From a transportation perspective with Canadian National. So I think this will be a really interesting conversation today. So joining us from CN, we have Ghislain Houle, who's the CFO. We have Derek Taylor, who's EVP and Chief Field Operations Officer. I want to make sure I get the title exactly right. Tracy's also joining us in the audience as well. So thanks so much for joining us, guys. Appreciate it.
Thanks for having us.
I think what we'll do is maybe, Ghislain, I'll kick it off to you to have some opening remarks, and then we'll dive into some questions. We certainly want it to be interactive, so folks in the audience, if you do want to ask questions, just raise your hand. We'll get a mic to you so everyone can hear it, and we'll get the questions answered. But Ghislain, over to you. Thanks so much for joining us.
Thanks, Chris. Thanks for having us, and thanks for everyone in the room taking interest in our company and people listening on webcast. It's always nice to come to Florida, when you are from Montreal in the middle of February. And I'm with my friend here, Derek. So, let me make a few introductory remarks to your point, and then we'll turn it over to your questions. First of all, recap a little bit on 2023. I'm extremely proud of our performance. When you look at the year, we had lots of adversity at us, whether it was a freight recession that was deeper and longer than we believed it was going to be.
And then those guys had to to deal with floods, they had to deal with forest fires in the second quarter and third quarter, and we quantified this for investors to have an impact of about $0.17 of EPS. But despite all of this, when you look at our operating ratio, which is a metric that a lot of people are looking at for railroads, we had the best operating ratio in the industry at 60.8%, and that was only 90 basis point higher than the previous year, where we had an operating ratio starting with a five. So I want to thank the 25,000 railroaders at CN for delivering that performance. I think it was a great performance, and despite what we faced during 2023.
When you look at this year, obviously, and I think that was, a little bit one of your questions, Chris. January, we started a little bit from the back tees.
Mm-hmm.
We had a good, Derek, I would say, 10 days in Western Canada, where we had temperatures that were -40 to -50 degrees Celsius. When you get to that cold, it doesn't matter whether it's Celsius or Fahrenheit, it just converges to the same thing, where literally we couldn't move any trains. So that got us a little bit from the back tees in terms of our costs, obviously, but also in terms of volumes. Our volumes on a revenue ton mile basis were down 7%. But that's behind us now, and when you look at February month to date, our volumes are up 2%. I think that from a workload standpoint, and Derek will touch upon it, I think we can see gross ton miles on a daily basis in the 1.3-1.4 range, which is very, very solid.
So, you know, that's boding well. And the good news is, as you get into further in February and then into March, these, you know, cold spells that last for a week or two will not happen. Like, we will have cold days, one or two, but then it'll let go, and then we'll get into temperatures that we can railroad. From an overall year standpoint, for people that listened on the call in January, we provided an assumptions of mid-single-digit volume growth, and I'm very, very comfortable with that, with that assumptions. When you look at it and you break it down, half of that volume growth will come from, CN-specific growth initiatives that we walked investors through, at our Investor Day. So the good news is those are coming on board.
They're coming on, and we can see the volumes, and they're not really those initiatives related to the economy. They are very customer specific, and we have great visibility on them. The other is, you remember, we had a West Coast port strike. That was another adversity that we had last year. And it had a lingering effect through the second half of the year that accounted for about 1% of growth that will not reoccur in 2024. So when you look at our volume growth and you break it down, we're not assuming that much of a supportive economy. We are assuming a slight positive industrial production. But if you remember, in our 10%-15% EPS growth target for 2024 to 2026, we were saying we need at least 2% industrial production.
In 2024, we're assuming slightly positive, call it 0.5%, hence why we are at the low end of the range at 10%. So when you put this together, and then I think my buddy here is a bit sandbagging on the operating leverage that we will deliver, you know, in 2024. I'm very comfortable we'll deliver at 10% EPS growth for the year. Now let me talk a little bit about share buyback. As you know, our board approved a 32 million share buyback program, CAD 4 billion of budget. Just to remind everyone that if you look at the share buyback at, on an after-financing point of view, it's not that accretive. Essentially, it's not accretive in 2024.
It's a little bit accretive in the out years because you get the cumulative effect, but it's not that accretive in 2024. Then finally, I think the team is gelling. The team is coming together. Ed Harris finally retired for the fifth time, and hopefully, he remains in retirement. And then, you know, Doug will eventually retire as well, and we put a press release around this. Remi Lalonde, who was a CEO of one of our customers in the forest sector, is joining us. He's a young guy. He's actually on the trains today, I think in Edmonton, Derek. So he's gonna fit well with the team. I'm excited, excited to have him on board.
We'll bring him out so that investors can meet him, but I think he's gonna fit very well with us. And I think that CN is under a very good position with Tracy as our leader, and I'm quite pleased with that. So on this, maybe I'll turn it over to Derek to say a few points on operations.
Yeah, no, thanks, Ghislain, and whenever he calls me his buddy this time in the morning, I'm off to a good start for the day.
That's a good thing. Yep.
Chris, thanks for hosting us today.
... So listen, you know, to back up a bit, like Ghislain Houle said, when you look at how we finished Q4 2023, that was critically important. We finished some really strong operating momentum going into the new year in 2024. And listen, we know winter comes in our network every year. So, you know, over the years I've been here, which is 24 years now, coming this May, it was one of the best operating, you know, times we had going into the new year. So that really gave us some solid momentum to deal with this 10-day snap you heard Ghislain Houle mention. And when you look at it, though, the last 18 months or so, you've heard us really talk about or make the plan, run the plan, sell the plan model, and that's something we're gonna stick to.
It's critically important to who we are and what we do. But a foundational pillar of that you may not hear as much about, but just as critically important, is the operating plan is sacred. You've heard that from Ed and many others, and you're gonna hear it from me. You'll hear it from my good friend, Pat Whitehead. That allows us to do some of the things we do here. So I want to keep that in mind as a bit of a theme as we go through some of my remarks here. But, let's go to January real quick. You know, that 10 days, yes, it was brutal. He kind of took my line there. You know, when it's negative 40 or 50 degrees Celsius, it's the same as Fahrenheit. I always tease my American colleagues.
You don't have to worry about the conversion at that point. It's just cold. Put it that way.
Yeah.
But you know, the impact, too, it touched about 70% of our network during that 10 days. I mean, I lived in Memphis, Tennessee, for 4 years, where I met my lovely wife. And listen, my in-laws are still there. They got 8-12 inches of snow. It was below freezing for almost a week in Memphis. So it gives you an idea of that impact that goes on. And you have certain places, the network, that you're accustomed to it, but others that aren't. So it was extremely impactful. But listen, it, it goes back to the plan is sacred. You know, when you look at it, they have, we have train length restrictions that go into place. You have to do additional track inspections. You actually have speed restrictions because it's so cold out. Lots of challenges which we get paid to manage.
But going into it, we have clarity of purpose in what we do. You know, we have what's called tier restrictions, so we reduce our train length by plan. It's not ad hoc to have chaos. It's a very planned out situation that we do. One thing unique to CN is our air cars. So we have well, over about 100+ converted box cars that are additional air source that help propagate the air throughout the train during cold weather to try to... It's not gonna maintain train length 100%, but it's gonna be longer than it would have been without having these in. You know, that supplements our distributed power, for example. You know, my good friend, Mr. Whitehead, and I, you know, whether it's a resources base, you look at your locomotive plan, what can you do?
What needs to maybe come out to supplement for a short term there to help, you know, offset some of that, the people situation. So it's a very coordinated effort that goes into this, but it always comes back to having that base plan. And listen, another piece is we can't forget, we coordinate with Doug MacDonald and the marketing team. When it gets that cold, we're not the only one having issues. Our customers have issues, even loading the rail cars and the different things that go on. So, you know, we try to prioritize what is a must-have versus what is a nice-to-have, for lack of a better word, during that 10-day period.
Mm-hmm.
But let's fast-forward a bit. Let's go into, you know, I believe it's the week of January 22nd, when we're both in a full-blown recovery, for example. You know, during that cold snap, our car velocity was about between 150 and 170 miles a day, basically on a daily basis, and that's obviously not where you want to be, but not unusual fighting through that. But within a few weeks, our velocity was back to between 205 and 215. That's in some cases, almost summer-like numbers. So that recovery happened quickly and effectively, but goes to clear to your purpose. It doesn't matter if you're the transportation manager in the power or operating superintendent. Everybody has the same playbook, and there's really good alignment on how we have that recovery and how we enable it, right?
You start with cleaning up what's on the main line, and then you work back with Doug's team, and you prioritize, okay, what needs to move next? So, you know, that recovery and how fast we did it, I'd say that is part of the new CN, and we, we know what's old is new again. We get back to the basics, right?
Mm-hmm.
I think it's a really key approach, and you heard Ghislain mention workload. You know, we measure that in terms of GTMs. You know, we are averaging about 1.3. We actually had two 1.4 days, one just this past Saturday. We haven't seen that for a while, so that's a strong, you know, sign of the recovery of the volume that we've had to move out of that cold snap. And then you look at it on a go-forward basis, too. You know, the teamwork is just like Ghislain said, the team is gelling. It's very critical to what we do. You know, Pat and I have spent some time with Remi, for example, gonna be our new Chief Commercial Officer at some point, but he's immersing himself in the operation.
As just said, he's been at Edmonton. He's been at Montreal in the field. He's doing a whole tour here and getting, for lack of a better word, his hands dirty on the railway side of things, which is great to see, and that resonates with a lot of people. I would close with this, on my comment side. You know, listen, Q1 of 2023, we had very, very, excuse me, very favorable operating conditions.
Mm-hmm.
A lot of things went right. We had an outstanding Q1 of 2023. Q1 of 2024 is a little tougher comparable, but when you get that 10-day stretch in there, it does create some noise. But, but I'm happy to say the recoverability has been there, and I'll close my, my opening remarks with this, which is Ghislain Houle said: "I'd like to thank the men and women out there doing it every day." I get the privilege of coming up here, which is Ghislain Houle, to discuss these things, but those folks make it happen day in and day out, in what really can be an unforgiving work environment out there. We look at the conditions, we work in, in this industry. So with that.
Great. Thanks very much for that. Appreciate it. It's a good sort of way to get started, and I guess maybe I wanted to key in on, you know, what you mentioned about sort of the tough comps in the first quarter. Obviously, last year was very good. This year, more normal winter, maybe even a little bit worse than normal. But you also have some interesting compares coming up middle of the year when there was strikes, things like that. So I guess if we're thinking about that mid-single-digit RTM growth target for the year, how do you think that cadence plays out, where obviously, like you said, February is +2%, so we're gonna look for some, probably some pretty big months in the middle of the year. Is that the way to think about it?
Yeah.
I don't know if you want to do it by quarter. How do we think about it?
I think that's exactly it. I think, you know, you can, we have some tough comps.
... to your point, in the first quarter. I mean, when you look at it, last year, our EPS was up 38% in the first quarter, and the OR was 61.5, which is not really an OR winter-like type of OR. Winter-like type of OR is more around 64, 65. But then we, you know, Q2 was difficult. The freight recession was deeper and longer than we believed, and then we had these issues that I talked about that impacted us by $0.17 in Q2, Q3, call it the port strike, the forest fires, and so on.
So, you know, when you break it down, you will see volume not as much picking up in the first quarter, but you will see it in the second, third, and fourth quarter. I'm confident, and that's how it plays out. Again, the key on this one, because last year, to be honest, we didn't call the economy as good as we would've liked. The key on this one is half of our volume growth is really the CN-specific growth initiatives that we have very good visibility, that we're tracking and that we're discussing at the operating committee on a regular basis. So these are tracking and we're following that up. So, and then that 1% volume impact that we had from the port strike won't reoccur.
So, you know, we're not banking on a, that much of a supportive economy in 2024. But we'll see. But we are assuming that the economy will be, will not be like industrial production. We follow 150 economic indicators, but to simplify for the market, we talk about one, which is industrial production. We're not assuming it's gonna be negative. We're assuming it's slightly positive, and when you look at the economists, that's what people are assuming out there. So the good, the other good news, I think, Chris, is our growth is diversified, so it's not, we're not banking on one commodity, one segment. It's some of it is intermodal, some of it is plastics and P&C, some of it is frac sand.
Coal, we're gonna have two new mines coming on our line in 2024. I looked at the indices yesterday. The indices for both metallurgical and thermal coal are very nice, okay? So people are making money. So it's diversified. So if one doesn't really pan out the way that we're planning or modeling, then someone else, another segment will do better. The two sectors that were weak, as you know, is intermodal international. I think sequentially we can see those volumes picking back up.
Mm-hmm.
I would tell you on forest products, you know, forest products in and of itself is pretty strong. The weak spot is lumber, and lumber, I think, is more or less stabilizing in the 1,900 car orders per week. Just to give you an idea, in the trough, we were as low as 1,600 car orders per week. In the peak, we're at 2,300 car orders per week. We've modeled around 18-19, so we're not banking on going back to the peak on lumber. We'll see what happens with interest rates and so on and so forth. There's still a housing shortage in the U.S., but we've been quite reasonable in our assumptions, hence why I feel quite comfortable with that volume.
And then we said, I want to reiterate and put my buddy on the hot seat here, that we will deliver operating leverage. Like, we have capacity on our trains.
Mm-hmm.
Especially when we call about the manifest or the merchandise trains, we do have capacity. Within the model, we will need to add train starts. But when you look at, and we were talking at dinner yesterday, the three of us, and when you look at Q4 sequentially versus Q3, our volumes were up 10%, and we added 6% train starts. So we're not adding as many train starts as volumes are coming up. So, I think I'm quite bullish for the year, to be honest, and, but we'll see. I mean, you know, there's a lot of geopolitical risk out there-
Mm-hmm.
-still, that we're all aware of. So, you know, we're monitoring those like everyone else. What's happening with Ukraine, you know, what's happening with China, possibly reconciling with the Taiwan. Anyway, all of those things that everybody's aware of, these are out of our control, but what's in our control is the way we operate. I mean, our, you know, our scheduled railroad is working, and it's working well, and we have the proof points to tell us that that's the way to operate, at CN.
So, Derek, Ghislain's making some, some compelling comments here about operating leverage. So let's talk about that. So, you know, five—let's say you get 5%. I guess, what, what do you think the network is capable of today, and I guess, how do you sort of plan out for the year? So if half is CN-specific, that you feel like you have a good line of sight for, do you sort of model the operations to that half, and then there's flex to the upside or downside, depending on what the macro brings you? How do you, how do you approach that, and what do you think the network has-
Yeah, no...
From a capacity standpoint?
You know, between my good friend Pat and I, you know, there's different modeling scenarios you do, right?
Mm-hmm.
So, to Ghislain's point, you know, a good proof point is what we did last year. When you look at Q4, as he said, 10% of growth, but only 6% increase in train starts. And I think the key thing to remember, going into 2024 here is, you know, our manifest package has some room for incremental growth, and that's at a lower incremental cost, right? And a lot of our growth is very based upon that manifest package. So we're, we're confident in 2024 that we can absorb a lot of that. Intermodal, obviously at some points, as everybody knows, in 2023, is down, in some cases, 20%.
Mm-hmm.
We did take train starts off, then. That's the right thing to do operationally. But as that volume comes back, as Ghislain mentioned, we do need to put train starts back on, but it's not haphazard, right? The mix of traffic you bring on, the destination of traffic you bring on, and then how we plan for that, Pat and I's teams, gives you a dense train that can be between 10,000 and 12,000 feet, depending on where it's going out on our network, that has the right mix, whether it's U.S. or Canadian-centric. So there's other levers, even though when you bring back some, you know, train starts per se, you maximize that start out to go from as far as you can from, say, Rupert, to-
... Chicago or Rupert to Montreal to leverage that across the network. So, similar to Ghislain, I'm confident we have the operating leverage on, on the manifest side going into this year, and then the intermodal side, we'll, we'll bring it on, we'll bring it on smartly, but the, the way we design that is just as important as bringing it on.
So let's talk about pricing a little bit, 'cause I wanna get ultimately to the EPS targets and your talk, your comment about the opportunity there. But let's talk a little bit about pricing. So we're hearing kind of mixed things. So in the US, there's a discussion of sort of price on being on the softer side relative to cost inflation. CP has been a little bit more optimistic. So where do you fall in that dynamic in terms of what pricing will look like this year versus where it was last year? Are we going up? Are we going down, sideways? How does it feel?
I think overall, on average, we will continue to price above rail inflation. I think we've done that year in, year out. I mean, we're not providing pricing targets or pricing numbers because none of the rails are doing so. But, you know, we monitor it very carefully. As you know, all contract renewals come and get approved at the operating committee, where Tracy, I facilitated Tracy, Pat, Derek, and Doug, and now Remi will be part of. We make sure that we have the right pricing. We make sure that we have the right resources and the right assets to move the business. And first and foremost, we do that so that we have good customer service. Now, when you look at our customer service, it's been pretty good.
I mean, surveys have been out there, where, you know, CN has been at the top. So that's always easier, for us to get better pricing when you get good customer service and good customer reliable service. Because remember, the notion of a scheduled railroad is you can move, the same amount of volume with less assets. And when these assets are owned by the customers, and now the customers can move more product with less cars, they get the car benefit, for them, then it's easier for us to go in and get the, get the, get the inflation plus pricing. So now, when you look at it from a, from a different region standpoint, definitely, in the western region, where our capacity is a little bit snug, we'll push for more pricing.
When you look at the eastern region or the southern region, where we do have capacity and we can bring on a lot of growth with very little investments, if no CapEx, then we can be a little bit more aggressive on bringing that business on the rail, especially when we do have the space on our trains and so on. So we take it on a case by case, Chris. We take it on a lane by lane. But we know that pricing is important. We know that it falls to the bottom line, and we know that to get good pricing, then it has to... We have to deliver good, reliable customer service, which we've been doing with our scheduled railroading model.
Are there contracts that are coming up that are underwater from an inflation standpoint, where there's a catch-up opportunity?
I wouldn't, I wouldn't, I wouldn't say so. I mean, as we've said publicly many, many times, we have about a third of our book of business that expires any given year. And when that happens, you know, we take the opportunity to look at them, and again, inflation plus pricing. And the ones, the contracts that are multi-year, they're typically tied to a kind of an inflation index type of thing, so that we make sure that the out years have a pricing that will be above inflation. So I, I wouldn't say there's, there's catch-up. We're, we're very, very disciplined on our pricing. We've, we've always been, and we'll continue to do so.
Okay. Okay. So maybe tying that back to the guidance for a second and the 10%. So understand below the line, I think you're talking about maybe 50 basis points of EPS, or like half a percent of EPS growth coming from the buyback, right? I think that's the way to think about the buyback math this year.
Very, yeah, very, very small.
Very small.
Very small, very small from an accretive standpoint. What we've said, to help you, reconcile to the 10% is we do have a $200 million of cost headwind. We wanted to make sure that people saw this in terms of, incentive compensation, depreciation, and, and pension.
Mm-hmm.
Our tax rate's going up a little bit by 50 basis points. We are assuming some operating leverage in there, and when you do the math with the pricing and the growth of all the growth in volumes, you get to around 10%. Some could call it that we're maybe a bit conservative. Some could call it that maybe we were. I wanted to make sure that I gave you the backup on our volume growth because I know some people thought that they were a bit surprised that we needed that much volume growth to hit-
Mm-hmm
... to the 10%. So I wanted to make sure that I gave you that detail.
Okay. Derek, from your perspective, like in terms of the, competitive dynamic with CPKC, I'm kind of curious about that a little bit. You know, from an operating perspective, are you seeing things, you know, on change materially? You know, you guys have the Falcon Premium Service that you have, and obviously CPKC's got their competitive product there. I guess from an ops perspective, where, where do you guys think you are in terms of the competitive, you know, framework with, with the new combined company?
Well, listen, you know, I mean, all the railroads compete. We know that. A lot of respect for Mr. Creel and the CPKC team, but just like he said, there's enough volume. This is about taking trucks off the road, not share from CPKC or vice versa. It's two different products, two different things, and when you look at what we've been able to do with the FXE and UP and our partners, it's nothing short of outstanding. I mean, it's a five-day transit time. We hit consistently from Monterrey to Toronto, and it's focused on taking trucks off the road.
You know, we're a full member in EMP now, as part of that with the UP and Norfolk Southern, and, you know, we have a product that's not Falcon, but it's similar to with the NS out of the Southeast, for example, out of Atlanta, heading to Canada. So we've replicated Falcon, but in a different market. But once again, it's not a share shift from a railway. It's more of a, you know, two or three railways acting as one on an airline basis, and I think that's the key. And you've heard Ghislain say this in the past: "You go where you go, and you don't go where you don't go.
Mm-hmm.
That's a line I'm gonna start using that he does.
Yeah.
But it's not just, you know, a top of the house talking about this. Like, my frontline supervisors in Chicago know what the connection times are on Falcon, know what the connection times are coming from the NS. So it, it's not just a top to top. This is permeated down through the organization, that they understand the importance of acting as a single line. They understand the importance of the on-time aspect of it. So it's been really powerful. And, you know, this year is gonna be the full, full, full season. So I think a lot of the RFPs are going out now this spring, so we'll see where that ends up. But we're really proud of both of those services and look forward to the future on them.
My view, and I've said this in the past. I'm extremely excited about that partnership with UP. I think this will become the role model of how railroads need to work together. I mean, to Derek's point, and I've said this, you know, the strength of a railroad is you can't replicate a railroad. Like, we have 8,000 bridges, but the limitation is you go to where you go, and you don't go to where you don't go. And to extend your network reach, you can't do it through acquisitions because the STB has spoken that there's not gonna be another round of Class I, you know, mergers.
Mm-hmm
in the near future. So how do you extend your reach? Well, you're gonna have to do it through partnerships, and when you look at this one, you know, it allows us now to go through Mexico, okay, without having to pay $30 billion and having integration risk. So that's a win-win for us. But it also allows UP to come to Canada, which they don't come. So I'm extremely excited and... But in the past, those partnerships have not worked out because they were CEOs having dinner together, and they were not operationalized down to the ground, which is what we've been doing with the, with this one. And the fact that, you know, Jim is the CEO of UP, he knows us very, very well, and he knows that this is, this is key.
You know, we have CNers across the industry, so I think CN is well positioned to have these partnerships because we have ex-CN all across the industry. But this one is a key one, and we're quite excited, and I truly believe that it will be the role model of how railroads need to partner going forward to extend our network reach.
Okay. I'm gonna jump around a little bit, and certainly, if there's any questions in the audience, feel free to raise your hand. We'll get you a mic. I wanted to go back to international intermodal for a moment and just talk a bit about that. I think on the conference call, there was a comment about maybe some of this. The international market has been disrupted with challenges in the Red Sea, Panama Canal water levels, even have the potential for some work issues on the East Coast of the U.S. as we get later into 2024. You know, from a customer perspective, you know, how should we think about that? Is that a benefit for you guys in terms of international intermodal? Does it play out anytime soon?
It's not, it's not a big benefit. The issues that are happening in on the Red Sea, I can't see... It doesn't make a big difference for us so far. I think there's one customer that decided to have a call to Vancouver-
Mm-hmm
... due to that, but, but it's not gonna move the needle. I think that, you know, we believe that intermodal international, and that's what the customers are telling us, will do better in 2024 than, than they, it did in 2023. But it won't do as good as pre-COVID. I know my friend Doug MacDonald on the call said that Rupert was gonna come to pre-COVID levels. I'm a bit more conservative than he, he is. That's why I'm in finance, and he's in marketing. We're not assuming, like, if you look at Rupert, for example, Chris, as you know, our capacity in Rupert is 1.6 million TEUs, and in pre-COVID, we did 1.2 million TUs. Last year, we did 700.
What we've modeled for 2024 is slightly above what we did last year, but not, not at all, what we did in pre-COVID. So we've been quite reasonable on our modeling. Now, if we do better, that's gonna be cherry on the sundae. So I think it's gonna do better, but I don't think we're back at pre-COVID levels.
Okay.
If I may, what I would say, too, you know, the unique network reach we have, whether it's Halifax or Port of Montreal, Mobile or New Orleans, Vancouver, Prince Rupert, no matter what's going on, we're well positioned to have opportunities-
Mm-hmm
... if things do happen, right? It doesn't. You know, you can, not so much pick and choose, but at least we're in a position to be able to participate in a solution, depending on what's going on in the world.
Okay.
Yeah.
Okay. I want to talk about CapEx for a moment. So, obviously, you guys gave your outlook at Investor Day. And I guess, maybe first, conceptually, as you think out over this multi-year period of time, you also gave us a volume sort of number that goes with that CapEx to, to sort of help us understand it. There's gonna be some macro dependence on some of those opportunities. Is the CapEx variable to the same degree that the volume might be variable? Meaning, if the volume doesn't show up, should we expect the numbers to be lower than what you originally forecasted?
Somewhat. The maintenance CapEx we will do year in, year out, and we've done that in the past. And maintenance CapEx meaning, you know, changing rail and ties. We typically, you know, invest about CAD 1.5 billion-CAD 1.6 billion. You could expect that to remain the same. And frankly, when we had volume decline, if you remember, in 2016, our volumes were down 5%-
Mm-hmm
... with the energy crunch. We did actually the unit costs on rail and ties, because it's easier for the engineering forces to get their work blocks. We actually, our unit costs were better by 15%-20%, so it's the right thing to do on a maintenance. You don't wanna, you don't wanna reduce maintenance CapEx in years where the volumes are lower and then have to catch up. That's not the right thing to do. But to your point on growth CapEx, absolutely. If some of these opportunities are pushed forward or some of the opportunities just don't happen, then obviously we're not gonna invest or we're gonna push our investments later.
I mean, what we're trying to do is invest as close to when the revenues come as possible so that we don't dilute on the ROIC. The ROIC is a very important metric for investors-
Mm
... and we committed ourselves to deliver 15%-17%, so we're very cognizant of that. So it's not baked in stone, Chris, I would say, especially on the growth side. Now on the rolling stock side, obviously, when you've ordered the locomotives or we're out there, like other rails, modernizing our some of our-
Mm-hmm.
some of our locomotives, and we are, we have ordered some cars, boxcars and some.
Some autoracks.
That's right, some autoracks, et cetera, et cetera. Those are orders. So sometimes when volumes are lower, we work with our suppliers to try to push these orders out, but, but, but sometimes we have to take the car. But we know we'll, we'll have those cars for the next 40 years, so it is what it is. But, but absolutely, on the growth CapEx, if the growth has been pushed out, then we'll push out our investments.
I know it's early because it's only six months or so plus since you, you kind of gave some of the volume outlooks, but as you sort of sit here today, what's your thought process? Maybe if you can go through some of the bigger categories. I know you have bulk, you have renewables. I think there's inter, you know, big buckets, also intermodal. Do we feel like we're on schedule now, or is this still kind of, you know, we're in an uncertain macro, so I guess as we think about it, maybe we're like a slightly behind schedule? Just kind of curious how you, how you frame it up.
I feel we're essentially on schedule.
Okay.
I feel I would like to have a more of a supportive economy.
Yeah.
You know, I think the economy is not where it needs to be, but it is what it is. We don't control that. I think that those customer initiatives that we talked about, I think they're happening as we speak. We're gonna see—we didn't see a big difference in volumes from some of those initiatives in 2023. We're starting to see it in 2024, which is great. You know, I think that the key for us will be to remain disciplined, especially on our growth in Western Canada. And we've said that a few times at the Investor Day. We cannot and will not oversell our capacity, okay? If, if anything, at CN, we've demonstrated that we can grow, and we've grown too much.
When you look at 2018 and 2019, it was too concentrated, and what happens, and we were bragging about having the top, the top revenue growth of the industry, but we were lagging on earnings. What shareholders are looking for is earnings growth. So we need to, especially in Western Canada, grow to our capacity and make sure that that top-line growth comes to the bottom line. That's the key. Then when demand is higher than supply, then you take the opportunity, especially with great service, that the team is providing, to get more pricing. So that's that, to me, that's the key, is we can get more aggressive on getting volumes in Eastern Canada and the South. We need to be very cognizant of our growth in Western Canada. We invest year in, year out in capacity.
I think, Derek, we're investing in two double tracks-
Yeah.
-in, uh-
On the Edson Sub-
On the Edson Sub.
which is our funnel between Edmonton and -
Mm-hmm.
-Jasper going to the west, and then on the former EJ&E in Chicago. And as Ghislain Houle says, you know, that's no-regret capital. When you're looking at that West Coast to Chicago corridor, that is the growth. So, you know, the, the timing's always you bring it as close as you can, but this is a time to continue to invest 'cause that is where the growth is at there. And I think, too, you know, when you look at, some of the CN-specific opportunities, the fueling, distribution center at Mac Yard in Toronto will be coming online. They're doing the wet testing now, if I'm not mistaken. That's gonna be a, a really nice-
Yeah
Bump for us here. Frac sand in Northeast BC.
Yeah
-has been strong. You know, we've got a great frac sand franchise in Wisconsin. I lived through that in 2016 with you, trying to get some things done, if I remember. But, you know, the output of that, though, out of Northeast BC is the NGLs, or specifically the propane, going export to Rupert, for example. You know, we've been public with the AltaGas stuff, so, you know, a lot of good market opportunities that are CN-
Mm-hmm
-centric, if that makes sense, not GDP-centric, that, we're looking forward to really getting going in 2024.
Getting towards the end, so just make sure that if there's any questions from the audience, feel free. I wanted to sort of break down the 10%-15% EPS guidance over the long term, so as you think about the building blocks of that. So this year, not much below the line, but maybe over the course of the next couple of years, that picks up a little bit. Like you said, the cumulative effect of buying back a bunch of stock. Obviously, the revenue opportunity from a volume standpoint is probably a big piece.
Yeah.
Anyway, you can kind of help us sort of break apart the 10-15?
I think it's, as we said to at the Investor Day, I think first and foremost, it's the volume growth coming from the CN-specific initiatives that allows us to grow more than the economy. I think we need to continue. And it's not one item, by the way. It's all of these items coming together. I think we need to continue to price above rail inflation. Then, we've committed to improve our margins. We didn't give a number, but we've committed to improve our margins on a year-in, year-out basis. And when you put all of that together and yes, you know, some buyback, but again, the first use of cash is towards the business, with projects that deliver 15%-17% ROIC or internal rate of return.
You know, we said that, you know, we were gonna get to a leverage of 2.5 times.
Mm-hmm.
We were at 2.25 at the end of 2023. We'll do that over time, and that will help a little bit in the out years. When you put all of that together, I think that we're comfortable and can see that 10%-15%. It's all of these things coming together. You continue to invest in capacity, especially in Western Canada, with a view of capital efficiency. You wanna make sure that you get as close to 100% of your bucks in the ground, and we know that if you try to do too much, there's leakage. You know, the engineering team doesn't get the work blocks. You finish the siding under snow, which you don't want.
So you do that year in, year out, and then you sell to that capacity with good pricing. When you put all of that together, 10-15 is a good number, and we're comfortable we can deliver on it.
Should CN be the best OR in the industry, or does that matter that much to you?
You know, it's funny because we don't have an OR as a target.
Mm-hmm.
We have it as a result of everything else we do. We know that if we do everything we need to do, then the OR will take care of itself. And we know that at CN, with the network that we have, running a scheduled railroad is the operating model that we need, and this is one of the first thing that Tracy did. I mean, when you look at what she did, she did two things. First, she clarified the operating model. We will run those trains on time, okay? That was not clear before. And if it's not clear, and I'm in Winnipeg, in Symington, and I've got a 7,000-foot train, and I know I've got a 2,000 incoming traffic coming that I could tag on to the train. If it's not...
Yes, and my train's supposed to leave at 2:00 P.M., guess what I'm gonna do? I'm gonna wait. I'm gonna put that 2,000, then I've got a 9,000-foot train going. I'm optimizing that region, I'm optimizing that train, but I'm sub-optimizing the network. Now, it's all about the network. We will optimize the network. So she did... That's what she did, clarify the operating model, and then she made some people changes to make sure she's got the right team to deliver. And, you know, I'm very happy with Derek and Pat. You know, they got a good promotion. I know Derek for the last 20 years. He was a young superintendent in Memphis years ago when we were both on the Hunter-
He had red hair still, then, by the way.
Yeah, exactly. So, you need to have the right people because the team produces. And so she made some changes there, and like I said, that's why, you know, the team is gelling and we're having fun together, and that bodes for results. So maybe just a few points to conclude.
Yeah, just pass it to you to wrap up here.
I think I hope, I hope, that we were able to convey this morning that CN is in, is in a good light. I think that the, the results are there. I think the results were there last year, despite adversity. I think I'm, I'm quite optimistic about 2024. I'm quite optimistic about 2024 to 2026. I think the key is we have a great team. The team is having fun. We can challenge each other, we can tease each other. That's what it's all about. And then it makes it easier when you're part of a winning team because everybody wants to be part of a winning team, and you get better compensated, and everybody's got a smile, and that's what, that's what we have at CN today. So I'm very happy about that.
Ghislain, Derek, Tracy, thanks so much for joining us. Really appreciate it.
Thank you. Thanks for having us.
Thanks, bud. Appreciate it.