Canadian Pacific Railway Limited (NYSE: CP)Q3 2018 Earnings Conference CallOct. 18, 2018, 4:30 p.m. ET
Contents:
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- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
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 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. If you would like to ask a question, simply press * then the number 1 on your telephone keypad. If you would like to withdraw the question, press the # key. I would now like to introduce Maeghan Albiston, AVP, Investor Relations and Pensions, to begin the conference.
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Maeghan Albiston — Assistant Vice President, Investor Relations
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 that 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 MDNA that’s filed with Canadian and US 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 today will be followed by a 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.
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Keith Creel — President and Chief Executive Officer
Thank you, Maeghan. Good afternoon, welcome to the call this afternoon. We’re gonna keep our comments brief to offer maximum time for the Q&A but with that said, we’re looking at the results and I’m sure that you would join me in saying that in our view that these are very impressive results, very pleased with the results for the quarter. Setting records across the board for the company, revenue is up 19% to 1.9 billion and the operating ratio obviously, 58.3; that’s an all-time record for CP. Certainly, something we’re very proud of. Operating income improved 27% to 790 million and adjusted EPS up 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 0.96 gallons per 1,000 GTMs, which not only is a CP record but as well as an industry best. These results overall reflect the collective efforts of this entire CP family and especially proud of John Brooks and the marketing and sales team, outselling this very compelling value sort for CP. Mike Foran and his team creating constructive tension as we develop the market strategies to make sure that we’re asset correctly.
And finally, Robert Johnson and the operating team — world-class efforts delivering the service that we sold to our customers. With this confidence, as you’ve seen yesterday as well, the press release we’ve applied to the TSX for our new buyback program. We advanced that discussion originally planned to have it in December but given the recent market volatility that we’ve all experience, we saw very compelling opportunity to create additional value for our shareholders real time.
So we advanced that discussion. The board approved it. We’ve applied for 4% buyback. This amount itself is manageable from a credit metric perspective and certainly, at the same time, illustrates our strong conviction in our CP story going forward. So with that said, let me hand it over to John and Nadeem to provide some color on the markets and the financials and then to my original point we’ll spend the rest of our time on some fruitful Q&A.
John Brooks — Senior Vice President and Chief Marketing Officer
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 for tailwinds of 4% and 2% respectively. And as expected as I guided to earlier this year, same-store price continued to solidly land in the middle of our target 3% to 4% range. And renewable pricing continued to trend north of 4%. 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 shipments to Vancouver. And we expect Q4 to also remain very strong as harvest is now fully under way as we’ve got by some of the weather challenges in Alberta. Strong export volumes from both Canpotex and K+X marked another record-setting quarter for potash with revenues finishing up by 24%. And I’ll note that was the third straight quarter of record potash volume. The energy chemical plastic portfolios 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 our energy train service. As expected, forest products were also up 12% as we continue to leverage the strength of our Vancouver, Toronto, and Montreal trans loads capabilities.
In fact, our lumber and panel business had the best quarter in the last ten 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 under way 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. Revenue dropped 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 looks good, demand environment continues to be positive, frankly stable and healthy in many of our commodity areas.
And I’m proud and I think you heard it during our investor day, the team is executing strategically and very disciplined in the marketplace. We’re picking our right partners, we’re enhancing our total transportation product, and appropriating in pricing value for the service we provide in this marketplace. So of course, as we said that day, there’s 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’ll pass it to Nadeem.
Nadeem Velani — Executive Vice President and Chief Financial Officer
Thanks, John. Tremendous results by you and the time. As Keith and John noted, this was a record quarter across the board. Revenues were up 19% or 17% on an FX adjusted basis driven by significant volume growth of 13% on an RTM basis. Continued to demonstrate our ability to grow at low incremental costs. This has resulted in a third-quarter operating ratio of 58.3%, an improvement of 270 basis points year-over-year and as Keith mentioned, the lowest ever for the company. This was in spite of rising fuel prices and stock and intensive 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 accrual margin improvement in the fourth quarter. Taking a closer look at a few items on the expense side, I’ll be speaking to the results on the 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 the 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 cost partially offset by increased efficiency and productivity in car repairs. Purchase services and other was 263 million and flat on an FX adjusted basis. Higher intermodal pickup and delivery costs and higher casualty costs were offset by reduced expense on locomotive repairs.
There have been no material land sales year to date. We still expect a land sale in the magnitude of about $30 million in the fourth quarter. However, there is some risk that it slides into 2019. This has no impact on our updated guidance and in fact, if anything, it improves the quality of their 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 our debt refinancing in Q2. Adjusted net income improved 40% and 37% on an FX adjusted basis while adjusted EPS grew 42% withstanding 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 by 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 this strong cash generation combined with taking a pause in our buyback the last six months we have lowered our leverage within our targeted two to two and a half 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 increased 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 pull back and we plan to be aggressive once we get CSX. We believe this 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, comfortable growth in Q4 and into 2019. And with that, I’ll hand it over back to Keith.
Keith Creel — President and Chief Executive Officer
With that said, I think again, overall, hard work, precision schedule railroading I think certainly reducing at the end of the day a very compelling value in the marketplace for our customers and at the same time producing a very compelling financial outcome for our shareholders in the marketplace. So with that said, let’s open it up for questions.
Questions and Answers:
Operator
Thank you. If you would like to ask a question, simply press * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key. As previously highlighted, please limit your questions to two. There will be a brief pause while we compile the Q&A roster.
Your first question comes from the line of Tom Wadewitz of UBS. Please go ahead.
Tom Wadewitz — UBS — Analyst
Good afternoon. I think we already knew there were gonna be strong results but congratulations nonetheless. Obviously, a very good quarter. I wanted to ask — I guess it’s kind of a granular question. On the energy side, how — maybe John or Keith — how do you think the ramp from the 23,000 looks like the next couple of quarters on crude? And then how much do you think about the offset in terms of frack sand? Maybe what frack sand problems were in the quarter and kind of where they might go the next few quarters?
John Brooks — Senior Vice President and Chief Marketing Officer
So Tom, as I mentioned a couple weeks ago, we’ll move into that sort of 100,000 annual run rate on the crude as we get into Q1, get through winter. See that ramp up. I think there’s, again, the 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 frack sand in Q3 and that was a little drop from I think an all-time high we hit in Q2 if I recall.
You know what? There’s a lot of dynamics at play in that space right now. We probably see a little further deceleration as we go into 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 developed the three new terminals in the Bakken, all repurpose crude facilities now delivering sand, taking unit trains.
And I think the thing you got to remember about that opportunity is, not only is that replacing that sand but it’s also a great margin opportunity for CP. It’s a single line haul. It’s controlled trains that allow us to run longer trains so what we lose on the top line is actually a pretty good bottom-line net story for us in that market. And as I said also, we’ve 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.
Keith Creel — President and Chief Executive Officer
I would add those sand unit times, it’s important to remember those fit right in our wheelhouse when we originate and terminate the move from an asset turn standpoint from a 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 can look at it all ways.
It’s a much more profitable business for us at the end of the day. We controlled our own destiny. And we’re gonna do better as a result of it. So I don’t need a car for car to replace benefit to the bottom-line when carloads go down on what you historically have seen as our numbers on the sand side.
Tom Wadewitz — UBS — Analyst
Okay. That’s helpful. And then maybe just one follow-up based on the same topic. Are you still doing crude by rail out of the Bakken and is that something that if there was a demand that there would be cars available that you could actually do some out of the Bakken if there was kind of the right market conditions?
Keith Creel — President and Chief Executive Officer
We’re 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 — UBS — Analyst
Are those car types available or not?
Keith Creel — President and Chief Executive Officer
Part of some of the lag of our ramp up in Canada, frankly, has been timing delays around the retrial freight and some of these newer model cars coming online. We probably face a little bit of that also if we were to come out of the Bakken but I think the cars are out there if the right deal presents itself.
One of our expectations for guidance is based on shipping eight carloads of crude out of the Bakken so I think that’s another critical point. If it makes sense we’ll consider it, if it doesn’t, we’re not going to. It’s not a good decision proceeding we’re obviously not going to be doing it.
Operator
The next question comes from Fadi Chamoun of BMO Capital Markets. Please go ahead, your line is open.
Fadi Chamoun — BMO Capital Markets — Analyst
Thank you. Just to follow-up on this crude discussion. Is the 100,000 run rate you talked about all is volume contracted over two to three years, I think the time frame you’ve been talking about, or are there more kind of tariff volume moving under –?
Keith Creel — President and Chief Executive Officer
All the volume is under contract. It involves NDCs and it involves term.
Fadi Chamoun — BMO Capital Markets — Analyst
Okay. Back to the supply chain, I guess. Are there terminal or storage bottlenecks that you’re seeing in kind of the — in terms of this crude ramp up or is it really more a question of having the right cars and ultimately evacuating crude as it comes up?
John Brooks — Senior Vice President and Chief Marketing Officer
We haven’t experienced that sort of back up. It would definitely be more the equipment that was a pacing item on some of these opportunities we have.
Fadi Chamoun — BMO Capital Markets — Analyst
Okay. My second question is kind of how do we think about the network positioning into 2019? I guess you’ve been hiding up the hiring, the locomotive overhaul to handle this growing volume. Can you help us understand a little bit if we see a 5% RTM growth next year what kind of headcount, what kind of flavor you would need to ramp up in order to handle that volume?
Keith Creel — President and Chief Executive Officer
Five percent. Again, it depends on the business side where it comes. Obviously, the G trains we don’t have anymore. A lot of synergies left for the unit trains when it comes to those types. But manifest and intermodal obviously it’s not going to be a one for one. So I would not suggest that it would be anywhere close to 5%.
One or two percent is a estimate based on a 5% or 6% RTM growth run rate. And as far as locomotives, we’ve got locomotives available that we could pull into ’19 and we’re certainly more than prepared to do that if the economics are there, then they’d get sent to retrofit to cover optics in that demand.
Nadeem Velani — Executive Vice President and Chief Financial Officer
I would just add that as we’ve pointed out to the last several calls, we’ve been ramping up the hiring and training to get to the position we’re at and to hit our stride as the volumes ramp up so I don’t think you’ll 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’re controlling what’s coming onto the railroad.
So what we described a couple of weeks ago, having the team in lockstep and how we plan and how we take on new business is an important function and an important process we go through to make sure we’re taking on what we can handle. We are taking on in a very prudent fashion.
Keith Creel — President and Chief Executive Officer
I think you got to look at some of the numbers that we’ve shared today. We look at a 13-14% RTM growth in the third quarter that we’ve just reported. From a train mile standpoint, we’re up less than double-digits and that’s only as a result of running fewer, longer trains. Heavier, longer trains, which is all part of the PSR model.
Operator
Your next question comes from Chris Wetherbee of Citi. Please go ahead.
Chris Wetherbee — Citi — Analyst
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 — President and Chief Executive Officer
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’re doing the deals in a way that’s good for the customer and good for CP.
Chris Wetherbee — Citi — Analyst
Okay. That’s helpful. 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 gonna 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’re thinking about the landscape and hitting — still getting back to that sub-60 OR again in 2019.
Nadeem Velani — Executive Vice President and Chief Financial Officer
The only material hurdle, Chris, would be fuel. 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’ll see what occurs there. We talked about some of the risks. We don’t see from an OR point of view many kinds of headwinds that we’ll 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’ll let that hurt us and create headwinds potentially but we’re 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. 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.
Operator
Your next question comes from Walter Spracklin of RBC. Please go ahead.
Walter Spracklin — RBC — Analyst
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 — Senior Vice President and Chief Marketing Officer
That’s good, Walter. 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’ve been able to get after that crop in northern Alberta pretty good here. And if you look out the next week or so, they’re gonna get after it. I think a lot of that’s canola in some areas where those crops are pretty resilient as long as they’re not beaten down to the ground.
I think certainly my discussions with customers have been that they’re 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. As you look at the carryout, it’s jumped around a little bit but I still think it’s above average. I’m still ten 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 — RBC — Analyst
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’m 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 — Executive Vice President and Chief Financial Officer
As I mentioned, we’re comfortable being at the high end of the range. We spent time with the rating agencies the last several days and we’re gonna stay true to our commitment of being within that range. We’re 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’ll 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’ll add a little bit of leverage onto that refinancing as well. We’ll still stay within our range below two and a half and I think we’ll be able to execute on this 4% buyback. So I think that’s a good time and a good story.
Operator
Your next question comes from Ken Hoexter of Merrill Lynch. Please go ahead.
Ken Hoexter — Merrill Lynch — Analyst
Great. Good afternoon. Nadeem, can you just clarify some of the comments on the fourth quarter margins. When you said they were gonna 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 — Executive Vice President and Chief Financial Officer
Sure. Yeah so, I’m gonna say that if you look at our operating ratio ex-land sales, it’ll 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. 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 gonna close, it’s just it could be the middle of December or it could be early January. So it’s that tight of timing. It’s just really a timing issue, nothing else.
Ken Hoexter — Merrill Lynch — Analyst
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’ve already kind of gone over grain and your view on crude so more maybe on the industrial side.
John Brooks — Senior Vice President and Chief Marketing Officer
We’re pretty bullish across the board there. If I had to call something out, we’ve seen a little bit of pricing volatility in the lumber market in the United States here the last couple of weeks.
Operator
Your next question comes from Steve Hansen of Raymond James. Please go ahead.
Steve Hansen — Raymond James — Analyst
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’re 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 — Senior Vice President and Chief Marketing Officer
No, we are. We’ve got the manifest opportunities in play.
Steve Hansen — Raymond James — Analyst
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 — Senior Vice President and Chief Marketing Officer
Outside of that one, nothing jumps out at me. I think 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’re aware of specifically.
Nadeem Velani — Executive Vice President and Chief Financial Officer
Hopefully, our finance minister will incent some further investments in Alberta.
Operator
Your next question comes from Allison Landry of Credit Suisse. Please go ahead.
Allison Landry — Credit Suisse — Analyst
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 — President and Chief Executive Officer
We continue to invest in strategically and surgically to increase capacity. So obviously, stand-alone; same weather, same conditions we’re gonna do better than we would’ve 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 — Credit Suisse — Analyst
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 just curious to get a sense of the trends there.
Keith Creel — President and Chief Executive Officer
The train starts are actually there. And I don’t have the exact number.
Operator
Your next question comes from Brandon Oglenski of Barclays. Please go ahead.
Brandon Oglenski — Barclays — Analyst
We thought about this I guess two weeks ago. 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 — Senior Vice President and Chief Marketing Officer
I’ll make a few comments on that. We talked about that day that our Asians business is in the 30% of our revenue type number.
Keith Creel — President and Chief Executive Officer
John, let me step in here because let’s talk about geography. I want to set the stage here, John, then I’ll let you clarify this. I think there’s a tremendous amount of confusion in the marketplace. 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, etcetera. 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 US and Canada, is 12% of our revenue. And if I want to get even more specific, China direct to the USA 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 — Senior Vice President and Chief Marketing Officer
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. Is that robust demand? In other words, 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, 3-4% maybe is kind of directly impacted. And if I were to call it out specifically, you’re right, it’s some of those Vancouver imports into the United States. And it’s our US grain business, it’s our soybeans out of the Midwest exporting to China. But outside of that, we’re pretty resilient in that space. And again, it is a total percentage — it’s not giant numbers.
Brandon Oglenski — Barclays — Analyst
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 gonna 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 gonna be pretty ratable opportunities throughout the next two or three years?
John Brooks — Senior Vice President and Chief Marketing Officer
I think it is a little bit weighted toward the second half into 2020 as I think about it.
Nadeem Velani — Executive Vice President and Chief Financial Officer
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’re not dependent on these China revenues call it, or international revenues to achieve our mid-single digit RTM growth.
Keith Creel — President and Chief Executive Officer
We’re 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. 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 — Barclays — Analyst
But not misrepresented by you.
Keith Creel — President and Chief Executive Officer
Not at all.
Operator
Your next question comes from Brian Ossenbeck of JP Morgan. Please go ahead.
Brian Ossenbeck — JP Morgan — Analyst
Hey, good afternoon. Thanks for taking my question. 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 US?
John Brooks — Senior Vice President and Chief Marketing Officer
It’s hard to peg a number on what sort of the opportunity is. But that being said, I do think it’s real and there’s gonna be — much like we faced in the US and the learnings you’ve gained this year, the tightness is coming as a result of that mandate. 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, I think there is road to rail opportunities that are gonna present themselves much like it did in the US.
Brian Ossenbeck — JP Morgan — Analyst
And that sounds like it’ll be upside to the three-year target for RTMs you’ve laid out?
John Brooks — Senior Vice President and Chief Marketing Officer
Yeah, I think there’s some upside there. Yeah. Again, we’ve 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 — JP Morgan — Analyst
Thanks, John. Just one quick follow-up of what we said earlier on the visibility into 2019 demand. You’re 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 — Senior Vice President and Chief Marketing Officer
I’d say so. A couple things. One is we’ve 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’re providing the value for our service, we’ve been willing to do some of the longer term commitments.
And I think we’re gonna keep that open mind approach as we look for new partners and these additional revenue opportunities that we spoke to you about. It’s got to be fair, though. The days of 1% rate increases in that annually have passed. It’s got to be a lot of value for the service we provide. The capacity that we outlined for you. It’s not that every opportunity fits that mold but certainly the right customers, the right opportunity, we’re very open to those term deals.
Nadeem Velani — Executive Vice President and Chief Financial Officer
And Brian, just where we’ve 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.
Operator
Your next question is from David Vernon of Bernstein. Please go ahead.
David Vernon — Bernstein — Analyst
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 railment works. 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 — President and Chief Executive Officer
I think it’s something that we’ve 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’re doing our job and I think the team’s doing a pretty good job as well from what I’m hearing. To me, the Ag product to export for the country, overall service levels are pretty solid, especially at CP. I think we’re gonna be in pretty good space.
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’re 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’ve 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 — Bernstein — Analyst
So no risk that you’re gonna become victims of your own success in any way in terms of the profit metrics guide increasing blowback or anything like that?
Keith Creel — President and Chief Executive Officer
Nothing ominous that I’m aware of, no.
Nadeem Velani — Executive Vice President and Chief Financial Officer
Certainly, Canadian competitiveness has been challenged by tax changes south of the border 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 US.
David Vernon — Bernstein — Analyst
John, maybe just as a quick follow-up. You guys did I think a great job articulating how you’re gonna 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 economy going forward?
John Brooks — Senior Vice President and Chief Marketing Officer
As we’ve talked about with Vancouver automotive compound and some of the other opportunities. If we’re gonna 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 — President and Chief Executive Officer
They’re all win-win strategic partnerships. That’s the way we look at them.
Operator
Your next question is from Turan from Scotiabank. Please go ahead.
Turan Quettawala — Scotiabank — Analyst
I guess, Keith, you’ve 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 to your country which 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 — President and Chief Executive Officer
I would always say that there’s gonna be room for incremental improvements. Again, quantum leaps when you’re the industry best is gonna 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 — Scotiabank — Analyst
You don’t want to give a number but maybe sort of low-single digits would be reasonable?
Keith Creel — President and Chief Executive Officer
Yeah. You know, 1%, 2%.
Nadeem Velani — Executive Vice President and Chief Financial Officer
We’re doing 3% this year. Could we do 2% next year? Fair assumption at this point.
Turan Quettawala — Scotiabank — Analyst
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 — Executive Vice President and Chief Financial Officer
I’m gonna 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.
Operator
Your next question is from Scott Group of Wolfe Research. Please go ahead.
Scott Group — Wolfe Research — Analyst
Thanks, afternoon guys, and thank you, Keith, for the clarification on China and Maeghan, helped us too on that. So we’ve 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? Maybe specifically as you think about potash hitting records. I know we’ve got K plus 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 — President and Chief Executive Officer
From the RTM standpoint, I’ll answer that with Scott. We have mid-single digits as a good number to model.
John Brooks — Senior Vice President and Chief Marketing Officer
Potash momentum looks to continue. It stays pretty close obviously to with those guys and Canpotex is folded out well in across the fourth quarter. The mosaic in a lot of the domestic program I think seems stable in the upside. We still haven’t gotten sort of to the place we want to be with K plus S. So I think there’s again significant opportunity yet to go with that group. Through the fourth quarter, we think the potash looks strong and frankly, I think it looks strong in 2019.
Scott Group — Wolfe Research — Analyst
John, on the pricing side. You’ve been talking the last couple of quarters about renewals north of 4%. The pricing numbers coming in sort of 3-4%. Does that suggest that at some point pricing will accelerate sort of above four and is there any way to think how much of pricing is locked in at this point for 2019?
John Brooks — Senior Vice President and Chief Marketing Officer
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 1.5-3% 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’re 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 3-4% range for the foreseeable future.
Scott Group — Wolfe Research — Analyst
Nadeem, can you just real quick just clarify one quick thing? When you talked about the OR seasonality from third 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 — Executive Vice President and Chief Financial Officer
Yeah, I mean certainly if the stock stays at these levels, they’ll be a further benefit to the OR. Even more bullish on the OR. I’m not factoring in the current market space. I would say that we’re optimistic that the value will be restored and there’ll be some short-term headwinds but.
As we buy the stock, I think that’s our expectation that we’re gonna get ahead of something that’s gonna naturally occur as they see the value that we can offer. So I think this is short-term noise. Bottom-line, irrespective of what the stock does, my comments hold.
Operator
Your next question is from Matt Reustle of Goldman Sachs. Please go ahead.
Matt Reustle — Goldman Sachs — Analyst
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’re 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 — Senior Vice President and Chief Marketing Officer
You know 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’re talking about is coming from. 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? I don’t know if I’ve 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 — President and Chief Executive Officer
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 gonna be there and we’re not gonna give away capacity. Especially capacity our long-term grain customers had value day in and day out, year in and year out.
Matt Reustle — Goldman Sachs — Analyst
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 — Executive Vice President and Chief Financial Officer
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 US peers I suspect. So I’d point to those two items.
Operator
Your next question is from Konark Gupta of Macquarie. Please go ahead.
Konark Gupta — Macquarie — Analyst
Thanks for taking my question. Just had a clarification on pricing. Can you help us understand the pricing of 3-4% 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 — Executive Vice President and Chief Financial Officer
Actually, grain was a little tricky in Q3. 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 US 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’ve given it off hand but I think it was a drag on that same store a little bit.
Konark Gupta — Macquarie — Analyst
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 — Executive Vice President and Chief Financial Officer
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 gonna 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.
Operator
Your next question is from Justin Long at Stephens. Please go ahead.
Justin Long — Stephens — Analyst
Thanks and good afternoon. 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’re trying to shift away from some of those contracts. 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 — President and Chief Executive Officer
I sort of frame it up in my head in terms of the book like this, we typically annually roll over about 40-50% of our book. And then you have multi-year 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. It’s got to be fair.
If we’re gonna 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’re moving away from index potentially. But if it’s the right measure and the right approach — not that we’re adamantly against it. We’re willing to look at that as long as it’s got the right parameters with it.
Justin Long — Stephens — Analyst
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’re expecting for RTMs in the fourth quarter and next year, how do you see that number trending in the coming quarters?
Keith Creel — President and Chief Executive Officer
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.
Operator
Your last question comes from the line of Bascome Majors of Susquehanna. Please go ahead.
Bascome Majors — Susquehanna — Analyst
Thanks for the time here. Your competitor into next year should have a considerable amount more capacity and I expect that they’re 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’ve been making for the last several quarters? How does CP approach that? How does CP respond?
John Brooks — Senior Vice President and Chief Marketing Officer
You know what? As we talked about a couple weeks ago, not every piece of business is gonna be right for us. So first and foremost, I would say we’re 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’re gonna be targeting those and we’re gonna be selective on what we target. Bottom-line, I think our sales people are going after the opportunities that we think fit our property and we’ll 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 — President and Chief Executive Officer
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’ve got a shorter route, they have their best day and I’m running longer miles and I have my best day, then they’re gonna 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.
Operator
You have an additional question from Seldon Clarke of Deutsche Bank. Please go ahead.
Seldon Clarke — Deutsche Bank — Analyst
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 — President and Chief Executive Officer
I’ll let John speak to the specifics of that but I’ll say blue sky to high level; we realize and understand we’ve 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’re gonna 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 — Senior Vice President and Chief Marketing Officer
I don’t have anything to add.
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 — President and Chief Executive Officer
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’m not gonna apologize for being oversensitive. I just think it’s important that we all clearly understand the strengths of this franchise. Certainly, we’re subject to the macroeconomy just like anyone else is. But from a micro level, we’re working hard every day to make sure that we diversify ourselves more and more as we go forward in the future.
We’ll always be a bulk railroad. We’re 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.
Duration: 68 minutes
Call participants:
Maeghan Albiston — Assistant Vice President, Investor Relations
Keith Creel — President and Chief Executive Officer
John Brooks — Senior Vice President and Chief Marketing Officer
Nadeem Velani — Executive Vice President and Chief Financial Officer
Tom Wadewitz — UBS — Analyst
Fadi Chamoun — BMO Capital Markets — Analyst
Chris Wetherbee — Citi — Analyst
Walter Spracklin — RBC — Analyst
Ken Hoexter — Merrill Lynch — Analyst
Steve Hansen — Raymond James — Analyst
Allison Landry — Credit Suisse — Analyst
Brandon Oglenski — Barclays — Analyst
Brian Ossenbeck — JP Morgan — Analyst
David Vernon — Bernstein — Analyst
Turan Quettawala — Scotiabank — Analyst
Scott Group — Wolfe Research — Analyst
Matt Reustle — Goldman Sachs — Analyst
Konark Gupta — Macquarie — Analyst
Bascome Majors — Susquehanna — Analyst
Seldon Clarke — Deutsche Bank — Analyst
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