This is Justin Long with Stephens. I want to welcome everybody back to our next fireside chat with Canadian Pacific Kansas City, CPKC. It's been a very exciting year for the company. We're thrilled to have them here at the conference. Sitting next to me, representing the company is Nadeem Velani. He's CFO. Nadeem, thanks for your support. This will be a fireside chat format, so I'll start with some questions, open it up to any questions from the audience, and then we'll go from there. But Nadeem, maybe to just get things kicked off, could you just provide a state of the railroad, how things are playing out now that we're halfway through the quarter relative to what you were expecting coming into 4Q?
Yeah. So first of all, thank you, Justin, for hosting us and inviting CPKC. It's been seven months now into the CPKC journey, and I can tell you that first of all, I'm thrilled to be here to represent our 20,000 employees. It's been a tireless and a very you know, exciting seven months as CPKC, and I couldn't be more proud of what the team's delivered when you think about you know, integrating systems, putting the team together, putting three cultures of Mexico, Canada, U.S., together. You know, advancing our safety agenda, improving on our industry-leading safety metrics.
You think about, you know, what we've done in terms of investing and supporting growth near term and future, and investing that capital successfully and providing competitive options that certainly is stirring the market to provide even more competitive options. So it's an exciting time. You know, we laid out our five-year plan, our five-year agenda at Investor Day, not too long ago, and you know, we see an opportunity that's unique in the industry, you know, high single-digit revenue growth. We see the opportunity to improve our margins, double-digit EPS growth over that longer-term horizon over the five years through 2028. And free cash flow, which I think is maybe an underappreciated part of the story of free cash conversion of about 90%+.
So excited about what the long term holds and excited about, you know, the team that we have, the network that we have, and couldn't be more excited for what CPKC is gonna deliver. And going to your question on the near term, you know, we're trending around 1.5% growth in RTMs quarter to date. Overall, you know, there's some pluses. The potash and coal story of met coal have been kind of in line with what we expected, you know, strong performance year-over-year with some pretty easy comps. You know, we're our energy, chemical, plastic area is growing tremendously.
We've got some synergy opportunities that we're starting to ramp up on that with a new contract from Shell. You know, we're seeing growth in automotive. That's been an area that we expect to continue to grow through the end of the year. You know, we have some new contract wins there that are also gonna ramp up starting in 2024. But near term, those are kind of the strong areas. There are a few challenges. It's been consistent with what we've seen so far this year is on the domestic intermodal side.
I think that's a story I'm sure your conference has shared, just the challenges in that sector that we've seen, and we haven't been immune to some of those near-term challenges. And then on the Canadian grain side, we're seeing some variability in terms of volume. You know, the Canadian farmers specifically are being challenged in terms of selling into the markets near term. So the way I look at that, though, is probably a bit of a shift of volume, so shifting from 2023 into 2024. The crop is gonna move. You know, our part of the crop is certainly you know, less favorable than maybe the North.
We had some drought conditions in part of the southern parts of Alberta specifically, and so, what doesn't move this year will move next year. So I think that's been more of a shift in volumes timing-wise. So overall, you know, the quarter is playing out not too differently than we anticipated. I'd say that volumes are maybe a point or two lower than we thought they'd be, but nothing to be concerned about. From a cents per RTM, we're doing better, so the yields are gonna be stronger. And from a cost point of view, we're certainly in line with what we expected.
I mean, we talked about a sub-60 type of OR for the quarter, and I don't see any reason why we won't be able to deliver that. September was very strong. We ended Q3 the right way with a very good operating ratio, and October was also very strong. So I think we're starting to hit our stride from a cost point of view, hitting our stride as the network has improved and service has improved, and we're gonna finish 2023 strong and enter 2024 kind of on a very high note.
Okay, great. Well, that's a good way to start, and there's some puts and takes, it sounds like, right now. On yields being a little bit better than you thought, what's driving that? Is that just a function of mix? Is price better than you thought? Is it both?
Sure. I think it's a combination. Partly, you know, currency has helped, so the Canadian dollar has depreciated, and so that's certainly as we translate some of our revenues back to Canadian dollars, that's helping. Our pricing has been strong. You know, as contracts come up, we're still seeing favorable pricing above inflation as those contracts turn, and so that's been a positive as well. I'd say that mix generally has been favorable as well in the near term. So overall yield is gonna continue to show strength.
Okay, great. And maybe to just get this one out of the way, there was some news last week in Mexico on passenger rail. I think that's driven some weakness in the stock here recently, but I don't know if that was too much of a surprise for you. So could you just elaborate on the potential impact that announcement could have, and any other thoughts you have?
Sure. Yeah, so you know, first of all, it was not a surprise. I think, I'm being surprised by how the markets reacted, to be honest with you. You know, right after day one, Keith and John Orr, and Oscar, our President of KCSM, spent time with AMLO and Mexican government and officials and, you know, offered to look at some of their rail infrastructure projects that they were investigating and looking at themselves, and we offered to provide some of our expertise. You know, they shared that they wanted to look at passenger rail between Querétaro and Mexico City, and so we offered to perform a feasibility study, which we're in the midst of doing as we speak.
We should have that complete by first half of 2024. And so, you know, we're working with the government to look at what that could look like in terms of passenger rail. So it's certainly no surprise. I'd say that when you think about how passenger rail and freight rail work together on the continent, you know, we work side along-- we work alongside passenger rail across our network. You know, you think about the Canadian network and, you know, from Montreal to Toronto, there's VIA Rail, passenger rail in, with, in and around Toronto and Southwestern Ontario, there's Metrolinx, there's VIA Rail, there's all kinds of passenger rail that operates on both Canadian networks.
You think about the U.S., with Amtrak, we've been seven straight years at CP, the best performing service provider for Amtrak. And even Metra, you know, our performance in the Chicago area for Metra, going on our track is high nineties level of service. So, this isn't a surprise, number one. Number two, we don't see it as a near-term issue whatsoever, and we'll see what happens with the Mexican government and where their priorities are, and as things evolve next year with the new election, once they get the results of the feasibility study and they digest that and see what priorities they see, we'll continue to work with them.
But right now, we don't see this as a huge concern whatsoever.
Do you have any insight into the areas geographically in Mexico that they're most focused on in terms of growing passenger rail potentially?
You know, they've looked at for our line, that segment within Mexico City and Querétaro. I know they've talked about. They've introduced the Mayan Train and some of that, but that's, you know, that's what I'd speak to. I couldn't speak to more of other parts of other rail networks, so.
Okay, fair enough. Well, maybe we can go back to the KCS merger. As you mentioned, seven months in, so it's still fairly early. But if you were to take a step back and assess where we are in terms of kind of revenue synergies, cost synergies, and the base business performance for KCS, so those kind of three buckets, you know, where are we tracking relative to what you thought at the onset of the deal?
Sure. Yeah, so you know, we're one company, one entity. So it's, you know, I won't speak too much into terms of dissecting CP versus KC, the legacy companies, but I would just say that KCS' performance has been in line from a top-line point of view with what we expected when we looked at the opportunity to acquire that entity. And when we look at from a synergy point of view, I think we're, you know, our current run rate is in excess of $350 million and ramping. You know, we're ahead of the game in terms of synergies.
You know, more opportunities unfolded as we dug deeper and looked at, you know, peeled back the onion and looked at the customer opportunities and the market opportunities. So that's advancing extremely well. You know, we're gonna be patient. I mean, this is a marathon, it's not a sprint, so we're not gonna try to overcommit. You know, part of why, when we had looked at the synergy opportunities, we wanted to make sure that we could service it. We wanted to make sure we're not impacting any of our existing KCS or CP customers. So there's some capital investments that's required from a car point of view, from a infrastructure point of view, siding point of view.
So we're gonna be patient, but, but at this point, we're, we are ahead of the game in, in terms of revenue opportunities. And we have a lot of confidence, I think, over the next five years, that, our original, you know, $1 billion of revenue target that we had outlined- the first three years was, is gonna be bigger, and longer. So we, we highlighted that at our, at our Investor Day. From a cost point of view, you know, we're, we're pretty much in line. I'd say that, as you get more opportunities from a volume point of view, as you grow the volume, you know, higher than where we are today, which is, which is flat to +1% type of levels for the year, you're gonna get more opportunities on the synergy front.
So, you know, the G&A side, from a headcount point of view, is gonna be a part of it, and we're realizing that today. But when you look at some of the sourcing opportunities and procurements, that's something that as contracts come up and as you start negotiating with your vendors, it does take time. So we're starting to see some of those benefits here, as we stand here today. But those are gonna take a little bit of time for some of those opportunities to come up. Bottom line, we're confident with the synergies. We're confident it's gonna have a longer tail, and the size of the prize is gonna be a bit larger.
Okay, great. And when you think about that $350 million of revenue synergies that you've locked in already, what, what's the rough split between intermodal and non-intermodal within that number?
Yeah. So, you know, we introduced that Chicago to Mexico service, the MMX train, Train 180, 181. You know, the anchor customers on that train are Schneider and Knight-Swift. You know, and their business is ramping up on that existing train, so that. You know, I'd put that at around $100 million type of revenue. We announced the ordering of 1,000 reefers, refrigerated units that are starting to come into the network. And, you know, the size of that prize, about $150 million type of revenue number. That's gonna ramp up. We're not at that run rate today, but that's gonna involve proteins going south, and then coming back with produce coming north from Mexico.
So that's an area I think that we'll start ramping up later this year. We announced a deal with Americold that's gonna take time for that development to occur on the network, on the land that we've allocated towards that. But when you look at overall of the existing CAD 350 million, you're probably looking at about 40% of it existing today about intermodal. And the rest, you know, you've got automotive, ECP and some of the metals business as well. And so yeah, that's the way it's split it up.
When you think about the opportunity for revenue synergies longer term, what do you think the split of that pie will look similar, 40% intermodal, 60% everything else?
You know, I think the intermodal piece, our original view was probably we underappreciated the opportunity on the intermodal side. So, I think our initial view was probably less than that, but I think that 40-60 split, as we stand here, as I just mentioned, I think that's a fair estimate of, you know, five years down the road, what it could look like. 'Cause I think the intermodal conversion opportunity and truck conversion opportunity is certainly larger. And as you think about what, you know, what it means from a customer point of view to shift truck as a part of their transportation solution over to rail, I think that's gonna be the easier conversion, overall. So I think a 40-60 split is probably a fair estimate.
Okay, that's helpful. Maybe I'll ask one more, and then I'll pause for, for questions for a moment, but you talked on the earnings call about an expectation for double-digit earnings growth in 2024. There's still a lot of uncertainties about the economy and the freight market, but you've got a, a lot of company-specific tailwinds that, that we've been talking about. So can you just speak to your level of visibility in that forecast for, for next year and some of the key drivers that inform that?
Sure. Yeah. So, you know, number one, as I mentioned, we're really starting to hit our stride here from a margin point of view, from a you know, synergy point of view. So a lot of the self-help type of non-macro-driven opportunities that are unique to CPKC. We're starting to see those and realize that. So we're gonna take a bit of a more bearish view of what the macro is gonna deliver. So it's difficult to call that. You know, I do like seeing some of the CPI numbers that we've seen this week, and what that could mean for rate hikes or rate cuts for the next year. So that could be supportive to the consumer.
But overall, you know, it's difficult to predict the economy. That being said, you know, when we factor in what we think is on the table for us as far as our key markets, you know, I think we have a high level of confidence on what we can deliver from a revenue point of view. The pricing that we've been able to lock in this year and recently, as well as the new contracts that are gonna be coming up, I think is gonna be very favorable to overall yields. And then, you know, when we look at how we're operating, you know, we've gone through seven months of the integration.
We've seen some real improvement over our operating metrics the last, call it three months. And you see that momentum building and what that could mean to overall operating leverage. I think it's exciting for what it means as far as what we can do from a margin point of view and from an overall earnings point of view. So I have a high level of confidence in terms of generating, you know, double-digit EPS growth. We'll see what happens with winter. You know, it's pretty mild right now in Canada, but you know, winter usually lasts about five months, so difficult to predict that either.
But I think overall, when we look at our key end markets, we think about how we're operating, think about what we can control, and what that means to our overall earnings visibility. I'd say it's very high level of view of delivering double-digit earnings. And that doesn't include any sort of buyback or any sort of other self-help financially.
Okay, and I know you're exiting this year. It sounds like at a sub-60 OR. There'll be some seasonality, there'll be some weather. Realize that, but feels like that's something that's baked into the forecast for next year, a continuation of sub-60-
Why, why don't we wait till January for that?
Okay. Had to try.
Thanks, Justin.
Any questions from the audience? We'll go right here, and then over to the right.
Just real quick. You talked about some investments, marginal investments you'll have to make to realize the revenue synergies. I think that's what you said. Can you talk about that a little more? Like, can you size that a bit and what some of the projects? I don't know if the Americold is an example of some incremental investment to enable, you know, revenue synergy, be detrimental to service levels.
Sure, yeah. So, you know, I'd say that when we looked at the transaction and what it means in terms of generating, you know, significant revenue growth, we looked at the base infrastructure, you know, making sure ensuring that the, you know, the sidings, the network can support, PSR can support the growth that we have in front of us, can support our service design. And so even prior to day one on the CP network, we were investing in the base infrastructure. KCS, while they were in trust, they invested in base infrastructure. And so, you know, when we look at what it means in terms of incremental capital, we were talking about $250-$300 million of pure incremental CapEx. Now, offsetting that, that's a net number.
We're also offsetting it with some synergies on the capital side, so when you combine the two networks. So it's not significant. We've guided on our five-year Investor Day to CapEx of $2.6-$2.8 billion, and that's supportive of the growth profile that we highlighted, kind of mid-single digit RTM growth over that period.
Question over here?
Yeah, just, thoughts around cost inflation for 2024, and then maybe your ability to price above that, what you've lost maybe over the last 18 months or so with the super global inflation, and how long it might take you to kind of recover that and, and, and its impact on your margins?
Right. So in terms of when you, when you think about the inflation that we've faced in our industry, you know, obviously labor was a huge increase in inflation that we saw this year. Now, you can't time all your contracts to be able to mitigate that labor inflation that same period. So, I would put it this way: in 2023, we saw a huge jump in inflation, primarily labor, but even some of the, you know, purchased services and some of the raw inputs that we have in our industry. So inflation closer to, you know, 7-7.5% type of number. Whereas pricing, you know, you can't get all your contracts, your 100% of your revenue to price in any given year.
So there's a bit of a lag effect, right? So a third of our contracts would come up. You can price above inflation, and then a third of the contracts have annual escalators, but they're also... There's sometimes a lag. So what we faced this year, speaking CPKC, was higher inflation than we were able to price timing-wise. But now as these contracts roll in, we can, over the, you know, near term and into 2024, and you can price above that level of inflation, and so higher than that 7%. And then you factor in, when we look at 2024, you know, I certainly don't think we're gonna have inflation anywhere near that level.
I think we're probably closer to the 4% type of level when we look at what we have in front of us from a labor point of view, from a you know key materials and inputs. So I think we're gonna see the benefit in 2024 of being able to price inflate above inflation. There should be a wider gap, and then you're gonna get that lag benefit in 2024. So that's how I foresee it.
And then by 2025, you sort of being yourself more?
E xactly.
Question in the back?
Yeah, just another question, just thinking back to before Kansas City. I mean, you, you went through the regulatory process with KCS. Seems, you know, your labor seems like it got a little bit above and ahead, kind of back above maybe where volume levels have been over the last year or so. If the macro is weaker than you think it is for 2024, do you have the opportunity to go after the, I guess, the labor and get it down finally a little more?
Yeah. So absolutely. So yeah, we were caught by surprise to an extent about from a macro point of view, but also, it was also by design. You know, we're not gonna enter, you know, the first Class 1 merger in 20 years with and being short on people, especially in this environment that we've seen in the last several years of trying to hire and train and the challenge that that's created on service. Last thing we wanted to do was hurt our customers and hurt our ability to provide the service that we have high expectations for, that can support the pricing I just described. So we intentionally, you know, we're gonna be long on employees, and then you factor in the macro weakness that was probably worse than expected, we became extra long on employees.
That being said, you know, we're in the midst of right now looking at near term and into 2024, what's the right level of employees? And I think we have the opportunity to not hire as much, to slow down some of that pipeline of new hires. And you know, we can take some of the employees that we have, you know, on guarantees, and we can invest in them to make them engineers. So we've been kind of pre-investing and prepaying on the labor front. And again, I think that gives you another opportunity to why it can be accretive into 2024, 'cause you're not gonna have that level of headwind that we saw in the past, call it 12, 18 months.
I guess building on that point, that was actually one of my questions. If we get into an environment in 2024, where volume growth is, let's call it mid-single digits, in that ballpark, does headcount grow low single digits? Can it be relatively flat, given what you've just mentioned and the synergy opportunities?
Yeah, I think it can be. If we were to generate mid-single digits volumes, RTMs, I think flat to low single digit employee headcount growth is in line.
Okay, great. And cost per employee, I believe on the last call, you gave guidance to be up mid-single digits. Was that on a sequential basis in the fourth quarter? And maybe you could talk about the opportunity in that area going forward.
Yeah. So my comments were more year-over-year-
year-over-year
... not sequential.
Yeah.
You know, the comp per employee is one of those that can be a bit difficult because, you know, year-over-year, you get the pension impact, so our current service costs, depending on discount rates. So next year, you know, I can't guide to that until December 31st, when we lock in our discount rates on our pension plan. That being said, stock-based comp is also one of those variables, right? So we mark to market each month, so each quarter, depending on what occurs there, that can be a headwind or a tailwind. So right now, it's gonna- as we stand here today, it's gonna be a big tailwind for Q4.
I'm optimistic it won't be a tailwind for Q4, but just something to keep in mind, that stock-based comp is always a moving part, and it can have a meaningful impact on comp per employee, so.
Okay. Question over here?
Yeah. Maybe like you know, you guys now have a network that logically should support a lot of intermodal kind of activities. What do you hear from customers that they would need additionally to see things really sort of get that network up and running, and is there additional stuff you need to do in those cars to, you know, support?
Yeah. You know, so there's some easy wins on the intermodal side in terms of, you know, as we've seen with our service and, offering a service that didn't really exist in the market, right? Train 180 alone, we've seen a step function in growth and this opportunity with the Train 180, Train 181. You know, we can add additional train pairs, and that's certainly something that we can do, that can allow for growth pretty easily. Then, if you think about the terminal capacity, that's a key part as well. You know, we have a deal maybe three years ago with the tollway in Bensenville.
So we have an investment in Bensenville that we have in front of us that can support the terminal capacity that's needed to grow into that end market. We have plans and opportunities in Vaughan and Toronto as well, where we can grow. We have existing capacity today. We have existing capacity in Montreal. So for us, when we look at our key locations, key terminals, we're in a very good spot. Where there's been some need in terms of other, call it, you know, capacity requirements to support growth is, you know, we've got the land. We've talked about some of our land philosophy in some of the southwest parts of our network.
So that's gonna be something that we can do a deal like we did with Americold, where they can put in the capital, we can give them the land, and they can provide an opportunity to grow with them. And then lastly, it's the cars, right? So, you know, investing in reefers, for example, investing in other rail car assets that are required for the growth would be the last thing. So I think from all of those pieces, I think we have a strong plan to be able to grow pretty significantly over the next five years.
Question, Dave?
Just expanding on the capacity dynamics. Within the KCS part of the network, where are you at in terms of double sidings or the need to add those, and also how does that compare to where you're at?
Yeah. So, you know, when you, when you look at kinda the mix of business, it's it can be very different, right? When we look at the CP network, very bulk-centric, very, you know, we'll run 8,500-foot grain trains. We've been investing in coal, which is long trains, and potash as well, which is significant. So that capacity and those sidings aren't necessarily as comparable, but there are some commonalities. You know, we're gonna introduce our 8,500-foot grain model into the U.S. grain side on the KCS network. So that's an opportunity over the next two years that we'll be able to work with Bartlett and others to introduce into the KCS network.
You know, over that three-year period that we had highlighted in our application, we'll get the sidings in place that are required, that we think are gonna optimize the network, improve train speed, you know, improve overall service, reduce kind of capital needs elsewhere in terms of locomotives and rail cars, to just support overall asset utilization. So I'd say we're probably, you know, 'cause some of it was done pre-day one, we're probably at that 40% level as we speak, by the end of the year. And so we're kind of on track in that three-year period to be able to have the sidings in place.
That's 40% of the KCS?
Correct. Go ahead.
You guys found out just more volumes, if we can go over to Vancouver, see the strike there. How long do you think it takes for volumes to sort of normalize and sort of get back on track on before the choice?
Yeah. No, it's a great question. So we've, you know, we've seen Canadian ports grow for many years, for over a decade, I'd say. Now, near term, we've seen some challenges. I think the port strike certainly didn't help, and the way the government responded to that probably didn't help in Canada. I'd say that, you know, we've seen some near-term headwinds with THE Alliance that suspended their PN3 service in the Port of Vancouver through the end of the year. You know, when you look at some of the steamship line earnings commentary, it's been pretty abysmal.
So certainly, when you think about the consumer, you think about the macro environment and, you know, hopeful that as inflation subsides and you start seeing rates maybe go the other way and some strength from the consumer, that's what I think it's gonna take for that to recover. I don't think it's gonna happen anytime in the near term. I think we're probably a year away from trying to see that. You know, we're not seeing a peak season today, certainly by any stretch. That being said, when I think about, you know, when we looked at this combination, part of the benefit was the diversity.
So, you know, reducing our reliance on Asian import-export, reducing our reliance on Vancouver, getting exposure to other parts of the network. So Lázaro has been up 26%, and that's helped us mitigate some of the headwinds that we've seen in Vancouver. So part of that dynamic of diversification, I think we're seeing play out and supportive to CPKC.
So there are near-term challenges in intermodal, but earlier, you talked about the intermodal opportunity being underappreciated, and it sounds like that - that's been one of the upside drivers to your revenue synergies going forward. I wanted to ask about the mix implications of that, because if you go back historically with the rails, there's, you know, always been this narrative that intermodal margins and returns are well below everything else. Has that gap closed at all for your business? And as you think about the synergy opportunity going forward and incremental margins, incremental returns, how much does it matter if it's intermodal versus-
Yeah.
... other categories?
Yeah. So when you look at, call it the, the CPKC or the, the CP network, you know, we always looked at intermodal. If you look at our average length of haul, it's closer to 1,600 miles. So uniquely, in Canada, we have a much longer length of haul, which I think is supportive for margins relative to, to maybe some of our U.S. peers. And it's no different when you think about what we're doing with the MMX train, Chicago and, and Mexico. You know, it's a longer length of haul than, than what, you know, some of our peers have had. It's a longer length of haul than what, what KCS has had, right? So that was a lot of traffic that would kinda end at the border.
You know, and you don't get the full value, and you don't get the full benefit of it. You don't get that density. So when we look at our intermodal opportunity, it's that longer length of haul that's gonna create, you know, take trucks off the road. That's gonna create a value proposition to the customer, but you can also price it at not a big discount versus your average book of business. So I don't think that's gonna be margin dilutive to us, growing intermodal.
Okay. Maybe we could talk about the balance sheet. I believe your target for leverage is 2.5x. Any update on when we could hit that target? And as we think about the potential for buybacks, being reinstated at some point, is the plan to wait to get to that 2.5x before we restart that program, or could we see something in the interim?
Sure. So we're gonna wait till we get to 2.5x . Number one, I wanna be... You know, when we told the market and told our, our debt holders what we were gonna do, told the rating agencies, you know, we plan on, on delivering that, which is to get the, back to the 2.5x . You know, there's times when you look at the market and you say, "Well, you know, it'd be nice to have a buyback," like today. But that being said, we're gonna do the right thing. We're gonna, you know, delever. We'll, we'll get there, probably mid-next year. You know, currency does have an impact, obviously, with the benefits we-- I spoke to on yield from, the Canadian dollar....
Depreciating also has the negative effect on the balance sheet, which hurts our overall leverage. So, 2.5x , kind of, probably mid-2024, and then we'll reassess. We'll certainly, we've been strong proponents of buybacks. You know, it can be supportive, it gives you flexibility, and gives you support at times like this when you see a bit of a dislocation between your stock price and the intrinsic value. It's a good way of rewarding shareholders and, at the same time, our dividend, our yield, getting feedback from shareholders and that needs to be looked at.
So I think you'll—you can expect we'll go to our board with a recommendation of doing, you know, revisiting introducing a buyback program and also increasing our dividend.
Okay, great. And you gave a range on CapEx for the next, or going forward. One thing that came up on the earnings call, though, was I think Keith mentioned more of a focus on the locomotive strategy going forward, given your growth plans and ESG targets. Could any color on what that could entail as it relates to both purchases of new locomotives and modernizations? I'm just trying to balance that comment versus some of the cost opportunities you've discussed.
Sure. Yeah, so, you know, as we integrate the two companies, we're getting full value of putting the fleets together, putting locomotive fleets together. And so, you know, if we look at our growth profile, and if you look at the age of our locomotive units, we will see the need, you know, in a few years to start potentially looking at either modernizations or acquiring Tier 4s. You know, if the vendors are willing to come to the table and we can see some benefits as well on the procurement side, we may have an opportunity to acquire some Tier 4 locomotives that will also help with our, you know, emissions targets and fuel efficiency.
We're also looking at, obviously, our hydrogen locomotive strategy. So we're in the midst of, you know, building up that program. We announced a deal with CSX to look at conversion kits on diesel-electric locomotives. We've announced a deal with Teck that will be testing some hydrogen locomotives on the coal loop in British Columbia. So we're excited about that opportunity in 2024. And we've done some... We built our first high-horsepower locomotive that's gonna go out for testing shortly, and two low-horsepower locomotives that have done some mainline testing and are gonna be doing some switching testing later this month. So a lot happening on the hydrogen side.
We think that that's kind of the natural opportunity to de-carbonize and provide a you know a sustainable solution in our industry. It's gonna take some time, but that's gonna take a bit of time and a bit of CapEx, which I think is gonna be well earned back from our customer base as well. So what does it mean from a CapEx point of view? We guided to $2.6 billion-$2.8 billion of capital over that five-year period through 2028. I don't think much changes on that guide as based on locomotive requirements.
Okay, that's helpful. Any final questions from the audience, Dave?
How about, how you think about capacity on existing trains, and at what point do you start adding new trains to modify that?
Yeah. So, you know, certainly when you look at volumes, you know, as an industry, we haven't seen huge surge in volumes since, you know, the 2021 levels at all. So, we have room on our network, we have room on the KCS network, and if you think about the benefits and the opportunities of the synergies as you combine the two entities and running longer, improving train speed, and the value of the sidings we talked about earlier as well, we have plenty of capacity. I don't see any sort of capacity challenges from a network point of view when you look out on that growth profile that we highlighted over the next five years of mid-single digit RTM growth over that period.
So, you know, there's your natural kind of pinch points that you can address in different areas of terminals and assets, but as far as overall network capacity, I don't see any challenges. We also have that second bridge that will come into effect over the next few years as well, which I think will help with overall capacity in north-south. And then when you think about some of the changes in dynamics of what's moving intermodal in the Mexico area, we could create additional capacity by others choosing to go short haul and reducing some of that short-haul traffic that's on our network, and that frees up capacity that we could sell at a much better yield and a much better market.
So I think these are all positives overall to the market to the value of our service and the value of our capacity.
Okay. Well, maybe I'll wrap things up with a final question. One notable trend we've seen in the industry is the Class 1s starting to come together more and collaborate, and I feel like every week I wake up and there's a new service offering that's hitting my inbox with the, with the press release. Can you just comment broadly on some of the opportunities and maybe the risks as well with some of the new service offerings that have been offered and your collaboration with the other Class 1s?
Yeah. So, you know, when we look at what we had mentioned on our integration and why it's supportive for customers and supportive for the economy, we said it was gonna be, you know, induce and drive more competition into the industry, and then we've seen some of that occur. So to us, it's a compliment, and I think it should be a huge compliment to the chairman of the STB who made that decision and supported this pro-competitive acquisition and deal. For us, when we look at where our opportunities are, you know, we've announced the MNBR deal, which is subject to STB approval.
We think that that's gonna be a great opportunity to have a direct linkage between the Southeastern U.S. and into some of the Southwest part of our network into Mexico and in Dallas. And so we think that unique offering is great for customers, great for kinda key end markets of autos, which I think CSX has six or eight new auto plants coming online in their network. And we've announced a new auto compound that we're building in Dallas, which I think can be a ver- a very favorable landing point for some of those automotive product- production facilities. So for us, you know, there's some natural opportunities to work with that MNBR.
But we're open for business to work with all the rails. You know, it's something that, when you can do things co-productive and can be supportive for customers, and it can be a very cheap and effective way to drive, you know, improve capacity and promote capacity on the existing rail network, we think that that's a win-win for all. So, you know, we'll work with each of the key Class 1s where there's opportunities, but that's the key one right now that we're focused on.
Okay, great. We'll wrap it there, Nadeem. Thank you so much for being here.
All right. Thanks, Justin.
Appreciate it.