Oct 19, 2018
Executives
Maeghan Albiston - AVP, Investor Relations and Pension Keith Creel - President and CEO Nadeem Velani - Executive Vice President and CFO John Brooks - Senior Vice President and CMO
Analysts
Tom Wadewitz - UBS Fadi Chamoun - BMO Capital Markets Chris Wetherbee - Citi Walter Spracklin - RBC Ken Hoexter - Merrill Lynch Steve Hansen - Raymond James Allison Landry - Credit Suisse Brandon Oglenski - Barclays Brian Ossenbeck - J.P. Morgan David Vernon - Bernstein Turan Quettawala - Scotiabank Scott Group - Wolfe Research Matt Reustle - Goldman Sachs Konark Gupta - Macquarie Justin Long - Stephens Bascome Majors - Susquehanna Seldon Clarke - Deutsche Bank
Operator
Good afternoon. My name is Sheryl, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Canadian Pacific’s Third Quarter 2018 Conference Call. The slides accompanying today’s call are available at www.cpr.ca.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.
[Operator Instructions] I would now like to introduce Maeghan Albiston, AVP, Investor Relations and Pension to begin the conference.
Maeghan Albiston
Thank you, Sheryl. Good afternoon, everyone, and thank you for joining us today.
Before we begin, I want to remind you that this presentation may contain forward-looking information and the actual results may differ materially. The risks, uncertainties, and other factors that could influence our actual results are described on slide two in our press release and in the MD&A filed with Canadian and U.S.
regulators. This presentation also contains non-GAAP measures, which are outlined on slide three.
With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, Executive Vice President and Chief Financial Officer; and John Brooks, Senior Vice President and Chief Marketing Officer. The formal remarks will be followed by Q&A and in the interest of time, I’d appreciate if you could limit your questions to two.
It’s now my pleasure to introduce Keith Creel.
Keith Creel
Thanks, Maeghan. Good afternoon.
Welcome to the call this afternoon. Certainly, well, I will say this, we can keep our comments brief to allow for maximum time for the Q&A.
But, with that said, looking at the results, I am sure that you would join me saying that, my view that these very impressive results. I am very pleased with the results for the quarter, setting records across the Board for the company.
Revenue was up 19%, $1.9 billion. The operating ratio obviously $58.3, that’s an all-time record for CP.
Certainly, something we are very proud of. Operating income improved 27% to $790 million and adjusted EPS at 42%, year-over-year to $4.12.
Operationally from a leverage standpoint, productivity standpoint, we continue to see train weights improve to hit record levels, fuel efficiency improved by another 3% to hit a record of $49.16 gallons per thousand GTMs, which not only as a CP record, but as well as is it industry best. These results overall reflects of the collective efforts of this entire CP family.
I am especially proud of John Brooks in the marketing and sales team, outselling his very compelling value story for CP. Mike Foran and his team creating the constructive tension as we develop the market strategies and make sure there were asset correctly, and finally, Robert Johnson in the operating team world-class efforts delivering the service that we sold to our customers.
With this confidence as you have seen yesterday as well, the press release we have applied to the TSX renewed buyback program. We advanced that discussion.
Originally, we had planned to have it in December, but given the recent market volatility that we have all experienced. We saw very compelling opportunity to create additional value for shareholders real time, so we advance that discussion, the Board approved it.
We have applied for 4% buyback. This amount itself is manageable from the credit metric perspective and certainly at the same time illustrates our strong conviction and our CP going -- story going forward.
So, that’s it, let me hand it over to John and Nadeem to provide some color on the market to the financials and then to my original point, we will spend the rest of our time on some fruitful Q&A.
John Brooks
All right. Thank you, Keith, and good afternoon, everyone.
As Keith said, total revenues were up 19% this quarter to a record $1.9 billion, with revenue growth across every one of our business units. RTMs were up 13%.
Fuel and FX were tailwinds of 4% to 2%, respectively. And as expected and as I guided to you earlier this year, same store price continued to solidly land in the middle of our target 3% to 4% range and renewal pricing continued to trend north of 4%.
So now taking a closer look at our revenue performance on a currency adjusted basis. Grain was up 7% this quarter led by strong performance out of Canada, with September being our all-time record month for shipment to Vancouver and we expect Q4 to also all the remain very strong as harvest is now fully underway as we have got by some of the weather challenges in Alberta.
Strong export volumes from both Canpotex and K+S marked another record setting quarter for potash. Revenues finishing up by 24% and I will note that was a third straight quarter of record potash volumes.
The energy chemical plastics portfolio saw revenue growth of 58%, while crude was a large contributor to this growth with over 23,000 carloads moved in the quarter. I would also highlight that excluding crude, ECP was up 23% and this was also a record.
This was led by LPG, fuel oil, gasoline, asphalt, and frankly, a reflection of Coby Bullard and his team selling service and adding carloads to energy train service. As expected, forest products were also up 12% as we continue to leverage the strength of our Vancouver, Toronto and Montreal transload capabilities.
In fact, our lumber and panel business had the best quarter in the last 10 years. Automotive revenues were up an impressive 20% in spite of a weak environment, a trend we expect to continue for the remainder of the year.
Further, construction is well underway on our new Vancouver auto compound offering our automotive customers a new option in the Vancouver market and another great growth opportunity for CP. Finally, talking about the Intermodal side of the business, revenues were up 18% with both international and domestic intermodal experiencing double-digit growth again.
Of note, RTMs were significantly more than carloads this quarter, a reflection of the discontinuance of our short-haul low-margin Expressway service and the continued success we have on our long-haul transcontinental service. So overall, the demand environment continues to be positive, frankly stable and healthy in many of our commodity areas and I am proud and I think you heard it during our Investor Day of the team is executing strategically and a very disciplined in the marketplace.
We are picking our right partners. We are enhancing our total transportation product and we are providing and pricing value for the service we provide in this marketplace.
So, of course, as we said that day, there is a lot of work yet to be done, heavy lifting to do, but the team is laser focused on the opportunities ahead of us. With that, I will pass to Nadeem.
Nadeem Velani
Thanks, John. Tremendous results by you and the team.
As Keith and John noted, this was a record quarter across the Board. Revenues were up 19% or 17% on FX adjusted basis driven by significant volume growth of 13% on an RTM basis, continue to demonstrate our ability to grow at low incremental cost.
This has resulted in the third quarter operating ratio of 58.3%, an improvement of 270 basis points year-over-year, and as Keith mentioned, lowest ever for the company. This was in spite of rising fuel prices in stock and incentive-based compensation accruals which negatively impacted the operating ratio by about 250 basis points.
As our numbers illustrate, the railway is performing well and we have strong momentum as we continue to drive productivity and grow at high incremental margins. We are confident that we will continue to see slow margin improvement in the fourth quarter.
Taking a closer look at a few items on the expense side, we will be speaking to the results on exchange adjusted basis which is shown on the far right column of the slide. Comp and benefits expense was up 11% or $37 million versus last year.
The increase is driven by higher volumes, as well as $23 million in higher stock and incentive comp, and higher pension expense and labor inflation. The increases were partially offset by efficiency improvements from enhanced labor productivity.
Fuel expense was up 46% primarily as a result of higher fuel prices and increased volumes. This was partially offset by improvements in fuel consumption of 3%, driven by improved train utilization from higher volumes.
As Keith mentioned, this was best ever fuel efficiency. Materials expense was $47 million, an increase of $2 million or 4% driven by higher locomotive maintenance and higher wheel repair costs, partially offset by increased efficiency and productivity in car repairs.
Purchased services and other was $263 million and flat on an FX adjusted basis. Higher Intermodal pickup and delivery cost and higher casualty costs were offset by reduced expenses on locomotive repairs.
There has been no material land sales year-to-date. We still expect the land sales in the magnitude of about $30 million in the fourth quarter.
However, there is some risk that it lies into 2019. This has no impact on our updated guidance and in fact, if anything, it improves the quality of earnings.
And one item below the line to note, interest expense was $3 million lower or $8 million lower, excluding FX. The reduction is primarily driven by savings from debt refinancing in Q2.
So, adjusted net income improved 40% and 37% on an FX adjusted basis, while adjusted EPS grew 42%, outstanding results. Taking a look at the free cash on the next slide.
We continue to generate strong free cash flow. Year-to-date, cash from operations increased by 23% and free cash flow increased 29%, in spite of increased capital spend.
As previously guided, we expect CapEx to continue at these levels and are targeting $1.6 billion at year end. We remain well on track to deliver more than $1 billion in free cash this year and a strong cash generation combined with taking a pause in our buyback for the last six months, we have lowered our leverage within our targeted 2 times to 2.5 times debt-to-EBITDA.
As Keith already noted, we have filed a 4% NCIB program as one means to redeploy this cash. With the support of our Board we accelerated this program and increase the scale as we see significant value in the share price.
So with our balance sheet discipline it has created an opportunity for us to take advantage of this pullback and we plan to be aggressive once we get TSX -- we believe is a very prudent approach to capital allocation. While there were some challenges in the first half of the year, our operating model remains resilient.
This quarter’s record results only serve to reinforce our ability to grow faster than others in the industry and we remain confident in our team to drive further sustainable profitable growth in Q4 and into 2019. And with that, I will hand it over back to Keith.
Keith Creel
Okay. With that said, I think, again, overall, hard work, precision scheduled railroading, I think, certainly producing at the end of the day a very, very compelling value in the marketplace for our customers and at the same time producing very compelling financial outcome for our shareholders in the marketplace.
So, that’s it, let’s open it up for questions.
Operator
Thank you. [Operator Instructions] Your first question comes from line of Tom Wadewitz of UBS.
Please go ahead.
Tom Wadewitz
Good afternoon. I think we are already knew there were going to be strong result, but congratulations nonetheless obviously very good quarter.
Keith Creel
Thank you, Tom.
Tom Wadewitz
I wanted to ask, I guess, it’s a kind of granular question. But on energy side, how -- maybe John or Keith how do you think the ramp from the 23,000 looks like the next couple quarters on crude?
And then how much you think about the offset in terms of frac sand, maybe what frac sand probably were in the quarter and kind of where they might go over the next few quarters?
Keith Creel
Yeah. So, Tom, as I mentioned, I guess, now, a couple of weeks ago, we will move into that sort of hundred thousand annual run rate on the crude as we get into Q1, get through winter to that ramp-up.
I think there is again opportunity to get beyond that, but it probably looks like more once you get into Q2, Q3 of 2019. Just going by memory here a little bit, but I think we landed in the neighborhood of around 18,000 or so cars in frac sand in Q3 and that was a little drop from I think an all-time high as we get in Q2 of it, if I recall.
You know what, that -- there is a lot of dynamics that play in that space right now. We’d probably see a little further deceleration as we going to Q4.
The positive is, I think, our sales and marketing team has been frankly out in front of this for quite a while. We talked about.
We have developed the three new terminals in the Bakken all repurpose crude facilities now delivering sand, taking unit trains. And I think, the thing you have got to remember about that opportunity is, not only is that replacing that sand but it’s also -- it’s a great margin opportunity for CP.
It’s a single line-haul. It’s control train that allows us to run longer train.
So what we lose on the topline is actually a pretty good bottomline that story for us in that market. And as I said also, we have got a few other things up our sleeves in some of those other markets where we can look at developing further unit train landing spots.
John Brooks
Yes. I would add those sand moves, Tom.
It’s important to remember, those fit right in our warehouse, when we originate and terminate the move from an asset turn standpoint from locomotive productivity standpoint, so from a margin standpoint the contribution per car, operating income, I don’t know which way you want to look at it. You look at it all always.
It’s much more profitable business for us at the end of the day. We control our own destiny and we are going to do better as a result of its, not only, car for car to replace benefit to the bottomline, when carloads go down, what you have historically seen as our numbers on the sand side.
Tom Wadewitz
Okay. That’s helpful.
And then maybe just one follow-up on just on the same topic, are you still -- are you doing crude by rail out of the Bakken and is that something that if there is demand there would be cars available that you could actually do some out of the Bakken, if there was kind of the right market condition?
John Brooks
We are not currently doing any crude out of the Bakken. Would we entertain crude out of the Bakken?
The answer would be yes. But to your point it’s got to be in the right car type.
Tom Wadewitz
So are those car types available or not?
Keith Creel
There is -- part of this -- part of some of the lag of our ramp-up in Canada, frankly, has been timing delays around the retrofit in some of the newer model cars coming online. We probably face a little bit of that also if we are to come out of the Bakken, but I think the cars are out there, Tom, if the right delay presents itself.
John Brooks
Yeah. None of our expectations for data is based on shipping a carload crude out of the Bakken.
So I think that’s another critical point. If it make sense we will consider.
If it doesn’t we are not going to and it’s not a good decision for CP and we are obviously not going to be doing.
Tom Wadewitz
Sure. Okay.
Great. Thank you for the time.
Keith Creel
Thanks, Tom.
Operator
The next question comes from Fadi Chamoun of BMO Capital Markets. Please go ahead.
Your line is open.
Fadi Chamoun
Okay. Thank you.
Just to follow-up on this crude discussion, is the 100,000 run rate you talked about, all is kind volume contracted over two years to three years, I think, the timeframe you have been talking about or are there more kind of tariff volume moving under this…
Keith Creel
Yeah. All the volumes is under contract.
It involve NDCs, it involves terms, Fadi, all of it.
Fadi Chamoun
Okay. And back to the supply chain, I guess, are there terminal storage bottleneck that you are seeing in Canada in terms of this crude romp up or is it really more a question of having the right cars and ultimately evacuating crude as it comes up?
John Brooks
Yeah. No.
I -- we have done our railroad. We haven’t experience that sort of backup, Fadi.
It would definitely be more of the equipment that was the pacing item on some of these opportunities we have.
Fadi Chamoun
Okay. My second question is, is kind of how do you think about the network positioning into 2019.
I guess you have been hiding up the hiring the locomotive overhaul to handle this growing volume like, can you help us kind of understand a little bit if we see a 5% RTM growth next year, what kind of headcount, what kind of flavor and you would need to ramp up into in order to handle that volume?
Keith Creel
So, 5%, again, it depends on the business line where it goes. I mean, obviously, the unit trains and we don’t have any more a lot of synergies left for the unit trains when it comes to those type, but manifesting and intermodal, obviously, it is not going to be one for one, so I would not suggest that it would be anymore close to 5%, 1% or 2% is a guesstimate based on the 5% or 6% RTM growth run rate.
And as far as locomotives, we got locomotives available that we can pull into ‘19 and we are certainly more than prepared to do that if the economics are there and it make good sense to retrofit to cover our fitting with that demand.
John Brooks
And Fadi, I would just add that as -- we pointed out to the last several calls, we have been ramping up the hiring and training to get to the position where we are at and to hit our stride as the volumes ramp up. So I don’t think you will expect from us to see a huge ramp-up in assets or resources to be able to meet our ‘19 demand and some of it’s been -- we are controlling the what’s coming on at the railroad.
So we described a couple weeks ago, having a team in lockstep and how we plan and how we take on new business is an important function and important kind of process we go through to make sure we are taking on what we can handle. So we are taking on in a very prudent fashion.
Keith Creel
Yeah. I think, you have got to look to some of the numbers that we shared today.
I mean, we look at the 13%, 14% RTM growth in the third quarter that we just reported and from a train miles standpoint we are up less than double-digit and that’s only as a result of running fewer, longer trains, heavier, longer trains, which is all part of the PSR model.
Fadi Chamoun
Great. Thank you.
Keith Creel
Okay. Thank you, Fadi.
Operator
Your next question comes from Chris Wetherbee of Citi. Please go ahead.
Chris Wetherbee
Hey. Thanks.
Good afternoon, guys. Understanding that it’s only been two weeks since we all spent some time together going through the opportunities, I think, at the time there were a few contracts that maybe you were awfully close to.
I guess, maybe stepping back and thinking bigger picture as you think about the progress toward winning particularly some of the competitive business. You obviously put a lot of information out a couple of weeks ago.
Just kind of curious sort of where things stand today in terms of getting closer in closing in on those deals. Do you feel better, the same that you did a couple of weeks ago about your ability to close, particularly on those competitive contracts.
Keith Creel
Chris, I would say this, I feel this is good, if not better. Men are dotting I’s and crossing T’s and making sure we are doing the deals in a way that’s good for the customer and good for CP.
Chris Wetherbee
Okay. That’s helpful.
And if I think about 2019 and honing in a little bit on the operating ratio, I know that’s more of an output than necessarily a target that you might model toward or operate toward, when you think about the puts and takes and the RTM growth opportunity, some of these longer-term contracts and some of the competitive business. What are the hurdles that are going to potentially keep you from dipping that OR back under 60 for a full year basis?
Just want to get a sense of maybe how you are thinking about the landscape and hitting -- still getting back to that sub-60 OR again in 2019.
Nadeem Velani
I would say, the only material hurdle, Chris, would be fuel and just taking on the fuel prices go up, and OHD goes up, you take on fuel surcharge revenue at 100% OR. That’s one hurdle.
Stock-based comp certainly was a hurdle up until the last few weeks and we will see what occurs there. But we talked about some of the risks, we don’t see from an OR point of view many kinds of headwinds that we will face.
I think we faced a lot this year, in the first half of the year, as I kind of mentioned, with a very difficult winter. If we have an extremely difficult winter, we will let that hurt us and create headwinds potentially but we are coming off of a very easy comp from a winter point of view.
And I would say that the other issue that we had in earlier part of this year that hurt our OR was labor disruptions and we certainly don’t anticipate that to be a case for us going forward. So, no, we feel very good about taking on these volumes at a very high incremental margin and we should see that OR continue to improve, and like we said, there’s no reason why we can’t be industry best.
Chris Wetherbee
Okay. Got it.
Thanks for the time. I appreciate it guys.
Keith Creel
Thanks, Chris.
Operator
Your next question comes from Walter Spracklin of RBC. Please go ahead.
Walter Spracklin
Thanks very much. Good afternoon, everyone.
Just on the grain side. John, you mentioned that you had some wet weather and I know when we were there we certainly experienced some of the snow and that early onset of winter I think is starting to come into some of the forecasts with regards to potentially negative in Alberta and maybe parts of Saskatchewan.
Has that, based on what your discussions customers, are you seeing any notable change in what you’d communicated to us previously in terms of the potential size of the crop and if you could balance that with what’s carried forward as well in terms of overall crop size for this year? That’d be helpful.
John Brooks
Yeah. That’s good, Walter.
Yeah. We wanted to show you guys what winter railroading was all about that day.
But honestly, the weather since then has somewhat stabilized and they have been able to get after that crop in northern Alberta pretty good here. And if you look out the next week or so, they are going to get after it.
So I think a lot of that’s canola in some areas where those crops are pretty resilient as long as they are not beaten down to the ground. So, I think, certainly, my discussions with customers have been that they are still pretty bullish that this is a 70 million plus or minus metric ton crop which puts us sort of right in where we pegged them.
And as you look at the carryout, it’s jumped around a little bit but I still think it’s above average. I am still 10 million metric ton plus type number.
I think that bodes well here for a strong fourth quarter, and frankly, a strong first half of next year.
Walter Spracklin
Okay.
John Brooks
We are in short fiscal year today, was in the 20s and in the 70s for American friend, so expecting beautiful since you guys left it at Analyst Day.
Walter Spracklin
I take your word for it. Okay.
On the buyback, Nadeem, actually, I know your target leverage is two to two and a half and that hasn’t changed, obviously, there have been others in the sector getting a little bit more aggressive. Your free cash flow profile is looking good.
It suggests that in past recession it showed a little bit of resilience in the railroad sector in general to whether the downturns. I am wondering if you start to see avenue here for being a little bit more aggressive on the buyback in getting the leverage level toward the upper end or even above your indicated rates of two to two and a half, how comfortable would you be with that?
Nadeem Velani
Yeah. It -- so as I mentioned, we are comfortable being at the high end of the range.
We spent time with the rating agencies the last several days and we have going to stay true to our commitment of being within that range. We are at 2.48 now, will we beat around the 2.5 level.
That’s fair. So we did ramp it up.
We talked about doing closer to a 3% program. So this 4% program kind of reflects us being a little bit more aggressive to your point.
Our visibility on free cash, our visibility into 2019 is very high and very positive. So we will be able to execute this program, stay with it, utilize our free cash and stay within our means.
We have a refinancing opportunity in the spring of next year. We will add a little bit of leverage onto that refinancing as well.
We will still stay within our range below 2.5 and I think we will be able to execute on this 4% buyback. So I think that’s a good time and a good story, so.
Walter Spracklin
Okay. Thank you very much.
Thanks, Walter.
Operator
Your next question comes from Ken Hoexter of Merrill Lynch. Please go ahead.
Ken Hoexter
Great. Good afternoon.
Nadeem, can you just clarify some of the comments on the fourth quarter margins, when you said they were going to be better. Is that year-over-year or sequentially?
And then with that, you noted land sales I guess are looking a little bit lighter than you thought at the Analyst Day. I think you said $30 million instead of $50 million.
Has anything changed there? Just trying to read what your comment on the operating ratio would be?
Nadeem Velani
Sure. Yeah.
So, I am going to say that if you look at our operating ratio ex-land sales, it will be difficult to improve sequentially given the challenges of winter weather and just some of the seasonality associated with how we railroad in Canada. I would say you shouldn’t expect an operating ratio without land sales to improve sequentially.
That being said, we expect it to improve year-over-year. So if I exclude land sales, it will improve year-over-year.
Why land sales change -- there’s some lumpiness associated with it. So there are maybe three land sale deals that kind of are pending.
Two of them were pushed from 2018 into 2019 and then one of them, which is we have a high level of confidence it’s going to close, it’s just it could be the middle of December or it could be early January. So it’s that tight of timing.
So it’s just really a timing issue, nothing else.
Ken Hoexter
And then, I guess, my follow-up, just given the gyrations of the market, John, maybe a question for you in terms of your thought, I know it’s really rapid since your analyst day. But is an increasing concern on the state of the economy from discussions with customers the last few weeks in terms of their thought on the state of demand?
I guess more industrial, you have already kind of gone over grain and your view on crude so more maybe on the industrial side?
John Brooks
No. And we are pretty bullish across the Board there.
If I had to call something out, we have seen a little bit of pricing volatility in the lumber market in the United States here the last couple of weeks. But I also look at our demand year-over-year in that space and it stronger than it a year ago at this time.
So overall we are pretty optimistic going in the Q4.
Ken Hoexter
Great. Thanks for the time.
Keith Creel
Thanks, Ken.
Nadeem Velani
Thanks, Ken.
Operator
Your next question comes from Steve Hansen of Raymond James. Please go ahead.
Steve Hansen
Yeah. Hey, guys.
Solid quarter. Just curious on the crude side here, whether you are contemplating or entertaining any manifest business at this point, it sounds like the three large unit frame facilities are starting to fill up to some degree, the loading terminal.
At the same time, it sounds like a lot of the smaller terminals in the north are still pretty idle. Just curious if you are seeing any options to move manifest businesses through an additional bolt-on opportunity without new train starts or if that’s not really in the cards at this moment?
John Brooks
No. We are.
We have got the manifest opportunities in play at some of our transload locations. So I do think manifest does play a role in this.
We haven’t been in it, Steve, at this point very heavy, but there are, as I said, three or four opportunities that the team is working on.
Steve Hansen
Okay. Great.
And just as a follow-up to that, I understand the heart of a few terminals undergoing expansion. I think you discussed that at the Investor Day.
Just as a border statement, have you heard about any more capital that’s starting to entertain investment into more loading capacity thus far?
John Brooks
Outside of that one, nothing jumps out at me. I think, I mean, obviously, spreads are pretty wide right now.
There’s quite a bit of noise and a lot of discussions under way out there, but nothing that I would call imminent or we are aware of specifically.
Steve Hansen
Okay. Very good.
John Brooks
Hopefully, our finance minister will incent some further investments in Alberta.
Steve Hansen
Yeah. I caught some of the comments earlier, so I appreciate the color.
Thanks.
Operator
Your next question comes from Allison Landry of Credit Suisse. Please go ahead.
Allison Landry
Thanks. Good afternoon.
Just maybe going back to the weather theme, have you made changes to the network in the last year or so that you think will make it more resilient if it does turn out that there’s a pretty difficult winter whether that’s the end of this year or early next year?
Keith Creel
We continue to invest in strategically and surgically to increase capacity and so, obviously, standalone, same weather, same conditions we are going to do better than we would have last year. Last year, in addition to the challenging weather, we had a very catastrophic derailment that really compounded our problems really had a tunnel going to the west coast that we literally shut down for several days.
That’s not normal, that’s definitely an exception of circumstance. It sucked a lot of capacity out of this railroad.
So in the absence of that, which I certainly plan and expect and hope and pray we don’t experience again, there’s a bit of resiliency in the railway versus last year given the same circumstances.
Allison Landry
Okay. That’s help.
And then, Keith, just following up on a comment you made earlier regarding the train miles being up a lot less in RTM growth. Could you also maybe share with us the year VR change in train starts in the third quarter versus maybe the previous three or four quarters.
I think that’s another good metric from PSR, so I am just curious to get a sense of the trends there.
Keith Creel
Yeah. The train starts are actually there and I don’t have the exact number.
I will get Maeghan to get back and touch with you and give you that number. I don’t want to misheard.
Maeghan Albiston
Yeah. I will follow-up with you Allison.
Allison Landry
Okay. Thank you.
Operator
Your next question comes from Brandon Oglenski of Barclays. Please go ahead.
Brandon Oglenski
Hey. Good afternoon, everyone, and thanks for taking my questions.
Look, I know we talked a lot about this, I guess, two weeks ago. But equity markets kind of rolled over here.
Are you guys incrementally concerned that we had closer to 25% tariff threshold on US, China trade that we can see a material slowdown in volumes coming out of Asia? And I guess, if that’s not a concern but it develops to be that way, what would you do to mitigate that business?
John Brooks
Yeah. So, I will make a few comments Brandon on that.
So, look, we talked about that day that our Asians business is in the 30% of our revenue type number, but.
Keith Creel
Let me -- John, let me -- let me step in here…
John Brooks
Yeah.
Keith Creel
Because -- let’s talk about geography. I want to set the stage here, John, then I will let you clarify this.
I think there’s a tremendous amount of confusion in the marketplace on Asia is specific to CP. So let’s start with what is Asia to CP.
Asia is China, Asia is Indonesia, Asia is Japan, Asia is Korean, Asia is India, et cetera. It’s not just China.
In a world of trade relations, I think, another critical point when you think about CP, a predominately Canadian-based railroad, Canada’s not at odds with China. It’s not a Canada-China trade war.
The majority of our revenue at CP originates and terminates in Canada. Not in the US.
And thirdly, if we want to get more specific, and I think, it’s important that we do, when we speak to China, China is specific to CP and that’s for the entire network, both U.S. and Canada is 12% of our revenue.
And if I want to get even more specific, China direct to U.S.A. is less than 5% of our revenue.
So for anyone to suggest that this railway is heavily weighted to China, the most heavily weighted railway in the industry to China is just ill advised and not fact based. Go ahead, John.
John Brooks
Yeah. Brandon, what I would comment on is we, probably, have started to see and this was a little different than just a couple of weeks ago.
We probably have started to see a little bit of pull-forward on some of the volumes in our international business. Now is that robust demand, prolonged peak or is that truly pull forward ahead of the 25% tariff?
It’s a little hard to tell. It’s starting to maybe feel more like the latter.
But, as Keith said, as we really look at our business, 3% to 4% maybe is kind of directly impacted and if I were to call it out specifically, you are right, it’s some of those Vancouver imports into the United States. And it’s our U.S.
grain business. It’s our soybeans out of the Midwest exporting to China.
But outside of that, we are pretty resilient in that space, and again, it is a total percentage, it’s not giant numbers.
Brandon Oglenski
Well, I appreciate the clarification, and Keith, we weren’t purporting that you guys have the most exposure there, just asking. But I guess, when you guys called out of mid single-digit RTM growth through 2020, should we be thinking that those opportunities -- because I think you called out numerous contracts, especially on the intermodal side that are going to come up for bid in that time period.
Is that more heavily weighted toward the back half of ‘19 or 2020? So should we be thinking it’s more lumpy and it comes later or is this going to be pretty ratable opportunities throughout the next two years or three years?
John Brooks
No. I think it is a little bit weighted toward the second half into 2020 as I think about it.
Nadeem Velani
And those are -- but Brandon and we weren’t implying that, certainly, didn’t read that assumption in your reports, so be clear on that. And quite, frankly, we are not dependent on these China revenues call it or international revenues to achieve our mid single-digit RTM growth.
Keith Creel
We are just a bit destitute getting tossed around a bit with this China connection being overemphasized in the marketplace. When I say overemphasized, I think, it’s important that it’s understood, maybe that’s the best way to say it.
So it’s been misrepresented because it’s been misunderstood and that’s the reason we wanted to be so compelling with a fact-based discussion as opposed to rather speculation.
Brandon Oglenski
But not misrepresented by you.
Keith Creel
Not at all.
Brandon Oglenski
Thanks, guys.
Nadeem Velani
Thank you.
Keith Creel
Thanks, Brandon.
Operator
Your next question comes from Brian Ossenbeck of J.P. Morgan.
Please go ahead.
Brian Ossenbeck
Hey. Good afternoon.
Thanks for taking my question. So, John just wanted to come back to domestic Canada.
How much freight do you think would be affected by ELDs coming online in the country, perhaps, later this year whenever they get around to it? Have you started to see any shippers really starting to look ahead and secure additional capacity ahead of that?
Could this be as impactful for certain lanes in the domestic as it was in the U.S.?
John Brooks
Well, it’s hard to peg a number on what sort of the opportunity is. Brian, but that being said, I do think it’s real and there’s going to be much like we faced in the U.S.
and the learnings you have gained this year, the tightness is coming as a result of that mandate. And I think, certainly, the momentum will sort of build as we go through 2019 and approach closer to 2020.
I don’t see -- is this or the next two quarters do we see a sort of any trends or upside relative that, no, probably not. But as we get into the back half of 2019, as it becomes more and more real, yeah, I think, there is road to rail opportunities that are going to present themselves much like it did in the U.S.
Brian Ossenbeck
Okay. And that sounds like it will be upside to the three-year target…
John Brooks
Yeah.
Brian Ossenbeck
… for RTMs you have laid out?
John Brooks
Yeah. I think there’s some upside there, yeah.
Again, we have had a lot of success in our domestic space and we continue to expect those growth rates we talked about a couple weeks ago to continue in that space and then we layer on the momentum assuming we gain some when we get to this mandate in 2020 and that certainly could be a tailwind.
Brian Ossenbeck
Okay. Thanks, John.
Just one quick follow-up of what we said earlier on the visibility into 2019 demand. You are obviously controlling what’s coming onto the network.
It’s a strong freight environment. But has there been a move toward more contracts and committed capacity, I know we see that in certain areas like group by rail and the dedicated green trains but has there really been any behavioral changes in shippers?
Are they willing to maybe stretch out a little bit more to get capacity where they think it’s needed?
John Brooks
Yeah. I’d say so, it’s part of -- a couple things.
One is we have talked a lot about our focus on de-risking some of our exposure with our customers and if it’s the right relationship and right partnership and it fits our network and we are providing the value for our service, we have been willing to do some of the longer term commitments. And I think we are going to keep that open mind approach as we look for new partners and these additional revenue opportunities that we spoke to you about.
So it’s got to be fair, though. The days of 1% rate increases in that and we have passed.
It’s got to be a lot of value for the service we provide, the capacity that we outlined for you. So it’s not that every opportunity fits that mold but certainly the right customers, the right opportunity, we are very open to those term deals.
Nadeem Velani
And Brian, just where we have put in capital investment as well, that has a quid pro quo in terms of volumes and commitment levels as well to ensure we get the right return.
Brian Ossenbeck
Right. Okay.
Thanks for your time. Appreciate it.
Keith Creel
Thanks, Brian.
Operator
Your next question is from David Vernon of Bernstein. Please go ahead.
David Vernon
Hey. Good afternoon, guys.
Keith, I’d love to hear your perspective on the regulatory environment right now in Canada, obviously, last year there was a lot of concern, a lot of pushback from the grain trade and the government in terms of the access to rail networks. How’s the tone of those discussions?
Is that now just behind us, we don’t have to worry about it or is that still something that is kind of on the radar?
Keith Creel
I think it’s something that we have always got to pay attention to and be respectful and mindful of but as far as being problematic, being a threat or a high degree of uncertainty. I think that is behind us as long as we continue to move to go to the marketplace and we are doing our job and I think the team’s doing a pretty good job as well from what I am hearing.
To me, the ag product to export for the country, overall service levels are pretty solid, especially at CP. I think we are going to be in pretty good space.
And again, there are some things that have regulation that I didn’t like but there are some things that I did. There are some things that I loved.
I loved the fact that we are going to be able to equip our locomotives with cameras to create a safer workplace for our employees, as well as the communities we operate in and through and I love the fact that we have got the economics now to invest in what will become a world-class, best-in-class in Canada going to enjoy that 8,500-foot train program across the industry, trying to maintain and continue to be pacesetters and leaders in the grain-ag space.
David Vernon
Okay. And then so no risk that you are going to become victims of your own success in any way in terms of the profit metrics guide increasing blowback or anything like that?
Keith Creel
Nothing ominous that I am aware of, no.
Nadeem Velani
No. And if anything, certainly, Canadian competitiveness has been challenged by tax changes south of the border and so arguably with an election coming up there could be some pauses on tap for us if the Canadian government reacts to the challenges presented by some of the changes in the U.S.
David Vernon
Okay. And then, John, maybe just as a quick follow-up.
You guys did I think a great job articulating how you are going to leverage some of the stranded assets inside of the network that’s maybe been under marketed in the past, whether it’s getting auto companies to help invest in yards or grain companies to invest in new elevators. How sticky are the commitments on some of those deals if we do end up seeing a little bit of a weaker down -- weaker economy going forward?
John Brooks
Fair. As we have talked about with Vancouver automotive compound and some of the other opportunities.
If we are going to invest, we want the right partners that are sort of hand in hand with us. So those commitments require that value to come to the table and if it doesn’t, there are consequences.
Just like there are consequences if we don’t perform and we don’t provide the service and we don’t get the facilities and terminals up and running as we described then there’s balance accountability.
Keith Creel
Yeah. They are all win-win strategic partnerships.
That’s the way we look at them.
David Vernon
All right. Thanks so much for the time guys.
John Brooks
Thanks, David.
Operator
Your next question is from Turan Quettawala from Scotiabank. Please go ahead.
Turan Quettawala
I guess, Keith, you have done a pretty good job here on the fuel efficiency side. Just wondering if you can talk a little bit about maybe how much more room there is, assuming there is more room here next year considering that your discussions about sort of incremental volume getting onto the same train starts are so forth, but if you could give us some color that’d be helpful.
Keith Creel
Yeah. I would always say that there’s going to be room for incremental improvements.
Again, quantum leaps when you are the industry best is going to be a challenge. But the more successful John and the team are at going after those manifest trains that have room on them that have those locomotives pulling without additional locomotives the more successful you are in running longer grain trains and longer potash trains, the more incremental those improvements might be.
So I definitely see runway next year with the business opportunities that are out there, and again, that continues to a degree once we start to onboard these train cars and start running 8,500-foot grain trains with like locomotives. There are definitely additional peel synergies in that.
Turan Quettawala
So, I guess, maybe, I mean, you don’t want to give a number but maybe sort of low-single digits would be reasonable?
Keith Creel
Yeah. I mean, 1%, 2%.
Turan Quettawala
Yeah.
Nadeem Velani
We are doing 3% this year, Turan. I mean, could we do 2% next year, fair assumption at this point.
Turan Quettawala
That’s helpful. Thank you.
And Nadeem, quickly just on the fuel, I think you talked about 250 basis point impact due to fuel here in the quarter. I don’t know if you have the number handy for the year-to-date and also how much of those 250 were lag versus just sort of the overall higher price of fuel?
Nadeem Velani
No. Let Maeghan follow-up with you with specifics.
But year-to-date it’s probably been about 150 basis points kind of impact and the leg was not impactful this quarter. It’s more than surprise.
Turan Quettawala
Thank you very much. More than surprise.
Okay. Thank you very much.
Nadeem Velani
All right. Thanks, Turna.
Operator
Your next question is from Scott Group of Wolfe Research. Please go ahead.
Scott Group
Thanks. Afternoon guys, and thank you, Keith, for the clarification on China and Maeghan, helped us too on that.
So we have got our math updated. I wanted to ask about RTM growth in the fourth quarter and how you guys are thinking about that?
Is that sort of in line with the mid single-digit? And then maybe specifically as you think about potash hitting records, I know we have got K+S ramping up but potash historically can be volatile.
How do you feel about the sustainability of the strength in potash right now?
Keith Creel
From the RTM standpoint, I will answer that with Scott. We have mid-single digits as a good number to model.
John Brooks
Yeah. What, potash momentum looks to continue.
It stays pretty close obviously to with those guys and Canpotex is sold out well in across the fourth quarter. The mosaic in a lot of the domestic program I think seems stable in the upside and we still haven’t gotten sort of to the place we want to be with K+S.
So I think there’s again significant opportunity yet to go with that group. So through the fourth quarter, we think the potash looks strong, and frankly, I think, it looks strong in 2019.
Scott Group
Okay. Helpful.
John, on the pricing side, so you have been talking the last couple of quarters about renewals north of 4%, the pricing numbers coming in sort of 3% to 4%, does that suggest that at some point pricing will accelerate sort of above 4% and is there any way to think how much of pricing is locked in at this point for 2019?
John Brooks
Well, let me pose that a couple of different ways. As I look at our same store, about half of that is made up of what I would consider our bulk business.
So a lot of the -- and that’s longer-term commitments. That’s maybe more of that 1.5% to 3% type escalation.
So that kind of creates, if anything, maybe a little drag on the same store. What I really sort of gauge my health on is if I get into sort of zero in on those areas that I expect the strength and that’s the domestic intermodal.
The merchandise, the carloads, the energy chemical plastics business, and that’s the area where frankly, we are seeing the pull upward, where that business has been renewing again north of 4% and actually in some cases 5%. So that’s sort of the balancing act between the bolts and those other spaces.
As I look forward, I expect in those key areas -- again, the domestics, the carload business that we continue to run north of 4% and that probably means the same store stays in that 3% to 4% range for the foreseeable future.
Scott Group
Okay. That’s really helpful.
And Nadeem, can you just real quick just clarify one quick thing, when you talked about the OR seasonality from third quarter to fourth quarter, I think you said there was a pretty material headwind from a stock comp in 3Q, obviously, 4Q not starting the same way. Does your OR commentary on 4Q take those headwinds, tailwinds into account?
Nadeem Velani
Yeah. I mean certainly if the stock stays at these levels, they will be a further benefit to the OR.
I will be more bullish on the OR. I am not factoring in the current market space.
I would say that we are optimistic that the value will be restored and there will be some short-term headwinds but. As we buy the stock, I think that’s our expectation that we are going to get ahead of something that’s going to naturally occur as they see the value that we can offer.
So I think this is short-term noise, bottomline, irrespective of what the stock does, my comments hold.
Scott Group
All right. Thanks for the time, guys.
Keith Creel
Yeah.
Nadeem Velani
Yeah. Thanks, Scott.
John Brooks
Thanks, Scott.
Operator
Your next question is from Matt Reustle of Goldman Sachs. Please go ahead.
Matt Reustle
Thanks for taking the questions. It could be here in the harvest is getting back on schedule but in the event that the crop came below your projections, what type of flexibility do you have to replace those carloads with other business opportunities and still meet the RTM targets.
It sounds like there’s quite a bit of business that you are passing on now to be prudent and just curious if there’s a shadow book business that you might tap into if other areas didn’t meet your projections?
John Brooks
Yeah. What, there’s a lot of good growth up in that north territory in terms of the grain crop.
The flip side is or the challenge sometimes is that’s also where a lot of the crude by rail is coming from, a lot of the potash opportunity is coming from, a lot of the manifest energy business and chemical business that we are talking about is coming from. So look, if you had to make trades or something happened in the grain business, I think, it would certainly give us the opportunity to then redeploy assets and consider do we want more crude business.
Can we handle more carload business from that territory? Can we up our expectations with a Canpotex potash customer from that region?
So I don’t know if I have got this little bucket of other opportunities in my hand but I think there certainly would present itself if we were faced with that.
Keith Creel
Yeah. I think there’s definitely some flex in those areas, those origin areas of strength.
That said, when it comes to grain we move a lot of grain and obviously if there were short-term headwinds for grain, whatever we might consider will have to match up against short-term because long-term that grain’s going to be there and we are not going to give away capacity. Especially capacity our long-term grain customers had value day in and day out, year in and year out.
Matt Reustle
Right. Understood.
That’s very helpful. And one quick one on fuel, it does look like you were able to improve the sourcing price better than some of your peers in the headline numbers.
Is there anything unique there in terms of procurement?
Nadeem Velani
We have instituted a deal in the past 18 months or so that has given us better opportunities and better rates. Some of the Canadian rack rates have also been lower and that’s helped us vis-à-vis our U.S.
peers, I suspect, so I’d point to those two items.
Matt Reustle
Okay. Great.
Thank you.
Keith Creel
Thanks, Matt.
Operator
Your next question is from Konark Gupta of Macquarie. Please go ahead.
Konark Gupta
Thanks for taking my question. Just had a clarification on pricing, can you help us understand the pricing of 3% to 4% in Q3, you said I think it’s on the mid-range there.
What would it have been without grain because I think grain is a bit of if it sounds right?
Nadeem Velani
Actually, grain was a little tricky in Q3, as we -- as I think we talked about during Q2, I thought it was the -- and it kind of proved itself out, present itself as a little bit of a headwind. The VRCPI was pegged at 2.8% in the regulated grain, would certainly be a little bit of a drag.
You sort of couple with that the U.S. pricing environment hasn’t been very good in grain at all.
Just sort of with the challenges on exports. So I don’t know the number and the list it would have given it off hand but I think it was a drag on that same store a little bit.
Konark Gupta
Yeah. Thanks.
And Nadeem, last one for you on the pension side, I remember you guys talking about pension could potentially be a tailwind in 2019 given where the rates are. Have you guys done any work on the pension side yet in terms of how it looks like in 2019?
Nadeem Velani
No. I wouldn’t say that we can show up the rates on an ongoing but we won’t know until early January so still feel like it’s going to be a positive to our current level.
And just given the way interest rates and discount rates have moved, we feel extremely confident that that’s the case.
Konark Gupta
Yeah. Thank you.
Nadeem Velani
Thanks.
Operator
Your next question is from Justin Long at Stephens. Please go ahead.
Justin Long
Thanks and good afternoon. So, maybe to start with the follow-up on the pricing discussion, I was wondering if you could provide an update on the number of contracts that are currently tied to an inflation index if you looked at your total book of business today.
I think you are trying to shift away from some of those contracts. So if that’s the case, could you provide any color on where you see that percentage of contracts tied to inflation going longer term?
Keith Creel
Yeah. So I sort of frame it up in my head in terms of the book like this, we typically annually roll-over about 40% to 50% of our book and then you have multiyear agreements that maybe make up a chunk of the balance and those again might be tied to just flat escalators or some of them might be index based.
I don’t know off hand what percent is index based but I think that to get to the root of your question. I think, yeah, we -- it’s got to be fair.
If we are going to enter into these longer-term agreements, not that an index might be wrong but maybe it has to have floors and ceilings, maybe there has to be some measures against it to make sure that ultimately that year-over-year price opportunity for us is fair. So, again, in principle maybe we are moving away from index, yeah, potentially, but if it’s the right measure and the right approach, we -- not that we are adamantly against it, we are willing to look at that as long as it’s got the right parameters with it.
Justin Long
Okay. Thanks.
And secondly, I wanted to ask about locomotives. Could you update us on the number of locomotives that you have in storage today and based on what you are expecting for RTMs in the fourth quarter and next year, how do you see that number trending in the coming quarters?
Keith Creel
The rough number’s about 200 locomotives in storage now. Does that mean that we wouldn’t remanufacture, repurpose all of it, no.
But as far as that number, I look forward to within the next year that number’s probably half of that.
Justin Long
Okay. Great.
I will leave it at that. Thanks for the time.
Keith Creel
Yeah, Jason.
Maeghan Albiston
Thanks.
Operator
Your last question comes from the line of Bascome Majors of Susquehanna. Please go ahead.
Bascome Majors
Yeah. Thanks for the time here.
Your competitor into next year should have a considerable amount more capacity and I expect that they are actively working to fill that up at this point. John, what are you hearing from your frontline salespeople about their competitive approach to the marketplace as they get through the capacity investments they have been making for the last several quarters and how does CP approach that --how does CP respond?
John Brooks
Well, what, as we talked about a couple weeks ago, not every piece of business is going to be right for us. So, first and foremost, I would say we are targeting the opportunities that fit us best.
And frankly, in some cases that may be business that our competitor’s handling today, frankly, it might not be in other spaces. Second, I think there’s a lot of growth opportunities for both carriers out there.
The demand is grounded and as I said earlier, it’s pretty strong against most commodities, and frankly, some of the areas just fit the competition better and assuming they are going to be targeting those and we’re going to be selective on what we target. Bottomline, I think our sales people are going after the opportunities that we think fit our property and we will continue to sort of price and drive the value out of the service we provide.
We would hope that again, our growth opportunities and whatever growth opportunities our competition goes after, there’s plenty of that opportunity for both parties.
Keith Creel
Yeah. I think the other critical way forward, fundamental precision schedule railroad.
You sell to the strength of your network. It’s all about asset turns, precision schedule railroads, about turning locomotives, turning cars, turning people, with or without capacity, if my competitor has capacity in a particular lane if they have got a shorter route, they have their best day and I am running longer miles and I have my best day, then they are going to do a better job at turning those assets.
That’s why I continually stress to this team. We sell to the strengths of this franchise.
In those areas where our franchise is superior i.e. faster asset turns.
If we do our job, if we don’t put more business on the railway than the railway can handle, we turn those assets, then we should be winning the business. Competitive cost basis, superior service offering, reliability, turn assets, that’s what wins business and what retains business and that’s what creates stickiness and that’s why we protect sustain profitable growth at all cost.
That’s the key to this. If you lose that, you lose precision schedule railroad.
And again, our best day, their best day, let’s assume we both have capacity, they will, we will. If our network is superior, we should win the business.
If their network is superior, they should win the business and we sell to those strengths.
Bascome Majors
Thanks, John. Thanks, Keith.
Keith Creel
Thank you.
John Brooks
Yeah.
Operator
You have an additional question from Seldon Clarke of Deutsche Bank. Please go ahead.
Seldon Clarke
Hey. Thanks for the question.
I just wanted to ask a higher-level question about Canadian crude by rail. If you just took a step back and like think about the next couple of years, how would you frame up the blue-sky scenario for crude, are there still contracts out there of similar size to this in over steel or are there a bunch of smaller contracts to win, any color on that would be super helpful.
Keith Creel
I will let John speak to the specifics of that but I will say blue sky to high level. We realize and understand we have always said this.
The pipelines will come. It’s not a matter of if, it’s when.
I can’t predict exactly when but I can tell you this. If this railway were to go out and consider and pursue that same level of anywhere close to that same level of crude business from those areas, we would have to make very extensive and expensive long-term investments and the only way we are going to do that is if the economics and the business is there to sustain them and I don’t see that kind of runway.
I don’t see that kind of tail blue sky for crude.
John Brooks
I don’t have anything to add.
Seldon Clarke
Okay.
Operator
There are no further questions at this time. I would now like to turn the call over to Keith Creel for closing remarks.
Keith Creel
Okay. Well, thank you for your time this afternoon.
I hope that the Q&A, the color provided some clarity. Certainly gave me an opportunity to provide some clarity that’s out there.
I am not going to apologize for being oversensitive. I just think it’s important that we all clearly understand the strengths of this franchise.
Certainly, we are subject to the macro economy just like anyone else is. But from a micro level, we are working hard every day to make sure that we diversify ourselves more and more as we go forward in the future.
We will always be a bulk railroad. We are developing service into low cost and reliable capacity, our ability to grow and expand our merchandise footprint and franchise to diversify ourselves as we go forward growing this business.
With that said, we look forward to executing for the shareholders in the fourth quarter. We appreciate your confidence and we look forward to sharing very encouraging results in January.
Thank you.
Operator
This concludes today’s conference call. You may now disconnect.