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Canadian National Railway Co (NYSE:CNI)
Q3 2019 Earnings Call
Oct 22, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to CN Third Quarter 2019 Financial Results Conference Call. I would now like to turn the meeting over to Paul Butcher, Vice President of Investor Relations. Ladies and gentlemen, Mr. Butcher.

Paul Butcher -- Vice-President, Investor Relations

Well, thank you, Patrick. Good afternoon, everyone, and thank you for joining us for CN's Third Quarter 2019 Earnings Call. I would like to remind you about the comments already made regarding forward-looking statements.

With me today is J.J. Ruest, our President and Chief Executive Officer; Ghislain Houle, our Executive Vice President and Chief Financial Officer; Rob Reilly, our Executive Vice President and Chief Operating Officer; Keith Reardon, our Senior Vice President, Consumer Products Supply Chain; and James Cairns, our Senior Vice President, Rail-Centric Supply Chain

Once again, I do want to remind you to please limit yourself to one question so that everyone has the opportunity to participate in the session. The IR team will be available after the call for any follow-up questions. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. J.J. Ruest.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Paul and good afternoon, everyone and welcome to our third quarter earnings call . I'm very proud of the CN team. They delivered very good result with solid cost management in a softer and uncertain economic environment for the North American rail industry. We produced adjusted EPS growth of 11% revenue growth of CAD140 million or 4% growth and an operating ratio of 57.9% an improvement of 160 basis point. In the next few minutes, Rob will cover our operation, James and Keith will cover their respective marketplace and Ghislain will peel off the financial.

CN pricing was above rail inflation. Our carload growth was flat , which is well above the industry negative average of 4.5% for the quarter and our cost and asset utilization KPI are improving while the North American rail industry is dealing with slower growth in manufacturing, natural resource, energy and trade, we stay very focused on building our sustainable long-term business, namely increasing our exposure to the consumer economy in intermodal and automotive, deploying productivities, enabling technology to our rail operation, creating new model of rail growth in partnership with others and building events of human talent as one of our long-term competitive edge.

Since we last spoke, we reach a purchase agreement for a CSX rail property and we are starting with a new joint service that will connect the US East Coast or some of them with the consumer distribution center located in Greater Toronto and Greater Montreal. We are also initiating whiteboard supply chain planning with PSA executive to leverage their purchase of an ocean terminal in Halifax. The same whiteboard discussion will also take place with the team of DP World who is acquiring the Vancouver Fraser Surrey bulk and container terminal and with AMCI who is acquiring the Rupert bulk terminal.

The CN franchise is very -- it has a very high barrier to entry, namely, we are the only railroad that reached the three coasts, reached 15 container -- 15 ocean container terminals and 23 inland terminal and growing. We believe at CN that partnering with select world-class operators and investors in their respective field of expertise is a very smart approach to create new model of future rail growth especially for the increasing and important demand derived freight from the consumer economy. Regarding cost improvement, PSR is in our DNA and rather has a number of initiative namely, the alignment of our mechanical shop with the downturn [Phonetic] in volume, the better leveraging of our now upgraded locomotive and railcar fleet. Rob's team is also downsizing our railcar fleet of the less productive and older asset targeting the removal of about 5,000 railcars , which is about 8% of our fleet. In the same vein of cost and productivities improvement, Ghislain will vacate 75,000 square feet of lease space in Montreal and make maximum use of our headquarter building.

And our Chief Digital Officer is scaling up our robotic process automation to accelerate the digitization of labor intensive repetitive work. By the end of this year, we will have 9,000 connected workers, train crews in common with mobile device in their hand. Michael Foster, our Chief Technology Officer is task to increase the productivities of these newly collected crews in 2020 by populating these device with productivity digital application. For long-term investors, who will recognize ESG as part of their investment decision, we are very proud to report that CN is again the only railroad to be on the Dow Jones Sustainable World Index for the eight years in a row and we are also again part of the North American Dow Jones Sustainability Index for the 11th year in a row. Also very much word of mention, our carbon emission intensity continue to decline.

Our fuel efficiency improved by 4.1% in the quarter, which means we avoided 50,000 metric ton of CO2 emission and saved CAD15 million in costs. We are the most fuel-efficient freight railroad in all of North America. With that Rob, I will ask Rob to cover the operation.

Robert E. Reilly -- Executive Vice-President and Chief Operating Officer

All right, thank you. J.J. First and foremost thanks goes out to the men and women within the CN team that helped deliver this quarter's outstanding results, some of the operational highlights this quarter include the team handled an all-time record GTMs for third quarter 1% more than last year's Q3 and 5% higher than 2017. Train speed improved 4% over the same quarter last year. Car velocity, improved 7% and train productivity, increased 2% versus the same quarter in 2018.

As J.J. mentioned, this quarter's financial results were in large part assisted by our strong cost control efforts. In the quarter, we delivered an all-time best fuel efficiency performance improving 4% year-over-year. That means we moved 4% more tonnage, the same distance with the same amount of fuel. CN continues to be the North American class one railroad leader in fuel efficiency using a little more than eight tens [Phonetic] of a gallon of fuel per 1,000 gross ton miles.

These results were not an accident, but the result of an intense day to day commitment by the operations team disciplined by our locomotive engineers and utilizing on board tools, minimizing idling locomotives and a strong execution of the number of locomotive used on trains to achieve these [Indecipherable] From a railcar perspective, we are in process of returning nearly 3,000 railcars were on lease, scrapping another 2,000 railcars and have parked over 6,000 cars to saving car hire expense.

All of these actions help to rightsize our fleet to the rail volumes we are experiencing and decrease our expenditures associated with them. As a result of these efforts, our active online inventory has dropped 6% year-over-year leading to a more fluid railroad. On the locomotive front, we continue to return lease locomotives and will return the last of these locomotives in Q4 as we rid ourselves of further expense related to lease locomotives. The increased reliability of our upgraded locomotive fleet has given us the flexibility to make these moves.

As J.J. also mentioned, within our mechanical department, we are aligning our resources with the increased reliability of our fleet and the softening traffic volumes. These moves will allow us to more proactively scheduled maintenance at the right locations and continue to improve our fleet's availability while minimizing the amount of inventory we carry at outline locations. Regarding safety, we continue to progress on plan for completion and conversion of all of our mandated Positive Train Control PTC subdivisions as we now have just two remaining subs to convert. All required territory on the CN will be completed by year-end, which is a full year ahead of the PTC mandate of December 31, 2020. This will allow us to continue to work with other Class 1 railroads on progressing interoperability between railroads in 2020. In addition, we now have received our first two autonomous track inspection cars, which are being commissioned now with another six more to be completed by year-end.

These cars will allow for increased testing and more consistent results that ultimately leads to a safer and more reliable railroad. With winter preparation in high gear, the team has worked very hard preparing for this upcoming season. To that end, the team has added 40 more aircars to our fleet. Bringing our total to 100 cars ready and prepared for this winter season. Our capacity additions continue on track and will aid in our resiliency to the impacts of winter as well.

While we don't know the severity of cold weather this season, we are there as we have ever been. To close, I am very proud of the results that this team has delivered as we continue to prepare and adjust, where needed, working with James and Keith's teams on the economic scenarios ahead.

With that, I'll turn it over to James.

James Cairns -- Senior Vice-President of Rail Centric Supply Chain

Thank you, Rob. Overall, revenue for the quarter was up 4%. Keith and I will walk you through the top line performance for our respective markets in Q3, and provide some insight of what lies ahead. The North American rail industry is facing a challenging economic environment and as you heard from Rob, we are managing our costs very closely. Looking at year-over-year results. It is clear that our unique three coast market reached a footprint in North America, our structural advantages that allow us to diversify our traffic mix and adapt to changing market conditions.

A great example of this structural advantage in action was our performance in North American coal segment in the third quarter. Coal is a tale of two markets in Q3. Strong growth in Canadian exports up 80% driven by the ramp up of Coalspur's new mine that opened earlier this year, was partially offset by sluggish US thermal coal exports down 38% as a result of low API to pricing. Looking forward, we will continue to see a sequential increase in run rate for Canadian Coal in Q4 and expect the same for US coal.

The Canadian grain crop has been delayed as a result of poor weather conditions. We ended the quarter 1% below last year. We expect to recoup those volumes in the spring of 2020. Again our market reach is a structural advantage. We run longer trains with direct CN to CN service from country elevators to west coast ports. The new G3 grain terminal in Vancouver is expected to be in service in the second half of 2020.

This will be the first grain loop track to loop track supply chain in Canada and will facilitate quicker asset turn times and allow us to ship more tonnage with fewer cars. We are creating new capacity and increasing resiliency to respond to higher Canadian crop yields. The structural change in the BC forest products industry was at the root of 11% decline in revenue for the segment in Q3. Several B.C. sawmills curtail production in response to low pricing and high stoppage fees in 2019.

We have reset our cost to support a new sustainable run rate moving forward. Natural gas liquids revenue was up 32% in Q3 driven mainly by propane and the full ramp-up of the AltaGas export facility in Prince Rupert. Volume is now running near Phase 1 capacity at 60 plus cars a day and we expect to see this production level continue going forward.

Prince Rupert is a gift that keeps on giving. In Q3, we saw the start up of the Raymond [Phonetic] plastics bagging line which feeds the container export market. Looking ahead we see more growth in carload transload for several commodities at the Port of Prince Rupert, producing container exports that improve steamship line round trip economics. Refined petroleum product's revenue was up 20% on the back of new long haul jet fuel business from Alberta to Ontario, as well as year-over-year increase in run rate from the Northwest refinery in Alberta, which began operation in late 2017.

Our market reach allows us to directly connect Alberta production of refined products with desirable end markets. Sand revenue was negatively impacted by a slowdown in drilling activity in Western Canada. We don't expect to see a recovery until the second half of 2020. Crude revenue was up 34% in the quarter despite several of our customers' shipping below their take-or-pay contract level, idling capacity in response to production restrictions. Recall that in Q4 last year. Crude differentials were very high and we shipped on average about 230,000 barrels per day of crude by rail, so the year-over-year comps in Q4 will be challenging.

Now, I will turn it over to Keith to speak to our consumer product supply chain Q3 results .

Keith?

Keith Reardon -- Senior Vice-President of Consumer Product Supply Chain Growth

Thank you, James and good afternoon, everyone. The consumer markets produced strong results in the third quarter. Our ability to adapt to the market realities with strong cost management as well as our ability to provide our customers with solutions have allowed us to outperform our markets . Revenues were up 13% and RTMs were up 2% for the Group in the third quarter versus 2018. In both intermodal and automotive . We continue to win with our unique network reach and consistent high levels of customer focus. The cost effective and efficient gateways with which we serve continue to produce sustainable long-term results. Starting out with automotive. CN's team has worked extremely well together to provide our customers with solutions that generated slightly above 5600 carloads growth, allowing us to outpace the industry growth rate and setting record monthly volume.

Our strategy to increase the number of auto port storefronts as well as providing a very solid supply of railcar capacity is winning in the market. Our new Vancouver auto port facility is also now open and producing results. In intermodal, the initiatives we presented at our Investor Day will continue to provide efficiencies and additional capacity in our inland terminals. CN has room to grow and we continue to generate new ways to improve our position as a cost leader in this segment. In the International intermodal segment, trade uncertainties have contributed to lower industry volumes. We have been able to leverage our network of efficient gateways, our extended reach into the hinterland and our points of product differentiation to outperform the industry. For example, Prince Rupert finished the quarter at run rates of 1.35 million TEUs, which is right at the terminals nameplate capacity. Expansions are coming in 2021 and 2022 to take that capacity to 1.8 million TEUs. CN and our partner DP World have a successful history of innovating ways to increase throughput above the nameplate capacity levels. In Q3, while growth rates at LA, Long Beach, Oakland and at the Seaport Alliance were 3% minus 5%, 4% and minus 8% respectively. Our growth in Rupert was about 30% over 2018. As we position ourselves for the upcoming contracting season of 2020 for our overseas customers, we have concluded agreements with ZIM, CMA CGM and Westwood. Most recently, we have also successfully concluded negotiations and increased our market share with the Ocean Network Express for their business at the ports of Vancouver, Prince Rupert and Halifax. As well as Costco for their Vancouver business.Our partnership with Mobile Grain at the newly opened Regina Intermodal Terminal is an excellent example of our strategy to continually add intermodal storefronts providing our export customers with additional reach opportunities and choice.

As ship sizes increase creating opportunity to enter new markets from various gateways is critical to continued growth for our customers and ourselves. Initial response to this new storefront has been quite favorable, and we see a strong pipeline of export volumes as we fully launch in the next couple of weeks.

The new CSX CN container train service from the ports of New York, New Jersey, Philadelphia and Wilmington into the Montreal and Toronto gateways will compete with over-the-road trucking for both dry and refrigerated consumer goods. On the domestic intermodal front, weakness in the manufacturing sector led to weaker volumes in the US domestic and transborder segments. In contrast, our cargos are protected [Phonetic] services, the TransX intermodal service, as well as our wholesale partners intermodal volumes are continuing to grow at better than industry levels.

Our full-scale partnership in the E&P program has also been a solid plus 15% growth contributor this quarter. So to sum it up, we are proud of our results this quarter which outpaced the industry growth rates. We look forward to working with all of our customers to figure out the ways of the 2019 and 2020 marketplace and providing the service, network reach and cost effective gateways that will allow us to win in the marketplace at whatever those challenges -- the waves may bring.

I will now turn it over to Ghislain for the final -- financial aspects of the quarter's results.

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Thanks, Keith. Starting on Page 11 of the presentation, I will summarize the key financial highlights of our third quarter performance. While we have witnessed weaker volumes driven by softness in the general economy, we swiftly rightsize our resources to changing demand while being conscious of the mid to long-term structural opportunities that are in front of us.

Revenues for the quarter were up 4% versus last year at slightly higher than CAD3.8 billion. Operating income came in at CAD1.613 billion, up CAD121 million or 8% versus last year. Our Q3 operating ratio is 57.9% or 160 basis point lower than last year.

Note that CN's operating ratio always excludes the benefit of any asset sales. Net income is just shy of CAD1.2 billion or CAD60 million higher than last year with reported diluted earnings per share of CAD1.66 versus CAD1.54 in 2018, up 8%. Excluding the impact of a large asset sale in 2018, our adjusted diluted EPS was up a solid 11% versus last year. The impact of foreign currency was favorable by CAD5 million on net income in the quarter or CAD0.01 [Phonetic] of EPS.

Turning to expenses, on Page 12, our operating expenses were up 1% versus last year at just above CAD2.2 billion. Expressed on a constant currency basis, expenses were flat versus last year. At this point, I will refer to the variances in constant currency. I will cover some of the key highlights. Labor and fringe benefit expenses were 2% lower than last year.

This was mostly the result of lower incentive compensation by over CAD40 million, partly offset by higher wages, driven by the on boarding of TransX employees. Purchased services and material expenses were 13% higher than last year. This was mostly the result of higher trucking and transload expenses due to the inclusion of TransX and higher repair and maintenance expenses.

Fuel expense was 11% lower than last year, driven by a 12% reduction in fuel prices and a 4% improvement in productivity to produce record fuel efficiency, generating over CAD15 million in savings and supporting our sustainability agenda. Finally, equipment rents were 11% lower than last year, driven by lower locomotive lease expense of CAD20 million. Now moving to cash on Page 13, free cash flow was almost CAD1.5 billion through the end of September.

Our first priority for cash remains reinvestment in the business. Our capacity in this are nearing completion and we have received 135 of the 140 locomotives on order for 2019. We continue to reward our shareholders with consistent dividend growth, and we are on track with our current share buyback program of CAD1.7 billion having repurchased 9.2 million shares at a cost of roughly CAD1.1 billion since the end of January.

Finally, let me turn to our 2019 financial outlook on Page 14, while volumes in Q3 -- in Q3 came in below our expectation and while economic weakness, trade and geopolitical issues are creating headwinds, unemployment levels are still at record lows and consumer spending so far remains resilient. Manufacturing has softened significantly. Therefore, we now expect our full year volumes to be slightly negative on a year-over-year basis in terms of RTMs compared to our previous volume assumption of mid single-digit growth.

As a result, we are revising our 2019 EPS guidance. We are now targeting to deliver high single-digit EPS growth versus 2018 adjusted diluted EPS of CAD5.50. On the capital front, we still expect to finish the year at approximately CAD3.9 billion. As previously discussed, we expect the capital envelope for 2020 to normalize to historical levels. Supporting improved free cash flow conversion.

In the face of a weaker economy, we will continue to tightly control costs while at the same time remaining focused on the structural opportunities that will provide growth for this franchise for the years to come, such as a 30% capacity expansion at Prince Rupert for intermodal by 2022. Growth potential related to the purchase of Ridley bulk terminal by the private sector, creating a Prince Rupert of the East at the Halterm intermodal terminal in Halifax now owned by PSA.

In closing, we remain committed to our agenda of operational and service excellence, and we continue to manage the business to deliver sustainable value for 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, Ghislain and before we open up for Q&A, I'd just like to do some conclusion comments here. So as was mentioned during the call, the consumer economy in North America continues to perform, so we have low inflation, low unemployment, fast [Phonetic] government spending, sustained consumer spending but business capital investment is weaker, manufacturing has slowed down Energy as in crude by rail and frac sand is quite volatile and trade is under -- is putting us under much pressure.

This suggests a North American rail industry volume, which was negative by 4.5% in Q3, we've currently performed the GDP. While at CN we continue to aim for carload volume to outperform our rail industry in North America. We're focused on long-term sustainable -- sustainability in every sense of the world, we have an exceptional balance sheet with -- an investment-grade credit rating, a debt to EBITDA of less than 2% [Phonetic]. We have a track record for increasing dividend for 23 years in a row and we have a dividend yield that currently stand at about 1.9%. We're passionate about building and innovating new supply chain for the future of the rail industry, we mentioned a couple of those on the call and we manage costs very tightly during a slowdown in cycle.

On that point, Patrick. I'd like to turn it over to the Q&A session.

Questions and Answers:

Operator

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

Brandon Oglenski -- Barclays -- Analyst

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

Jean-Jacques Ruest -- President and Chief Executive Officer

So it's J.J., thank you Brandon for the question. There's two things that we're trying to do, we try to, as an industry as a North American industry, we'd like to outperform the GDP, obviously not possible short-term. And at CN, we would like to outperform our own industry and that is our goal.

So we did that in the third quarter, we have volume flat and the industry was at minus 4.5%, you see the carload stats, so far quarter-to-date. The carload stats for the industry actually they are more challenging than they were in the third quarter for all of the railroad and CN's objective was this fourth quarter of next year is to outperform the industry.

But while the economy is difficult for manufacturing energy, trade and natural resource, the rail industry may not be able to outperform the economy. And hopefully that helps.

Brandon Oglenski -- Barclays -- Analyst

Yeah. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you. Brandon.

Operator

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

Cherilyn Radbourne -- TD Securities -- Analyst

Thanks very much and good afternoon.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon.

Cherilyn Radbourne -- TD Securities -- Analyst

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

Jean-Jacques Ruest -- President and Chief Executive Officer

So I think, James. That's in your [Phonetic] market space. So maybe you can provide color on these three segment.

James Cairns -- Senior Vice-President of Rail Centric Supply Chain

Yeah. So we were disappointed to see the late -- the late harvest for the Canadian grain crop. We're still confident that moving forward, we're going to have a pretty good grain year this year. All indications are that it could be one of the largest crops in Canadian history. So we are eager to start moving that. We have the resources to do so.

On the crude side of things, a little more difficult, there was some government intervention that took place in that market segment and we build out capacity to move about 300,000 barrels a day of crude. In September we moved about 180,000 barrels a day, we still have that latent capacity available to move that crude, if fact it does become available.

Indications are pretty clear that we will see the Alberta Government crude contracts going to private hands here, in short order possibly by the end of the month. And we're very excited to start moving that at crude volume when it does. Talking about the Coalspur mine, they had some challenges kind of ramping up. But right now, they're kind of where we expect them to be in a annualized rate of about 3 million tons a year. We're hopeful moving forward that that rate is going to continue to accelerate. We see could see sequential improvements and and get to that 5 million ton per year on you base[Phonetic]. Thank you for the question, Cherilyn.

Cherilyn Radbourne -- TD Securities -- Analyst

Thank you. That's my one.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

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

Chris Wetherbee -- Citi -- Analyst

Hey, thanks, good afternoon.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon.

Chris Wetherbee -- Citi -- Analyst

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

Jean-Jacques Ruest -- President and Chief Executive Officer

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

Robert E. Reilly -- Executive Vice-President and Chief Operating Officer

Yeah, absolutely. Thanks for the question, Chris. So I talked about some of that in my comments, some of the things we're doing certainly in locomotives. I talked about turning back the lease locomotives. We're doing that. Adjusting to it. We've got 150 locomotives laid up right now and we'll continue to adjust as we go on.

From a rolling stock standpoint, J.J. talked about it, we've got 5,000 cars. We're readying ourselves up another 6,000 laid up that are off car relief. We will continue to be aggressive in that area. From a people standpoint we continue to adjust our hiring model year-over-year. So we've done that as the year has gone on. We will continue going into next year. And then finally, I talked about the mechanical footprint that we're, that we're looking at from an alignment standpoint as we see the volumes dropping, it is about getting our locomotives to the right shop, reducing inventory, increasing reliability and ultimately that will need less people to do that.

So we will continue to be aggressive in this area and continue down that path.

Jean-Jacques Ruest -- President and Chief Executive Officer

That's right. And more effort on fuel efficiency. And even in IT, where we are in the process, having in process now for a few weeks and we're going to do that between now and year-end to convert what we call to paycheck of consultant with one paycheck of our permanent employee. So you will see some money moving from purchased services into added wet headcount, but the net of that is almost a ratio of 1.9. The net of that is dollar savings because the employee at CN are -- the way we have it sorted out are -- it could -- the cost is less than the purchased services of a consultant.

I don't know if that helps --

Chris Wetherbee -- Citi -- Analyst

Very helpful, thank you very much. Appreciate it.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Chris.

Operator

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

Benoit Poirier -- Desjardins Capital Markets -- Analyst

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

Jean-Jacques Ruest -- President and Chief Executive Officer

So I think Keith can answer that in your question is sort of the for short term, which is the peak season and then blank sailing in the long term, which is though the expansion, which will take place, Keith.

Keith Reardon -- Senior Vice-President of Consumer Product Supply Chain Growth

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

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Thank you very much.

Jean-Jacques Ruest -- President and Chief Executive Officer

If I may add Benoit. If you go in our, in our deck for this quarter. You go on Page 21 and you will see the expansion that have been worked on by DP World and there's CAD300 million of CAD4 million of jointly fund track in different infrastructure outside the terminal itself, which can be built for the next 24 months by CN. The federal government and the port of Prince Rupert.. So they're investing and we're investing and those infrastructure are going ahead.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay, thank you very much for the time, thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Benoit.

Operator

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

Ken Hoexter -- Bank of America -- Analyst

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

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

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

James Cairns -- Senior Vice-President of Rail Centric Supply Chain

Yeah, I'll take -- I'll talk about a couple of markets. You mentioned forest products. So forest products, that is a structural change in the BC forest products industry. That business is not coming back, but you can expect to see the same run rate in or similar run rate in Q4 that we saw in Q3. On the crude side of the business, that's a little different.

If you look at the comps from last year Q4 compared to Q4 of this year, we had an all-time record 232,000 barrels a day that we move in Q4 as we are getting to ramp up to take on this additional capacity and the government contracts that were coming into bear that didn't happen. And this year we're not going to see that level of shipment. We don't expect to see the same level of shipment that we saw net last year. So it's going to be very difficult comparison year-over-year basis. Coal is going to continue to be a very, very favorable year-over-year comps in Canada. Coal in the US as much as we are seeing a improved run rate from Q2 into Q3 and expect to see that continue into Q4. We are not going to hit the record coal volumes of US export that we saw in 2018 . I hope, I get to the root of your question there.

Ken Hoexter -- Bank of America -- Analyst

Absolutely I appreciate it, thanks James.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thanks Ken.

Operator

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

Soni Rice -- Morgan Stanley -- Analyst

Hi, good afternoon. You've got Soni Rice [Phonetic] on for Ravi, maybe just bringing back to crude by rail here. I guess the question is how quickly could you get teams in place to be able to move higher volumes in the event that the Alberta Government does transfer the program to private hands and removes curtailments there and then maybe just any way to frame how you guys could see volumes ramp into 2020 in that case?

Jean-Jacques Ruest -- President and Chief Executive Officer

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

James Cairns -- Senior Vice-President of Rail Centric Supply Chain

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

Soni Rice -- Morgan Stanley -- Analyst

Great. I appreciate the color there.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

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

Allison Landry -- Credit Suisse -- Analyst

Thanks, good afternoon. I just wanted to ask a little bit about the Q4 guidance and specifically be LR[Phonetic] it seems like the implied operating ratios maybe a bit worse sequentially than we've seen historically so I was wondering if you could talk about the factors that might be driving that. if it's mix driven. If there is any seasonality with transacts that we need to think about, any color would be helpful.

Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

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

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Yes , there is always on, when you look at the OR, Allison on a quarter-by-quarter basis there's always some seasonality. I mean remember we are the railroad at the North. So obviously the winter hits us earlier than others so that there is some seasonality there. I mean we just had a quite a dump of snow in Western Canada about a week or two ago.

So there is some seasonality there and as I said, some of it is, some of it is volume and some of it remember is we are reducing or rightsizing our resources, but as I've mentioned a few times, there is always a lag when you do that where by the time that we identify cars or locomotives to be return sometimes that benefit is it comes a couple of months after because you need to inspect, you need to know where you're going to return those assets to the lessors and so on, so there is a lag. So as J.J. mentioned, we don't guide on a quarterly basis on OR, but there is seasonality, winter it comes every year and then there is a lag when we reduce costs.

James Cairns -- Senior Vice-President of Rail Centric Supply Chain

Hopefully that gives you a bit color, Allison. And thank you for the questions.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

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

Jason Seidl -- Cowen -- Analyst

Thank you operator and afternoon, everyone. You guys obviously mentioned you are rightsizing throughout the quarter and fully understand the lag effects of that, but it's hard to rightsize CapEx because programs have already been started, how should we start thinking about 2020 CapEx as it relates to the levels of 2019?

Jean-Jacques Ruest -- President and Chief Executive Officer

Go ahead.

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

I can take that one, Jason. Like we said and at CN we do what we say we're going to do. So again, we've said that we would have two years of elevated CapEx '19 -- '18 and '19. This money. We will need because this is on our core route going from essentially Western Canada Edmonton Winnipeg and then for Chicago, so we believe that we will grow this railroad into mid to long term for sure. I mean you just heard Keith talk about Rupert being the gift on keeps on giving.

So we will need that -- we will need that capacity and that will be good for us. We've caught up now so now we need to keep up with our partners and DP World and their expansion. But we will go back to historical levels. So again next year and we've said that to people that next year we would go back to historical levels and you've been following us for years, you know what that means and frankly as we finalize our business with our Board this fall, we will provide more visibility on the absolute number in January as we typically do but rest assured that CapEx will go back to historical levels in 2020.

Jason Seidl -- Cowen -- Analyst

That was my one [Speech Overlap]

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Thank you very much.

Operator

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

Walter Spracklin -- RBC Capital Markets. -- Analyst

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

Jean-Jacques Ruest -- President and Chief Executive Officer

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

Keith Reardon -- Senior Vice-President of Consumer Product Supply Chain Growth

Sure Walter, you talked about competition, we compete against all the Class 1 railways, we compete against the truck but I also compete internally against James for money for capital. So if I bring a project where I want to grow the business to Ghislain and J.J. and I don't meet the hurdle rates, then I don't get the money. So we have a very disciplined approach inside that if we need things then we have to have a good track record and we have to have gained confidence from J.J. and Ghislain that we are doing the right things from a pricing standpoint. So thank you for your call.

Walter Spracklin -- RBC Capital Markets. -- Analyst

Okay, thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Thank you the next question is from Steve Hansen from Raymond James. Please go ahead.

Steve Hansen -- Raymond James -- Analyst

Yes, good afternoon guys. Just a quick one from me on forest , if I may. James, I think you mentioned earlier in the call that forestry is down to a more stable run rate now, are you getting good indications from the BC customers, the millers [Phonetic] that is that the predominance of the capacity curtailments or shutdowns since occurred thus far. Should we, should we expect or are we at risk of another step down once some of the log -- burn through just curious, any color that you might have there.

Thanks.

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

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

Jean-Jacques Ruest -- President and Chief Executive Officer

And if I may add this, Steve, if I may add to [Indecipherable] deal was actually moving in the province of Alberta. And there is a number of producer that tell us that they think the province will have to do with BC has done, which is to control the prime beetle, they will have to open up the forest to a higher rate of cut. So we even though this the fast pace of cutting of the Pioneer [Phonetic] in BC has done. At some point, we may see some of that in Alberta in an area that's favorable to [Technical Issues].

Steve Hansen -- Raymond James -- Analyst

Understood .Thanks guys.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

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

Seldon Clarke -- Deutsche Bank -- Analyst

Hey, thanks I just want to get back to CapEx for a second and so can you just help me better understand why the intensity of investments wouldn't come down next year, sort of, I guess below your typical historical range given your envelope this year is unchanged at CAD3.9 billion, RTMs have been, your RTM assumptions have come down from up high single digits to now down slightly year-over-year.

So could you just give us a sense of why that -- you wouldn't see savings roll over into next year, based on your capital both for this year.

Jean-Jacques Ruest -- President and Chief Executive Officer

Yes , maybe I can start. The entity [Phonetic] of the CapEx will go down next year and we've been very clear about this we now for quite a number of months and what will be the final CapEx program we're going to just say, decide that in January, at the Board meeting because we would like to see what the four quarter will do in term of total volume. There is obviously a direct relationship between how is the business doing, how much CapEx we need to lay out and I think right now been in the part of the economy that's moving fairly fast, we would like to have the benefit of knowing what the fourth quarter will do in term of rail road. In term of volume for all the railroad before we find out the CapEx. But the CapEx intensity is going to come down. Including at CN. Anything else you want to ask?

Seldon Clarke -- Deutsche Bank -- Analyst

I guess..

Jean-Jacques Ruest -- President and Chief Executive Officer

Well maybe I just want to. I just want to Seldon tell you as well. That again our use of cash strategy has not changed for the last 15 years, it's always the first use of cash is is toward the business.And we have a very focus on return on invested capital as you know and we publicly said that we are targeting 15% to 17% in the nextv two years to three years. So we have a very disciplined approach. But if we have projects at CN, that can generate a return in that range. We'd rather do that then do share buyback and because that creates real shareholder value.

So to J.J.'s point I think our capital intensity or capital envelope will be rightsized and resize because now we're out of the catch-up CapEx. Now, we need to keep up CapEx, but again we manage this business for the mid to long-term and we understand that quarters are important, but some of these investments we're making will actually feed this network for many years. And remember DP World is investing hundreds of millions of dollars in increasing its footprint in Rupert, we need to keep up to make sure that with our partner, we make that gateway competitive and continue to take market share from LA Long Beach.

Seldon Clarke -- Deutsche Bank -- Analyst

Okay, thanks.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thanks for your question Seldon.

Operator

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

David Vernon -- Bernstein -- Analyst

Hey, good afternoon guys. So I think the Investor Day, you guys have outlined CAD1.3 billion to CAD2.4 billion of incremental revenue opportunity in 2020 to 2022. It feels like we're going a little bit in the opposite direction. Is there anything outside of the structural shift you've seen in the forest products market. Perhaps that that has changed in terms of what that incremental upside opportunity could be or should or should we just be thinking that this is pushed out a year or two as we get through this soft patch in the economy.

Jean-Jacques Ruest -- President and Chief Executive Officer

I think -- if I may start. So definitely for all railroad manufacturing sector is actually probably -- as you were saying negative growth versus positive growth. The Alberta energy space whether it's frac sand accrued is also going to be producing short-term negative growth as opposed to positive growth to the point made earlier by James.

There is crude production available in Alberta, but it's been curtail. So we obviously, we can't move it. In the case of Forest product, the fact that the price of lumber is down and the price, the cost of stumpage is up and the fact that forest does not have as many dying tree that it had, it's a combination of secular shift and also just cyclical -- cyclical is about the price of the stumpage fee and the selling price of lumber.

So you know the story about US coal. And US coal company who are producing thermal coal are increasingly having a tough challenge making any money and obviously that has an impact on how much volume is available for the railroad in the case of CN, we're talking the the export market.

So I think the issue here is more about the broad economic environment, then our customers not being able to perform in their space. There space is under pressure. So, all of them are either producing less or they've had to take some curtailing production. So we, we can only -- we are not losing market share but the market that we're serving on manufacturing, natural resource, energy and trade is not as big as it was. And I think that's true for all of the North American railroad.When you see volume down for the North American railroad it's way beyond just the precision schedule railroading impact a big part of that is what demand is available for us in term of the overall economic environment.

David Vernon -- Bernstein -- Analyst

So the projects that were identified are still going to be vary. They are just going to have some offsets to work through, is that the right way to interpret that or is there specific...

Jean-Jacques Ruest -- President and Chief Executive Officer

That right.

David Vernon -- Bernstein -- Analyst

Okay.

Jean-Jacques Ruest -- President and Chief Executive Officer

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

David Vernon -- Bernstein -- Analyst

All right, thanks a lot for the time guys.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

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

Jordan Alliger -- Goldman Sachs -- Analyst

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

Jean-Jacques Ruest -- President and Chief Executive Officer

Keith, you want to do that ?

Keith Reardon -- Senior Vice-President of Consumer Product Supply Chain Growth

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

Jordan Alliger -- Goldman Sachs -- Analyst

Okay.

Keith Reardon -- Senior Vice-President of Consumer Product Supply Chain Growth

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

Jordan Alliger -- Goldman Sachs -- Analyst

Okay, great, thanks. That was my question.

Keith Reardon -- Senior Vice-President of Consumer Product Supply Chain Growth

Thanks.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

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

Brian Ossenbeck -- JP Morgan -- Analyst

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

Jean-Jacques Ruest -- President and Chief Executive Officer

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

Robert E. Reilly -- Executive Vice-President and Chief Operating Officer

150

Jean-Jacques Ruest -- President and Chief Executive Officer

And then we are returning the last of the leased locomotive on the people side, we do have the qualified crews and either they don't furlough or they taking vacation and it's partly across -- partly across we can avoid partly across worth the carry. And when it comes to the take or pay system maybe you want to add color James.

James Cairns -- Senior Vice-President of Rail Centric Supply Chain

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

Jean-Jacques Ruest -- President and Chief Executive Officer

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

Brian Ossenbeck -- JP Morgan -- Analyst

And the fourth quarter expectation similar to 3Q. And so these are this get you...

Jean-Jacques Ruest -- President and Chief Executive Officer

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

James Cairns -- Senior Vice-President of Rail Centric Supply Chain

Yeah, I would say we're looking at. Again looking at difficult comps, but if you look at Q3 going into Q4, we were flat Q3 from Q2. We're going to be slightly down, I think in crude by rail volume going Q3 to Q4, unless something changes. At the end of the day if the customers bonus up that have these take-or-pay contracts and say I'm ready to move let's go we're going to be ready to move. The differentials aren't quite there yet, we're looking at differential somewhere in the range of CAD14 to CAD15 per barrel.

Should be a strong pricing single moving forward to get back in the game, but again I think the government curtailment and the kind of cap on the amount of crude produced puts an artificial cap on the differential customers look very, very hard about getting back into the crude by rail space without some notion of longevity.

Jean-Jacques Ruest -- President and Chief Executive Officer

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

Brian Ossenbeck -- JP Morgan -- Analyst

Got it. Thank you very much.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

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

Scott Group -- Wolfe Research -- Aanalyst

Hey, thanks. Afternoon guys.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon.

Scott Group -- Wolfe Research -- Aanalyst

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

Jean-Jacques Ruest -- President and Chief Executive Officer

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

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Maybe I want to -- maybe I can give a little bit of color to your point J.J. On this one, you will have to stay tuned and we will provide visibility at the end of January as we typically do and frankly as J.J. has mentioned in the first half like again in Canada of being the railroad of the North, the winter comes every year so that's, we never know how that's going to, that's going to impact us. Now we've done, we've done a few with -- quite a bit of investment to help us through the winter, like for example, we have 40 more aircars, Rob that we will be able to use.

So now, we'll have a 100 aircars and this typically allow us in when it's very cold to have long -- to be able to have longer trains than if we wouldn't have them. So, there's things that we did and that we're doing, that will help Q1 and, but in terms of cost take out and volumes as Scott on this one. I mean we're, as you know that the environment is changing quickly and I would tell you to stay tuned on that one and we'll provide more visibility in January as we typically do for the entire 2020.

Jean-Jacques Ruest -- President and Chief Executive Officer

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

Scott Group -- Wolfe Research -- Aanalyst

Okay, thank you guys.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Thanks Scott.

Operator

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

Konark Gupta -- Scotiabank. -- Analyst

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

Jean-Jacques Ruest -- President and Chief Executive Officer

Keith?

Keith Reardon -- Senior Vice-President of Consumer Product Supply Chain Growth

Yes Konark. Thanks for the question. We do have those discussions with our liner customers, we know that they are in their discussions with -- with the beneficial cargo owners. We've seen some of those dates that those surcharges will go into play. We've seen some of them get pushed out from maybe some of them want to start in October. We've seen some of them push to December maybe some in November, but that is something, they're going to have to do to recoup their higher costs.

We also see some of the BCOs with their own surcharge that they're going back to the lines with. So it is a very dynamic situation and one that we're keeping apprised of but it really should not impact us at this point in time.

Konark Gupta -- Scotiabank. -- Analyst

Thank you.

Keith Reardon -- Senior Vice-President of Consumer Product Supply Chain Growth

Thank you.

Operator

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

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon, Tom.

Tom Wadewitz -- UBS. -- Analyst

Yes good afternoon. Thanks for the chance for question. Wanted to see if you could offer some thoughts sequentially on headcount and Rob, if you could kind of ballpark some of the commentary on mechanical resource reductions. Are you -- are you talking about 50 people, a couple of hundred people. What's the magnitude of potential reduction in resource in that bucket and how quickly you can respond on headcount in fourth quarter?

Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

You want to add some color, Ghislain.

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Well, maybe high level and then I'll let Rob jump in. But if you look at our headcount on a sequential basis between Q2 and Q3 we're basically flat. If you look at, if you look at headcount on a year-over-year basis Tom Q3 over Q3. If you -- got to take into consideration TransX here. If you do take into consideration TransX then actually our head count is down about 1% and so, and then I'm going to reinforce J.J.'s point and then turn it over to Rob. When you look at headcount, you've got to be careful because we're focused on costs and headcount is part of the story, but it's not the entire story and the example that J.J. talked about a little bit is -- is in IT in our technology department where actually headcount, there may be a little higher, but we're getting rid of a lot of high paid consultants and therefore on a net basis. It's a net net win for us.

So that's what we're focused. At CN we used the nomenclature of being focused on paychecks and paychecks includes consultants. So Rob, I'll let you cover the mechanical piece.

Robert E. Reilly -- Executive Vice-President and Chief Operating Officer

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

Thanks for the question, Tom.

Tom Wadewitz -- UBS. -- Analyst

Okay. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

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

Justin Long -- Stephens -- Analyst

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

Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Ghislain?

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

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

Jean-Jacques Ruest -- President and Chief Executive Officer

Rob?

Robert E. Reilly -- Executive Vice-President and Chief Operating Officer

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

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

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

Justin Long -- Stephens -- Analyst

Okay, fair enough. I appreciate the answers .

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Justin.

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Thank you.

Operator

Thank you, this concludes today's question-and-answer session. I would like to turn meeting back over to Mr. Ruest

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, operator. Thank you, Patrick. And thank you for all of you to join us tonight and I'd like to take the occasion to take a very special thanks for myself to all of the CN employee. We are dealing with every challenge as they come to us, but first and foremost with safety in mind and everybody at CN, how they can-do attitude.

So I appreciate very much the effort of all the CN team who makes possible the solid EPS and operating ratio that we've been producing in the third quarter. So thank you for joining us. Thank you, Patrick. This is the end of today's call.

Thank you.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Paul Butcher -- Vice-President, Investor Relations

Jean-Jacques Ruest -- President and Chief Executive Officer

Robert E. Reilly -- Executive Vice-President and Chief Operating Officer

James Cairns -- Senior Vice-President of Rail Centric Supply Chain

Keith Reardon -- Senior Vice-President of Consumer Product Supply Chain Growth

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Brandon Oglenski -- Barclays -- Analyst

Cherilyn Radbourne -- TD Securities -- Analyst

Chris Wetherbee -- Citi -- Analyst

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Ken Hoexter -- Bank of America -- Analyst

Soni Rice -- Morgan Stanley -- Analyst

Allison Landry -- Credit Suisse -- Analyst

Jason Seidl -- Cowen -- Analyst

Walter Spracklin -- RBC Capital Markets. -- Analyst

Steve Hansen -- Raymond James -- Analyst

Seldon Clarke -- Deutsche Bank -- Analyst

David Vernon -- Bernstein -- Analyst

Jordan Alliger -- Goldman Sachs -- Analyst

Brian Ossenbeck -- JP Morgan -- Analyst

Scott Group -- Wolfe Research -- Aanalyst

Konark Gupta -- Scotiabank. -- Analyst

Tom Wadewitz -- UBS. -- Analyst

Justin Long -- Stephens -- Analyst

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