relevant is the environment and the environment has been conducive to -- for higher value for the capacity yet available for the marketplace.

Christian Wetherbee -- Citigroup -- Analyst

Okay. That's helpful. Thanks for the time. I appreciate it.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Chris.

Operator

Thank you. The next question is from Scott Group at Wolfe Research. Please go ahead. Your line is now open.

Scott Group -- Wolfe Research -- Analyst

Hey, thanks. Afternoon guys.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good Afternoon.

Scott Group -- Wolfe Research -- Analyst

If we look at the last few weeks, and I don't want to get carried about by last weeks, but intermodal auto forest products volumes, or RTMs, are all down and those are all sort of consumer facing end-markets. How do you think about the weakness there? Is it temporary, is it -- are there timing issues, because of tariffs? And that's impacting some of the intermodal or how do you look at this and not get a little bit worried about some of the economic outlook?

Mike Cory -- Executive Vice President and Chief Operating Officer

Yeah. So I think this is where you -- Scott, when you get into a specific railroad resolve for a very short period of time, like you described, you need to take that, that's one point of reference. But in the broader economy, we feel very confident that even though people may not be buying as many finished vehicles as they've done last year, that's a fact, the overall consumer consumption in there and how much that drives traffic is still very good. So I think I mentioned in my comments that on the domestic container business, for example, this year, because of capacity, we decided to focus on price. And, therefore, obviously, we didn't necessarily go and went out and exploited what the over the road market -- when made available for railroad like for us.

But as a service comeback, our capacity on the network come back and as I mentioned in my comment as we have more reach factors, chassis and winter containers and dry containers coming in service in the fourth quarter, we will be able to be -- hopefully be able to do both, slightly better price, but also compete with long haul business, especially with the truck market, where the driver shortage or the driver situation hasn't really improved. So, I would say, in our intermodal business is not a reflection of the trade issues between Canada and US, or trade issues with US and China, it's reflective of the position that we're in right now, which we are quickly regaining strength and capacity to be able to get back in the marketplace that we see and historically is capable of doing.

Scott Group -- Wolfe Research -- Analyst

And you don't think there's been pull forward then lag and then maybe another pull forward coming related to tariffs as it relates to international intermodal?

Jean-Jacques Ruest -- President and Chief Executive Officer

My view is definitely there has been pull forward. We saw the pull forward -- we got the sense that we had in the earlier peak this year, but the so-called fall peak came in earlier, because people could extend their factories, producer back in Asia, back in China specifically was able to ship the product ahead of duty coming in or ahead of the potential or bigger duty coming in. That was a factor. The next phase of what are you talking about has to do with whether or not the US consumer is still consuming strong and even more what people thought would be in last July and August. So that fall peak might be extended on the back of strong -- demand is strong and there's still potential tariff coming in at the end of the year. So there is definitely a factor of early fall peak that could be extend, because demand is strong. You've got to remember though eventually when we get to 2019, if people who consume the product will come from somewhere. And in our view that we've been having offices and traveling in China for the last 20 years plus, in fact especially light manufacturing factories move very quickly. A number of them have already moved out of China and they are going to Vietnam, they are going to Bangladesh, they are going to Indonesia and their products still be made, but it's made or being made in another countries, which still basically are there to feel the demand of the people who need the products. So, overall, we're very bullish about trade from Asia, so especially trade from Asia to North America in 2019. But they might be coming from different countries or different part of origin.

Scott Group -- Wolfe Research -- Analyst

Okay. That makes sense. If I can just ask one more, just to follow-up this big picture, so you've spent a lot this year in terms of capital and OpEx in terms for a lot of volume growth next year and it sounds like you still think that's coming. But if for whatever reason that volume growth doesn't come, how quickly can we reverse some of the spending, right? The rails as a group probably didn't do such a good job of that in 2015. Do you think that we can do a better job of that or you can do a better job of that, if for whatever reason the volume doesn't show up in 2019?

Jean-Jacques Ruest -- President and Chief Executive Officer

Okay. I'll answer your second question.

Scott Group -- Wolfe Research -- Analyst

And then I'll hop. Thank you for the time.

Jean-Jacques Ruest -- President and Chief Executive Officer

Two things. One is on the people side, which is -- so they can expand. We've already have normalized our hiring at this point. On the union side, the only group that we're having the T&E, which is the conductors and as for the attrition that we forecast for the second quarter of next year, and at this point we're no longer having on the management side. So already -- it starts to normalize. We replenished a pool of people, having it normalized and we're only having the conductors at this point in time.

On the capital side, we have a capital envelope that we're working to detail for next year, but we will be mindful of what we build in the spring second quarter and then be mindful that what we scheduled to do in the third and fourth quarter we might decide at least not to do it or to delay it if there was going to be a slowdown in the demand for our services.

Operator

Thank you. The next question is from Turan Quettawala at Scotiabank. Please go ahead. Your line is now open.

Turan Quettawala -- Scotiabank -- Analyst

Yes, good evening. Thank you for taking my question. J J, you've talked a little bit about technology, I guess, in your presentation. I was wondering if you can talk a little bit more about that in terms of which are the projects that you're sort of moving ahead with? And do you think that you can see some of those benefits as early as next year?

Jean-Jacques Ruest -- President and Chief Executive Officer

Mike is my technology guru, so Mike will pick up that one.

Mike Cory -- Executive Vice President and Chief Operating Officer

Hi, Turan. Yeah, look from a sure operations perspective, we're talking car inspection through machine visioning and then the machine learning and the analytics we can use to improve, first of all, our inspection capability whether both from an efficiency perspective and a safety perspective. Second is our automated track inspection, some of the things we did at Investor Day, we plan to roll that out especially over our heavy corridors next year. And then just from that the ability to gather that big data lake that we're looking for in terms of both car and rail and lifecycle and analyzing it, putting the full analytics behind it that starts to open up the doors on material consumption, getting to the problem before it gets to you. And then, again, to support all of that we're building platforms for the data to be housed and so that we don't have a whole bunch of separate legacy systems that we've had for many years. We have applications that can be far more nimble and agile for our people to use. It's all around safety, efficiency and service. So car, track that leads to locomotive analytics again with the same database using the Internet of Things and those are the things that we're starting to deploy next year along with some mobile reporting for crews, for mechanical employees, and from a safety perspective the ability for our crews to not only have their older operating manuals on a tablet but also for us to communicate whether it would be CBT training on safety and actually just better communication channel. So, all of those things are in full play and they'll be deployed starting next year.

Jean-Jacques Ruest -- President and Chief Executive Officer

So I think next year you're going to see our crews working, they're going to have a handheld device in their hand and you will also see we are building eight cars, boxcars with equipment to do a track inspection. So you're going to see these at some point these eight boxcars moving around the network on our regular train service and basically inspecting the track as our regular train move around the network as example.

Turan Quettawala -- Scotiabank -- Analyst

Great. That's helpful. Thank you very much. And if I could just ask one quick on crude by rail. J J, you all worried about car supply kind of being a limited factor to your growth here crude by rail next year?

Jean-Jacques Ruest -- President and Chief Executive Officer

The car supply, I'll leave that for customers. They're the ones who have to secure the fleet either they own it or they lease it from others or they have it modified, but most of the people that we work with, at this point, have either the car supply or have visibility as to when they will have the car supply, it's on that basis. So we feel fairly confident about how much business we're going to do on crude next year. So, car supply is maybe the one element of bottleneck right now for the crude industry, from the shipping using the rail transportation mode, but each crude producer is dealing with that issue as we speak.

Turan Quettawala -- Scotiabank -- Analyst

Thank you very much.

Operator

Thank you. The next question is from Jason Seidl at Cowen. Please go ahead. Your line is now open.

Jason Seidl -- Cowen and Company -- Analyst

Thank you, operator. Good afternoon, J J and team. I wanted to focus a little bit on 2019 and looking at it from a NOR perspective. You've got all your major projects completed now, volumes seem to be pulling onto the railroad and your pricing out, what I would call, fairly high rates at 4.5%, that's well above rail cost inflation, how should we look at the OR improvement in 2019 over 2018 just from a historical basis?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Jason. This is Ghislain. I think as we've mentioned before, this year was a big capital year. We invested a lot in infrastructure and capacity that we've acquired to actually accommodate growth at low incremental cost. We're starting to now see this that coming through in the fourth quarter. We've said to the market that we expect that 2019 was going to continue to be a significant CapEx year in the same range as what we have here in 2018. And as we've said before, when you have the right infrastructure then you're operating costs naturally comes down. You can expect your fuel productivity to get to go up, you can expect your reclose to go down, you can expect your car velocity to increase and, therefore, you need less car to move the same amount of volume.

Same thing on locomotives, we expect our locomotive utilization to get better on a year-over-year basis and therefore we hope and we think we're going to be able to -- we've started actually to return some leased units that are less performing. I think, MIke, we've returned something like closer 20, 24 of leased units that are expensive and as our network will become more fluid we hope to return hopefully next year all of those leased unit and then your cost will come down and then OR therefore will be the result of that. So stay tuned, but we're optimistic and I think we're in a good position.

Jason Seidl -- Cowen and Company -- Analyst

Okay. That was my one. Thank you for the time, gentlemen.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Mike Cory -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Thank you. The next question is from Ken Hoexter at Merrill Lynch. Please go ahead. Your line is now open.

Kenneth Hoexter -- Merrill Lynch -- Analyst

Great. Good afternoon. J J, thanks for the thoughts on the current economy before, that was helpful. Just your thoughts maybe on some of the shifting crude contracts. Are your contract demands getting longer now that you've kind of taken up and given up some of the initial capacity that you had? And does it change as Mike opens up more capacity with the Western build out in terms of getting longer contracts and kind of fixing in that those additional contracts?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah. So those contracts, they are and they were multiyear, and they were and they are with backstop, meaning that there's an element of take or pay to it. So therefore this is kind of steady business that if doesn't come in, we will be able to get a return on investment on locomotives for example and on the mainline. So in terms of which part of the network is where this business is -- will mostly Mike can probably answer that better than me. Mike?

Mike Cory -- Executive Vice President and Chief Operating Officer

Yeah. Now this capacity buildup can definitely allow us to go after more lucrative business, because really where we're focused on are those same lanes, because they go from Western Canada to the Gulf Coast that long reach and that's really where our focus is.

Jean-Jacques Ruest -- President and Chief Executive Officer

The mainline.

Mike Cory -- Executive Vice President and Chief Operating Officer

Yeah.

Kenneth Hoexter -- Merrill Lynch -- Analyst

Right. Maybe I wasn't clear. What I was -- just maybe if I could rephrase it, then what I was wondering is that, I know you had initial business that came on as you've expanded the capacity and you focused on that and I'm just wondering as you expand the capacity, do the terms change? Do you go in and say, OK, it's even rarer now that extra capacity, so we want to get longer term contracts or is it still the same as kind of what you're looking at on the crude by rail?

Jean-Jacques Ruest -- President and Chief Executive Officer

I'd say more or less. Obviously, since that the issue that happened in Canada about the trans month and pipeline or Kinder Morgan pipeline getting into some crude delay, the window, the marketing window for the rail industry of moving crude is longer and pace a crude producer or crude buyer to be more comfortable but making commitments to crude by rail, but we'd qualify that. I think the market right now is probably a little more focused, more comfortable of making commitments whether the rail industry since the option in the pipeline is not quite as good as maybe all the way they are looked at six months ago.

Kenneth Hoexter -- Merrill Lynch -- Analyst

Thanks for the time. Appreciate the insight.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from David Vernon at Bernstein. Please go ahead. Your line is now open.

David Vernon -- Bernstein -- Analyst

Hi. Good afternoon, guys. Just those sort of question on the margin. I guess, if you look at five, six years, incrementals have been running around 50% or so, let me be low-50s. This year is obviously a little bit lower into an investment year, next year will be an investment year. Is there any reason to think that you wouldn't get back to that sort of 50 range, would be the first part of the question. And the second part would be, is there any under earning right now in this year, because of the capacity congestion that would lead you to believe that 2019 would be an even better year on the incrementals, just as kind of a catch up here?

Mike Cory -- Executive Vice President and Chief Operating Officer

Yeah. David, you're right. I mean, when you look at our incremental margin, I mean, if you look at this quarter, our incremental margin is in the 25 range, slightly lower than what we saw in Q2, still in the 40 range, but as I said and this relates to the OR question, as our capacity comes online, you can expect that our costs will naturally come down and as our cost naturally come down and J J made a couple of points about some of the hiring or some of the some of the reduction of hiring that we're looking to do going forward and so on as we're restabilizing our workforce, then I think you can expect that our incremental margins will come back to what people have been historically used to see and deliver.

David Vernon -- Bernstein -- Analyst

And is there any potential for snap back in 2019 or would that be more of a 2020 kind of event?

Mike Cory -- Executive Vice President and Chief Operating Officer

You can expect us -- again, we're going to continue to get better. I mean, you're going to get better in Q4 and we'll see what winter holds. Winter in Canada is always tough as you talk to Corey, he reads the almanac on a regular basis and he scares you some times, but actually as we are going to continue in 2019, you can expect that improvement on the operating side will continue sequentially as we continue to move.

David Vernon -- Bernstein -- Analyst

All right. Thanks very much for the time. Talk to you next quarter.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Mike Cory -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Thank you. The next question is from Tom Wadewitz at UBS. Please go ahead. Your line is now open.

Tom Wadewitz -- UBS -- Analyst

Yeah. Good afternoon. Your competitor had a Analyst Meeting recently and focused a lot on what the share gain opportunities with some contracts you have expiring noted that intermodal is one of those areas, and I just wanted to see J J if you could offer some thoughts on how you think about the book of business that you have? I guess, there are benefits to having scale and efficiency comes with that as we think about intermodal at the same time, so you could say, well, market share is important and it's important to retain things, the other side you could say, well price and profitability of contract is important. And I just wanted if you could offer some thoughts about how important is retention in market share versus kind of profitability of an individual contract?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah. Thank you, Tom. CN is a growth company. We're focused on profitable growth, we're focused on over performing the economy. The market right now is very strong, it's strong for all of us. There's a lot of business to go around, that's a market environment. We're more focused about the OR, they returned invested capital that we are on specifically on market share. As it relate to the company did will. I know very well the character of my commercial team and they're very experienced, very capable, and when it comes right down to it I know that they will know not allow anybody to come and push us around in our own market.

Tom Wadewitz -- UBS -- Analyst

So do you think it's quite likely retained all of the contract?

Jean-Jacques Ruest -- President and Chief Executive Officer

I think we have a very capable sales force and they will do what needs to be done to be sure that CN has the role that he needs to have in the North American team.

Tom Wadewitz -- UBS -- Analyst

Right. Okay. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Jean-Francois Lebra (ph) at Desjardins Capital Markets. Please go ahead. Your line is now open.

Jean-Francois Lebra -- Desjardins Capital Markets -- Analyst

Yeah. Thank you very much, gentlemen. You highlighted in your presentation, the Kitimat liquefied natural gas terminal and that will be a long term positive for CN, I was curious to have your thoughts on this one, please?

Jean-Jacques Ruest -- President and Chief Executive Officer

Francois, what I meant by that is that the terminal finally was enough (inaudible) it will be built. These things take many years to build. So the benefit comes in twofold. One is as to build a terminal in Kitimat, which is on the coast, the terminal also needs to build pipeline capacity from the gas well, mostly in Northern BC and Alberta to connect the Kitimat terminal with the gas that can be exported. So there's business to be made, to be gained in moving pipeline for the construction phase. Also, when you build one of these big terminal, you need to create capacity to feed it. So they don't wait for the terminal start-up to do the drilling, they do some drilling and capping in the year before the terminals start-up. So that means more frac sand and more drilling pipe.

When the terminal is finally in operation in 2025, this is where you have your run rate of drilling activities to make sure that you have enough gas to feed the terminal and some of that gas is dry. So the benefit from that is we move frac sand and drilling pipe for the drilling activities to keep the terminal, some of that gas is wet and some of that liquid gas or propane and butane will then probably find its way to the other terminal. The propane export terminal in Prince Rupert, two of them are being currently being built. One of them will come in -- one propane's export terminal will come in operation in late in winter 2019 and the other terminal from Femmes (ph) is probably going to be in operation sometime late 2019. So all these things what we do is they create a long term franchise of drilling activities, export activities to the Asian countries, so it basically unlock good long term business for the rail industry.

Jean-Francois Lebra -- Desjardins Capital Markets -- Analyst

Great. Thank you very much for the color.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Matt Reustle at Goldman Sachs. Please go ahead. Your line is now open.

Matthew Reustle -- Goldman Sachs Group -- Analyst

Thanks for taking my question. I had a follow up on labor costs. You mentioned the run rate on hiring is now normalizing. When do you think that shows up in labor productivity, and particularly thinking about the OR? Can we tie this into the six-month training period and think about six months from now that should start showing up or how would you frame that?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Matt. This is Ghislain. I think, you're right. I mean, if you look, we've been catching up on hiring crews, if you look at our labor productivity in third quarter, which is if you look at million GTMs gross ton miles per employee, it's negative by 7%. If you look -- if you go back to 2016, this measurable was up on a year-over-year basis by 10% to 12%. So as we stabilize our hiring now and as we're going to continue to grow our franchise and we're going to continue to grow our volumes, you can expect that the productivity will come back and it's not going to come back in one shot, it's going to come back as every week, every quarter as we get that volume and that we reduce our costs with the right infrastructure, then and the right velocity and capacity, and train speed, you'll see that that our costs are going to come in line and therefore part of that is because of our employee productivity is going to come online.

Matthew Reustle -- Goldman Sachs Group -- Analyst

Great. Thank you for taking my question.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Seldon Clark at Deutsche Bank. Please go ahead. Your line is now open.

Seldon Clarke -- Deutsche Bank -- Analyst

Hey, thanks for the question. Just stay on that similar topic. Could you help quantify some of the moving parts that impacted the operating ratio in the quarter? You mentioned mix on the call and obviously had a number of expansion projects that reduced volumes, but how should we think about the underlying operating ratio in the quarter and if you could just help quantify maybe the revenue impact from those expansion projects and like what we should anticipate from those five additional projects you have in the fourth quarter from the revenue perspective?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah, sure. Let me open up and then maybe, Mike, you can jump in. But if you look at the remarks we made and you go back to some of the points we made in the presentation, our velocity and our train speed was not where we would have liked it to have it in the third quarter and there are some reasons for that. Partly some of it is because especially like in the month of July where it was a little tougher month, we were doing a lot of track maintenance on some of our busy corridor and we tend to do that in July, because we want to do it before we hit the fall peak. So that had a bit of impact on the volumes. This is why you can see volumes were down or not that down, but we're not as high as in August, that we're up 4% and then August was a strong month. So that all had an impact on that on some of our operating metrics, and if you look at our operating metrics and it is in the presentation, they were lagging year-over-year and they're still slightly lower than 2Q. So that obviously -- when operating metrics are lower, then obviously your costs are higher than what you would have liked and that obviously translates into operating ratio. I think we have to deliver on our basic infrastructure maintenance, which I've just talked about, then we have to deliver on a lot of our capacity projects, which will please that -- from my point, we have about 80% now on in-service, it's new but, it's coming it's there and now you can expect that some of these operating metrics will come slowly but surely back in line and therefore our costs will come down. Mike, you want to add anything?

Mike Cory -- Executive Vice President and Chief Operating Officer

Yeah. I'd look at fuel, because fuel productivity is down and as trains don't go as fast and then that means locomotive isn't pulling as many gross ton miles per hour. Car hire expense to equipment are going slower. Obviously Ghislain mentioned earlier the labor costs, whether it's the training overheads that we have right now in productive people that are learning the job and/or trains taking longer to get over the road requiring more crew, those are three big components from a cost perspective that we are focusing in on and we've expect to see improvement as the capacity takes hold.

Seldon Clarke -- Deutsche Bank -- Analyst

Okay. And then I guess is the similar impacts -- we should expect the similar impact in Q4 just obviously on a much smaller scale from those projects?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah, you should see the improved as capacity opens up and the volume comes on.

Ghislain Houle -- Executive Vice President and Chief Financial Officer

So in the fourth quarter, we're focused on improving the capacity, the growth come out. We can generate more revenue. That's helpful to the OR. We've normalized the hiring. As we said, at this point, we are the only group that we're doing hiring as the T&E, which is to be able to deal with that turnover in the second quarter of next year. And as the velocity for the network gets better, we get better fuel utilization and better limit some other cost and all these things add up eventually to the model and precision railroading.

Seldon Clarke -- Deutsche Bank -- Analyst

Right. I appreciate the color. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from Brian Ossenbeck at JPMorgan. Please go ahead. Your line is now open.

Brian Ossenbeck -- JPMorgan Chase & Co -- Analyst

Yeah, hi. Thanks for taking my question. So you mentioned several times the benefits of adding capacity and improving the fluidity with capital investments this year, but looking at next year the spend is still significant and implementing it this year is causing disruptions to networks. How are you making sure your getting paid for these additions not outgrowing them next year and then limiting impact on the core business in addition earning something for that extra flexibility that you've mentioned keeping in the system to meet some of demand volatility as it come up from your customers, you can't necessarily plan for it in advance?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah. So, as we had one of the slides in our deck where we were showing that the major pinch point of that network and the major pinch point resentment in any, especially that's the area that when -- as you do work in that segment, these amendments on it's way to win if the -- this is the one that has biggest impacts, this is where the capacity is more tight. So I mean we will be as mindful as can be next year as we do basic maintenance and/or adding capacity starting November track. The work that we've done this year though will be quite a bit helpful like we want to start with the network which is as tax as the one that was this year. So, Mike, If you want to add about how you see the capital program and the maintenance program next year in these.

Mike Cory -- Executive Vice President and Chief Operating Officer

Yes. And this may start, Brian, with volumes in 2016 and that quarter they have 35%. And we didn't do a lot of capacity improvements in that quarter until this year. So obviously we -- for next year, our plan will be to look at the seasonal peaks, I mean you have grain that stops in a certain period, you have potash that slows down, that's when we'll be in there doing our basic maintenance. And for construction projects, this is all about growth as it goes forward and like J J mentioned set it earlier quite clearly. We will take it quarter-by-quarter, we're pairing ourselves right away, we've done a lot of the permitting ahead of time. We know want we want to do. We won't do it until we're sure that we need to do it.

Brian Ossenbeck -- JPMorgan Chase & Co -- Analyst

Okay. Thanks, Mike. And then maybe just if I can follow up on the keeping some flexibility in the system to meet the demand is how you expect to get paid for that or if that's something that the customers are willing to entertain, that notion right now when demand is tight. When capacity is tight rather how do you expect that to kind of go throughout the years and if you still have to maintain that extra to make sure you don't get pinched when volumes do come online at the same time?

Mike Cory -- Executive Vice President and Chief Operating Officer

Well, maybe I can start this. Right, this quarter has -- again, I want to keep referencing J J, but since 1990 this has been a key quarter for CN and it will continue to be. This is where traffic goes to and from the Western Canadian ports to the US prairies where our grain is. This is the estimated there for many, many, many years. That's your question.

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah. And maybe Brian, I mean, we've talked about this before, the -- this -- the key corridor, our key corridor between Edmonton and Winnipeg, we want to build a bit of a buffer in that corridor, because all of our commodities go through that corridor and therefore if demand slows down a little bit, don't be surprised if we continue to invest a little bit in capacity in that corridor, because if we're wrong then it will be time value of money because at one point we will need that capacity whether you like it or not. So -- and we believe that we will continue to grow that business. So we -- when we've said that before in this year and many times that we want to get a little bit of buffer, not everywhere but on certain places and Edmonton and Winnipeg is one of those area. The other ones as I said if and J J has mentioned, if demand goes down we will stand back and we'll look at it much tighter, especially if demand were if supported only by one or two commodities, then you can expect us to refrain on the capital. And we've said that as well. So, and frankly the business is coming on. The good news is we're growing this business. So this is a good problem, we've got some good organic growth opportunities coming at us. That we've mentioned to the market in '19, that are coming some of it our market share organic growth that are coming at us, but we need to have the infrastructure, otherwise our costs are going to -- are not going to be where they need to be.

Brian Ossenbeck -- JPMorgan Chase & Co -- Analyst

Okay. Thanks for your time.

Operator

Thank you. The next question is from Justin Long at Stephens. Please go ahead. Your line is now open.

Justin Long -- Stephens Inc -- Analyst

Thanks, and good afternoon. I wanted to ask about your coal business. Could you just go through the incremental coal business you expect to come online over the next couple of quarters? I know there are a lot of things that are in the works and on the near term horizon. So just wanted to get your latest thoughts on how much additional tonnage you expect? And also if there are any minimum volume commitments associated with this new business similar to what you discussed on the crude side?

Paul Butcher -- Vice President, Investor Relations

Yeah, Justin, it's Paul here, so I guess I'll answer that question. Just to give you a bit of an insight in terms of the -- there are two coal mines that have actually reopened this quarter. The two mines that we talked about one would be the Conuma, the old -- I think that was the old Walter Energy Willow Creek. The actual capacity on that mine is about 1.7 million tons on an annualized basis. Then the other mine that to reopen as well was the old Grande Cache mine, which is called CST. That's about 2 million tons per year of capacity. So those that actually reopened, so we're going to start seeing volumes this quarter and then into next year and it really the other one that's going to open up, which is the bigger mine, which is the thermal coal mine out of Western Canada. The visa project by Coalspur, that, as I said, probably will start late in the first quarter and the annual capacity there will be about 6 million tons per year. So as you can see a lot of opportunities there on the coal side in Canada and also we're seeing pretty good growth on our US franchise basically on the export side. So basically that's coal coming Illinois (ph) basin, heading to Con Ventura for export. So once again pretty solid volume uplift for coal both in Canada and the US into next year.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Paul.

Justin Long -- Stephens Inc -- Analyst

Okay. That's helpful. And then on the second part of that question, are there any minimum volume commitments associated with that new business? Just curious if you could comment on that, the contract structure?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yes, these are -- we qualified as a -- like when you look at take or pay contract, this is a world of crude, this is the world where the customers are using a mode of transportation that's not for natural to them. But when you talk about all the other commodities like coal, lumber, pulp, potash, rain, these are very long from rail user. And we don't get into take or pay commitment. We just look at the fact that they're investing significant capital and having a lot of people to restart these mine and their investment in these small mining communities is their commitment, but they are there to ship.

Justin Long -- Stephens Inc -- Analyst

Okay. Thank you for the time.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Allison Landry at Credit Suisse. Please go ahead. Your line is now open.

Allison Landry -- Credit Suisse -- Analyst

Thanks for squeezing my question in. I just wanted to ask another quick one on crude. Just in response to some of the comments from the Alberta premier on Monday in response to wide differentials and the expectation for the government to submit a business plan in terms of outlining more efficient ways that the rails can help get the crude to market. Does this concern you at all from a regulatory risk standpoint to the extent that there's any government influence in terms of prioritizing this business for the rails?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yes. Allison, it's J J, We don't know very much about the exact details of the plan of the Prime Minister Rach Notley. No, we're not for concerned from the regulatory point of view. I think all it does is indicate the fact that the price of Western Canada Select price of Canadian crude in Alberta is very low, that spread as high as it has ever been. I think we're talking of net back crude in Alberta remain in 20, low-20s, which is not great for neither of the Alberta economy, the Canadian economy. So we're doing everything we can. And you know we've been at it since the beginning of the year to create capacity on our network to be able to move more crude, no need to -- because it's business that is used -- is good for result, but also, because it does help the Alberta economy and the overall demand for our services in general, it just makes sense. So I think maybe it's a recognition right now from the Alberta province that crude by rail for the time being is not a substitute, but it's a good supplement to try to help to the extend that we can to bring this crude differential at higher level than what it is today. No risk on the regulatory side.

Allison Landry -- Credit Suisse -- Analyst

Okay. That's helpful. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Konark Gupta at Macquarie CM. Please go ahead. Your line is now open.

Konark Gupta -- Macquarie -- Analyst

Thank you, and good afternoon. My question is on the volume outlook for 2019. So you mentioned about coal and propane business over the next three quarters and we know Synovus is starting soon in Q4 and then you have some central beams coming in recently, so that should support lumber. I guess. So what other opportunities do you see beyond these three or four commodity groups heading into 2019?

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah. Konark, listen, I can give you a little bit of color. We're not going to provide specific guidance on '19 on volumes at this point. We will do that as we typically do in January. But you can hear -- you heard at Paul Butcher talking about some of the opportunities we have in coal. I mean these are real, these are there. I think we're optimistic about Rupert. Rupert continues to grow. So we're optimistic about Rupert. I think Rupert is very good for us and remember that Rupert will stay with us for the next 70 years. So I think we do have in grain -- some of the grain elevators being built out online out of 20 to 23. They were about 19 on our line and I think they're coming in, some of them are already built, so that will be -- that should be good for us on grain. And when you look at grain, the crop in and of itself is increasing 2% to 3% a year due to fertilizer technology and so on and so forth. So if you go through where we have a pipeline of growth opportunities that we have told the market at our Investor Day these growth opportunities are still there. They're coming online. They're real and stay tuned. But we're optimistic about '19 and quite bullish and frankly we'll give you more detail in January when we provide more specific guidance at the fourth quarter call.

Konark Gupta -- Macquarie -- Analyst

Okay. Just to clarify you're not expecting frac sand to rebound substantially next year, right?

Mike Cory -- Executive Vice President and Chief Operating Officer

At this point, I would say frac sand is a whole card. At this point, it's actually a year-over-year volume wise negative. So we'll see when the -- the personal fraction is really when will the pipeline capacity and we've talking to US here -- when will the pipeline capacity be able to get caught up with the current crude production, so that you can increase the production of crude even higher, right. So don't know exactly when that will be. I'm sure it will not be in the fourth quarter.

Konark Gupta -- Macquarie -- Analyst

Okay. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you. There are no further questions, Mr. Ruest. I would like to turn the conference back over to you, sir.

Jean-Jacques Ruest -- President and Chief Executive Officer

Well, thank you for joining us today. I think we may be over handled on time a little bit, and I thank you for your patience. So, thank you all. We'll talk to you on the road and we'll see you on the call in January. So, the operator this is the end of the call.

Operator

Thank you, sir. Ladies and gentlemen, your conference has now ended. All callers are asked to hang up their lines at this time, and thank you for joining today's call.

Duration: 73 minutes

Call participants:

Paul Butcher -- Vice President, Investor Relations

Jean-Jacques Ruest -- President and Chief Executive Officer

Mike Cory -- Executive Vice President and Chief Operating Officer

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Walter Spracklin -- RBC -- Analyst

Steve Hansen -- Raymond James -- Analyst

Ravi Shanker -- Morgan Stanley -- Analyst

Cherilyn Radbourne -- TD Securities -- Analyst

Christian Wetherbee -- Citigroup -- Analyst

Scott Group -- Wolfe Research -- Analyst

Turan Quettawala -- Scotiabank -- Analyst

Jason Seidl -- Cowen and Company -- Analyst

Kenneth Hoexter -- Merrill Lynch -- Analyst

David Vernon -- Bernstein -- Analyst

Tom Wadewitz -- UBS -- Analyst

Jean-Francois Lebra -- Desjardins Capital Markets -- Analyst

Matthew Reustle -- Goldman Sachs Group -- Analyst

Seldon Clarke -- Deutsche Bank -- Analyst

Brian Ossenbeck -- JPMorgan Chase & Co -- Analyst

Justin Long -- Stephens Inc -- Analyst

Allison Landry -- Credit Suisse -- Analyst

Konark Gupta -- Macquarie -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool has a disclosure policy.