Great. Good morning, everybody. Welcome to the start of day 2 of our 33rd annual Industrials, Transportation and Airlines Key Leaders Conference. I'm Ken Hoexter, BofA's air freight and surface transportation and shipping analyst. To kick us off this morning, we have Canadian Pacific Kansas City's CFO Nadeem Velani and COO Mark Redd. Nadeem has been CFO for 10 years now, and we welcome him to his second time here as a CFO. I know there were many more times at your prior shop. Mark, welcome to BofA for your first go-round since taking over the role in 2019. This is CP's 19th time participating in the 25 years we've hosted the event, so we thank the company for your dedication and participation.
From the company, we've got Ashley Thorne from Investor Relations in the audience, joining us for the seventh time, here going back to her KCS days. With that, welcome, good morning. Nadeem, let me turn it over to you for your thoughts on the state of the market and maybe just also in that if you want to include three key takeaways you want us to walk away with today.
Sure. Well, first of all, thanks for having us, Ken. It's great to be here. It's been a great start to the year so far. I just think Q1 was a little noisy with some of the headwinds tied to FX and fuel. Overall, volumes are trending kinda in line with what we expected so far this year, 4 months in. You know, we just celebrated our 3-year anniversary of CPKC, which it's amazing to think about it's already been 3 years. We're very pleased with how the integration's gone, very pleased with what we've been able to deliver. We've led the industry in volume growth, EPS growth over that period. I think we've integrated well as a company and the culture.
We look at kind of the near-term environment. We're pleased, as I mentioned, how we started the year. You know, we've got moving a ton of grain on both sides of the border, Canada, U.S. and into Mexico. We've got a significant crop in Canada that's gonna serve us well through the bulk of the year, no pun intended. I think that's gonna give us a big base of growth that we're seeing. When we look at kind of the intermodal side, international, our alliance with Gemini has served us well. We feel good about what we're gonna be delivering, continuing to deliver on the international side.
Domestic, we've seen growth with Americold, a new facility that's come on in Kansas City, and they're set to open additional facilities on the Canadian East Coast and into Kansas City. That's gonna continue to serve our domestic volumes. I think when you look at kind of the state of the trucking market, where we've seen some capacity kinda come off and even pricing accelerate, we feel good about what that could mean for overall domestic volumes on our network. Feeling good broadly about where things stand from a volume point of view. You know, we've seen some headwinds on the coal side, which we'll continue to face. Overall, our mid-single digit volume growth outlook for the year, we feel very confident about.
You know, we've seen our first quarter cents per ATM was a headwind. We saw the impact. Some of that's tied to fuel surcharge timing and FX headwinds from the Canadian dollar being quite low a year ago in the first quarter of 2025. Well, we've seen that turn into a positive. As we sit here, you know, 4.5 months into the year, cents per ATM is actually positive year-over-year. In fact, for the month of May, we're up 10% year-over-year on cents per ATM. It's not only the headwinds gone, but it's turned into a bit of a tailwind.
From a free cash shareholder return point of view, we announced a 17.5% dividend increase. It was our first dividend increase since we've formed the new CPKC. We're also doing balanced shareholder returns. We're in the midst of a 5% share repurchase program. Certainly, looking to be disciplined in our capital deployments and reward our shareholders. Overall, feel good about where we are 4.5 months into the year and feel good about what's in front of us the next 6 months. Let me turn it over to Mark.
Yeah. Just, you know, as far as operations, if I look back at the quarters, we come out of fourth quarter quite well with operations expense savings. Q1 didn't disappoint. I know that we had, you know, you always have weather in the, in the winter. It was pretty spread across the network this year. We had some ice storms down south where they would recover real quick. Snow really just been the problem for the first quarter, but ended well. I mean, ended solid year-over-year. If I look at this month, kind of this second quarter, we're starting out very strong. You know, when it's disappointing when I was look a year ago and I look at Day One, I think about what Day One brought us.
You know, from Louisiana, Mississippi, we had some service issues down there but, you know, recovered quite nicely. If I look at compares year-over-year now, you'll see double-digit compares of how the railroad has improved. I think that's really, if you see just getting through the headwinds of, you know, terminal operations, how we handle equipment through terminals, we're seeing more synergies with each other. We're seeing the operating system as one, not multiple. With that, we can convert into, you know, better savings, better management execution, operating execution. You know, if I think about just kinda where we are leading in the second quarter, certainly record performance so far this quarter.
I think about, you know, three takeaways. Nadeem kind of talk about the macro, but, you know, operations doing well. We're converting our locomotives. We're converting the sides that we put together for the STB plans, so we're doing well in that space. You know, speaking for John, his pricing is good with the service metrics that we're giving him to deliver. He can convert in pricing. He's done well in that space. Although we've had macro headwinds, we're set up for success. Throughout the year, we can control what we can control with fuel savings, with different initiatives that we do internally and getting more comments on the macro.
Yeah.
Awesome. Sounds like nothing, not much going on. I guess I'll throw it over, either of you. I mean, Keith, let me let's get this out of the way, right? Keith's been very vocal on too much rail consolidation, already, despite being the last to acquire a company. Why, why is a TransCon merger not fait accompli just by announcement and where we are in this process? Why, why did what's his updated thoughts on the resubmitted filing? I know you guys had a press release out, pretty quickly. Where do you see the sustainable issues with the potential merger?
Well, first of all, we don't think it's necessary. We don't think that putting that much power in the hands of one combined railroad is good for the economy, it's good for the supply chain. It puts a lot of risk and puts a lot of pricing power in the hands of one railroad. You know, you think about the 2001 STB, the new rules, it has significant threshold to achieve. We don't think this application necessarily achieves this or this combined network would serve the public interest or serve the interest of shippers. I think it puts the economy at risk, supply chain at risk. You think about, you know, what it could mean to downstream effects, what it could mean to changing the landscape of the rail industry.
If you were to allow this to occur, you're probably gonna see further consolidation, which again is probably not in the best public interest long term. When you think about what they've offered as CGP or as any sort of remedies, we don't think that's necessarily something that's going to alleviate the impact of that, the power of one dominant rail and the risk that that would have on a supply chain. You know, I think the STB is gonna take a very thorough assessment and thorough regulatory review and certainly don't feel that it's a fait accompli, and I think the momentum shifted. I think labor has come out.
I think there's customers are gonna come out and we'll see what transpires the next few weeks here with the first response from the STB. I think this is far from over.
Okay.
Yeah, if I could just add something.
Please.
We talked about, you know, 2001 and despite, you know, we're the ones that took over KCS. I think we all knew KCS would be taken over at some point. It was just a matter of when and who. You know, the way we fit well with KCS, Kansas City Connection, CPKC now, I thought it's the right thing to do to connect that railroad. The rest of the, you know, the rest of the railroads have this high bar they've got to achieve. Frankly, I mean, with their submission, UP hasn't done that yet, in my opinion.
Yeah.
For sure.
KCS was, it was a different under a different rule.
Certainly. Well, they left it out so we could be acquired.
Sure.
Right. Yeah.
Right.
You got Ashley. Mark, you kind of started off your overview with the service levels, right? I mean, velocity is at multi-year highs, dwell near decade lows, cars online are falling, train lanes up 7%. I mean, I can go on. I'm sure you'd love to talk about it a bit. Seems like a renaissance of service post the integration. Maybe just give us some thoughts on what's going on and is this just the start or are we kind of seeing the benefits post-merger of what you can achieve?
I think the tail is, you know, you kind of look at an integration standpoint of a day in, but if you go back Day One, you can see year-over-year we've improved every year. I think, you know, the team that we put together, the things that we do from our PSR measures, the way we handle cars, the way we do service design, locomotive utilization, I mean, it's putting the pieces together for a CPKC network, not just CP alone. As we unleash and unlock some of the capacity that we've had, from the STB merger application that we put together, the 275, we spent CAD 1 million just to build out those capacities. I think that's what's unleashed and unlocked this railroad.
This railroad flows better with each other, not just standalone, against each other. I think that's really what's chosen, what really the difference is between this railroad, that you can run through Kansas City, you can run through Shreveport with blocking back and forth. In my mind it'll continue to get better and better each year.
Okay. That sounds great. Nadeem, I guess on the flip side, you just reiterated targets mid-single digit volume growth for 2026. We're at what? About 4%. No, I'm sorry. We're at 4% for the year. I guess we're aligned with that. You're facing tougher comps in the second quarter now. Intermodal, you mentioned 19% growth last year in the second quarter. You've got another 11% facing in the third quarter. Coal is down upper teens. Alternatively, grain, you mentioned setting records. Maybe just do a little bit of walk us through how we got there.
I mentioned the grain. I mean, we're seeing significant strength in grain. That's going to continue. Canadian grain crop is a record crop. We're going to see volumes continue to be significant double-digit growth through till at least the end of August till the beginning of the new crop year in early August. We feel good about that. U.S. grain as well, strong crop. We're moving a lot of it. When you look at what, where we are kind of near-term comps, we've got some very easy comps. Mark mentioned the Day One system cutover challenges we faced a year ago, where we had some service disruptions through the, you know, bulk of the second quarter, even into the third quarter to an extent.
Certainly some easy compares from that perspective. You know, when we look at 2025, we had prior to Liberation Day a year ago, there was a pull forward of volumes that we saw in Q1. That was the dynamic of that created a tougher comp in Q1 for us this year, but creates an easier comp in post April 1. We've seen that translate so far this quarter. Volumes are up 3.5% so far. When we look at the pull forward that we saw in autos, for example, that's gonna start accelerating our auto volumes year-over-year.
You know, the business development, the merchandise side when You know, that's what I look at a little bit more of the state of the economy as far as some of the overall merchandise volumes. We're starting to see some benefits there or some improvements on that side. Both on, you know, even on the lumber side, we're seeing it in the refined fuels into Mexico. We've seen overall the energy kind of market be stronger. Metals, minerals, despite some of the tariff noise on cross-border Canada and the US, we've seen that start to accelerate. Overall, feel good about, you know, where things are on the merchandise side, on the bulk side.
Again, intermodal, we're starting to see some of the benefits of our Gemini alliance that's continued some market share gains on that, on that side. Some of these Americold initiatives that are taking place that we've seen kind of on the domestic side. You know, I'm not gonna say the freighter session's over by any stretch, but it feels like we're on the cusp of that turning. It feels, you know, when I look at again, the trucking capacity, trucking prices and the rates, you know, probably as optimistic as I've been in some time when I look at that market as a whole. I think that's gonna serve us well, certainly on the volume and on the pricing side.
We're seeing it with our 181 train that's starting to accelerate and our new SMX product with CSX, which I think is going to bode well for the growth of that product.
Okay. Yeah, let maybe delve into that part of the, you know, one of the things we saw immediately post merger was the lengthening of trips, the benefit of getting cross-border, extending that. You've now got an agreement with CSX. Maybe Mark you wanna talk about what's going on in terms of the network with that Meridian & Bigbee, you know, kinda how you're extending the network and talk about the opportunity to keep going on increasing the length of haul and getting more traffic on the rail.
Length of haul, I mean, we can see that clearly in automotive. I mean, we're handling traffic from Canada to Mexico to and from. You can see that length of haul in the automotive business increase significantly. You know, what's good is this M&B purchase that we had, you know, 2 and a half years ago, just after KCS, it's unleashed and unlocked competition, okay. When you talk about competition, you talk about UP and NS, you talk about, you know, CPKC and CSX, what we're doing with CSX. We've been out on a train trip, we've been on the railroad with each other. We've been planning this.
We, you know, we may have launched it two years ago, today's time we did a relaunch just due to the fact we put CAD 58 million into the network, rail ties, ballast, everything you need to do to improve service. Now we're running 49 miles an hour. CSX has done the same thing. We've introduced SMX again, you gotta understand this service is three-day service from northern Mexico. Southern Mexico is four-day service. If I look at just competition to the MS LLC, Dallas to Atlanta, we are actually faster than Norfolk Southern's MS LLC route. There's a lot of good things that's gonna come out of this purchase of M&B and the alliance that we have with CSX and how we can partner together and grow that business.
Your in-region competitor was talking about winning some share in intermodal and some other areas. Yet, you know, in the first quarter, maybe because of the comp issue, it looked like it. Now you've caught up and maybe even caught them and now you're talking about accelerating to their flat growth. You're looking at mid-single digit growth. Nadeem, you had told me, "Absolutely not. We're not losing share." Maybe convince me it's not a share issue and I don't know, maybe the go forward targets make that easy to profess, but maybe just talk to me about that a bit?
Yeah, well, certainly it's not a share issue when I look at one quarter. We had some own, some headwinds that we faced. We had, you know, plastics plant that shut down, some refined fuels into Mexico that stopped moving. Some of the headwinds I mentioned on the coal side that affected our volumes.
Right.
That was CPKC specific as opposed to market share shift. If you wanna look at volumes, I think this quarter, 6 weeks in, we're up 3.5%. Last I saw on Monday, they were down for the quarter. If you wanna look at market share shifts, I think we'll let the facts speak for themselves. 1 railroad's growing 3% plus, one's down for the quarter and doesn't have the strongest of outlooks from last I heard. I'm not concerned about market share shifts between us and Canadian National, I think, you know, they've got their own growth story. I think they've got some opportunities on their network. We're focused on our combined, 3-nation network and our opportunities within CPKC.
I think pricing has been strong. I'm not concerned on that front. I don't see that share shift game being played. I think, you know, they've seen what can occur if you start going down that path and what's the impact that that can have on their network and on their service. I think those lessons have been learned a long time ago at CN.
Yeah. You targeted doubling EPS from 2024 to 2028. Given where we are today, here at, you know, almost midway through 2026, is that still achievable? Do we need to recalibrate from this point forward? Is mid-teen still the good outlook? Or given the lower base, do you need a higher growth to meet that target?
I feel good about low double digit EPS growth for 2026. You know, when we set those targets, obviously it was a different environment from a macro point of view, and some of the tariffs and some of those headwinds certainly weren't expected and some of the geopolitical challenges that the economy is facing. That being said, you know, if this feels like the longest freight recession of my almost 30-year rail career finally comes to an end, there could be an opportunity for full accelerated growth in into the back end of this year and into 2027, 2028. You know, we'd need to achieve kind of mid-teens EPS growth, which isn't unachievable.
Certainly if you get You know, we're doing double digit EPS growth on the back of a pretty weak base economic growth. You know, we still see a path for additional synergies into the next several years. If you get a more robust macro, you know, we're now getting the benefits of share repurchases and some of the benefits below the line. Certainly, mid, you know, teens kind of EPS growth is certainly achievable in a better macro environment.
All right. CP recently came up with some hourly agreements in the U.S., I think it was BLET and SMART TD. Is that the last conversion you were waiting to do to hourly? Is that just the U.S. now and we're still standard in Canada? Just maybe talk about the differences and your thoughts on that.
Yeah. Why don't we just talk labor in general? I mean.
Yeah
I think hourly, we have an hourly agreements out for ratification. We're probably about a week away, week, 10 days, to get that vote back. Regardless, you know, if we get that vote or not, the fact is we've served some notices to and from the union, and one some notices that, you know, at a minimum we'll be at a mid-south agreement, which I'm accustomed to. That's actually where I started railroading. We do have an hourly base, daily rate base, regardless going forward.
Which what it does for us, it takes away work crews in and around Shreveport, work crews across the what I would call the KCS Tex Mex property, to better align crew districts, to get synergies from crew districts, and obviously cycle times for all the trains that run in and around that area. If I look at Canada, I mean, I think it's the same. We'll continue to do what we've done for many years is, you know, negotiate back and forth, take a look at what's beneficial to us, take a look at what's beneficial for the people in the field and work together and negotiate through that. Same as Mexico.
The good news about Mexico is we've landed on salary increases for this year and next year, which is kind of unheard of. We were a year out. Typically you do it every year, but we've had some good conversation and frankly, we've got a good relationship with the leadership of the union in Mexico. We'll continue to work through work rules. There's many different things we've done in the past three years to remove some of the redundant type worker, meaning locomotives moving in the yards and things like that, where we can do it with existing crews and multiple stops across the network where we can pick up and set out. There's a lot of good things that we're doing on that labor front.
If you remember 3 years ago when we talked in Kansas City at our Investor Day, we knew at that point the first thing we needed to do was get in front of our union leadership and make sure they understood, "We hear you. We're gonna work together. We're gonna figure out how to make this railroad more efficient.
Okay. Nadeem, you mentioned in your opening comments kind of May was up 10% on cents per RTM with fuel, right? Maybe talk about pure pricing under that. You mentioned kind of the market's rational, it's still doing well, still above inflation. I know inflation has picked up. You wanna talk about how it's going on the core pricing?
Sure, yeah. We're, you know, long term our view is in that 3%-4% range, in a decent kind of environment, which we've been able to achieve. We've been closer, I'd say, in that midpoint of that, around 3.5% pricing recently. I'd say that's, you know, that's driven by the strong service, as Mark mentioned, you know, record performance from a service perspective. We've been able to price to that service. Inflation, while it's come up, for us it's been actually, you know, we've got long-term labor agreements in place and our inflation is in that 2%-2.5% overall, when you look at obviously labor and ex-fuel surcharge, which has its own mechanism.
Yeah, we're pricing slightly above inflation and pricing to the service and to the benefit of the shippers, right? Our customers are benefiting from this better service.
All right.
If I could just add one thing.
Yeah, please.
is as far as labor stability, if we realize this hourly agreement that we're working with the SMART and BLE, I mean, it's 1 year in the rear, but it's 8 forward. Imagine that he gets 8 years of labor stability in an agreement where we don't have to negotiate for a very long time. It's just really good for pricing and understanding what future looks like.
Yeah. Maybe explain just a sentence or 2, why is this better in terms of this shift when you go to hourly from the mileage-based?
There's a couple of things it does, okay. Number 1, it gives you standard off days for the employees. That's what the employee gets out of it. They get a higher rate of pay. You get flexibilities within terminals, flexibilities within yards to where I actually don't have a yard, a road concept anymore. I'll typically have just one job, can do anything, anywhere, anytime. You set your railroad up that way. I can put pools on anywhere we like. You can move people around as needed. At the end of the day, if we were to get ourselves in trouble for whatever reason, you know, we can put officer crews on trains as well, which is unheard of. We do it on the DM&E, the old DM&E property.
We don't do it on the Soo Line, with this agreement, we have it in and around Kansas City with the implementing agreement we did with KCS, also moving forward, we'll have it across this railroad, including Tex Mex. Let's say, you know, Houston becomes a problem like it was four years ago, just prior to the CPKC merger, we can actually put officers on those trains and move them around as well. It's very unique. It gives a lot back to the employee as far as standard time off days. We can work four and three rotations. We can do a lot of different things with flexibility, it also gives the carrier flexibility to get work done as well.
I hope everybody understands that. Right now, if somebody's in Kansas City and they can only go west, that's their territory. They can't go east. If you have trouble east, you can't move them, and now you can take people and move them around.
Yeah. I would say more Shreveport. Kansas City is an hourly agreement. Shreveport's the same way. Literally in Shreveport, you got four seniority rosters.
Yeah.
Okay. I can only go certain ways out of Shreveport. What it does for us with this rock plant that we have just north of Shreveport, we would have to go 75 miles, swap crews, and go to destination. Now we can run 1 crew to destination. You can see in our MMA, our MMC, the rock out of this facility is more than doubled. I guarantee it's doubled to this point, to where we can move rock out of that facility out to these locations like Monroe, Wylie, Greenville, just different places like that around Shreveport. Very beneficial.
I don't want to belabor the point, does this start to get thinking of, you know, whether it's autonomous trucking or other things that you could do to run things from that plant to your network, to your hub, and then move on? Do you start thinking about different things like that could change how you operate?
I think what we would do is look at crew districts as a whole.
Yeah.
I think crew districts down on the Tex Mex, we've done some work on the Mid-South, little bit of work on the KCS, but as you get an hourly agreement, you can unlock, you know, double crew districts. Autonomous trucking, things like that, I mean, we're gonna sit back and watch what's going on and understand what's going on. You know, I wouldn't, you know, really have that conversation at this point. Certainly, how we look at crew districts and how we can move around, switching yards and things like that'd be the benefit for us.
It was certainly a discussion yesterday night before. I mean, I think just going from theoretical to.
Sure
More start commercial. It's years away, but still accelerating. Nadeem, I wanna come back to you. You talked about the costs and how revenues are accelerating. You know, operating ratio the last 5 years, you've averaged a 250 basis point sequential improvement from 1Q to 2Q. You noted, despite the negative from higher fuel surcharges, hey, no reason we can't meet or perhaps beat that. Do you get even more confident, I guess, given what you said about pricing, given what you said about volumes here, is that kind of an easier bogey and is there an accelerated target on that?
No, we had a great April. Feel good about some, you know, where we are a couple of weeks into May. Halfway through the quarter, I feel just as confident as I was when we announced our results that we'd achieve a sequential improvement in the OR and continue to deliver year-over-year improvement for the year. We're sub-60 in 2025. I think despite the headwind from fuel surcharge on just the translation or the calculation impact on the OR from a higher fuel surcharge, I still see year-over-year improvement. I feel good about that.
Okay. Kind of structurally, you mentioned sub-60, right? Can this be, you know, if we're starting to see these gains and operating leverage with the volumes, can this be a mid-50s railroad? Is that your kind of your thought on operating level?
Yeah. You know, as I mentioned, we've been in this freight recession and, you know, I think a big component of that to what's impacted the railroads is not being able to forecast or predict the volumes, or you're protecting service and you're protecting resources, assuming a certain level of volume growth year-over-year, and then it doesn't materialize, and you get a higher cost structure associated with that, and your margins don't improve. I think what, you know, what we've seen this past year is just a concerted effort to not chase those volumes and not expect a comeback in the macro. You know, we've been holding tight on labor.
We've been, you know, sizing the fleet when we think about kind of the overall assets, sizing the fleet to a more, you know, a softer growth number expectation. With that, we've seen operating leverage as volumes kind of start materialize in this kind of mid-single digit level. You're gonna get the benefit of operating leverage. What do I think? I think we, you know, 100, 150 basis point type of improvement year-over-year, kind of on a sustained level. If we can get a more beneficial macro and really get that operating leverage, you know, you could start seeing some real improvement in the operating ratio. You know, we were 62 and change a couple of years ago. We're sub 60.
I think the goal is not to get to mid-50s. The goal is to focus on what we think is a true core metric of shareholder return is Return on Invested Capital. Should your margin improve from, you know, getting closer to the mid-50s level over time, if we can get some consecutive years of a stronger economy and get the benefits of operating leverage, benefits of the labor agreements, as Mark mentioned, and better service, and strong pricing, absolutely. That's something that long term is achievable.
you said, I just want to clarify for this year, you said despite fuel year-over-year improvement from the sub 60-
Right
year-over-year improvement, not the 150, or is the?
No, I'm not, I'm not saying 150 basis points. I'm saying longer term.
Longer term.
with a better macro, that's achievable.
Just wanted to clarify. Thanks. Last we talked, you were targeting, what, a billion and a quarter in synergies post-merger. You know, where are you on that path, and what's the target?
Yeah, by the end of the year, we'll be at that, we'll be close to CAD 1.3 billion-CAD 1.4 billion EBITDA synergies for the year on an annualized basis. Yeah, I think, we still see opportunities ahead. You know, at some point, you're 3, 4 years into the merger, you know, it starts shifting as far as whether they're synergies.
Yeah
or pure growth as a combined entity. Certainly the benefits of the combined network, growing as a combined entity, I think that we've seen, you know, we've been able to outperform the industry, and I think there's a path to additional synergies, into 2028 and 2029.
Okay. I just wanna get a couple numbers, ones in before we wrap up. You reiterated your CAD 2.65 billion CapEx, but you added some new locomotives. Maybe thoughts on, is that growth? Is that replacement? How are you thinking about the purchasing?
Yeah, you know, it's a little blend. I mean, we've got some older locomotives we're taking out of the fleet for sure. We'll have some for growth as well. It's a balance between the 2. You know, we've got 2 vendors, strong vendors that's in the U.S. We're gonna utilize both of them. Certainly I wanna say 300 and, about 300 and change, I believe it is, past couple of years that we've, we're working toward, and we haven't gotten all on board yet. We'll certainly start taking the Q3, Q4, we'll start taking the Progress Rail locomotives. We've got 35 of those coming this year, 30 more next year, for 65, total 65 package, and we bought the 170 from Wabtec.
Doing well with those?
Will help our fuel efficiency as well.
Yeah.
Employees, you mentioned that briefly, kind of 19, you know, or I guess Mark was talking about employee base, 19,500, but you noted you would climb a bit through the year, right? Is that, how do you plan staffing with mid-single digit volume targets?
Yeah, I think very low, single-digit increase, so maybe 1% increase.
Okay. You're now at what, just over 3 times debt to EBITDA, continues to fall from 4.5 times post-deal. You're comfy at 3 times leverage? Trim more?
Yeah, I think 2.75 long term. I think, you know, we've seen our multiple compress, and we've seen some opportunities to accelerate our buyback and, you know, take advantage of this pullback. That's what we've done. Slightly elevated near term, but long term, 2.75 is, I think, a reasonable level.
We're about to go into the summer. Thoughts on USMCA renegotiations impact on ops business?
Yeah, I think it's going to be a long process. I don't think it's going to be, you know, a July 1 type of renegotiation, certainly on the Canada-U.S. side. I think it will take some time. I think, you know, there's change in administration and on the Canadian side as well. You know, it will be a long negotiation, I think. I think overall, we feel positive as far as, you know, the impact that Mexico, Canada, and U.S. have on trade and the ability for those three nations to continue to work together closely. I think we're going to benefit as a tri-nation railroad on trade across those three nations. I think I'm not too concerned about the impact of not having a renewal July 1 by any stretch.
All right. I guess if I were just to lastly talk about your buyback, right. If I think about your cash generation going forward, right, you're accelerating the top line. You're talking about increasing ROI, which yields improving free cash flow. You've got a 5% buyback. How do you think about deploying that capital going forward?
Yeah. I think we're going to be balanced. You know, we want to do both dividends and share buybacks. I think we all want to still want to invest in the network. We pulled back our capital because we had had an additional kind of pull forward as part of the merger and the integration. Number one, we're always going to focus on investing back in the business where there's opportunities and where there's opportunities to generate high ROIC projects, which we still have on the network and across it. I'd say that CAD 2.6 billion-CAD 2.8 billion CapEx is going to be kind of consistent over the next several years. What remains will kind of return to shareholders, kind of being mindful of that 2.75, 2.8 type of debt to EBITDA.
You know, depending on where the stock is, it'll be a combination of share buybacks and dividends.
If I were to summarize our discussion here, right? Services are almost record levels and improving mid-single digit volume growth. You know, good solid growth across the board. You've got some easier comps coming up, which started off tougher comps pricing up core 3%-4% with fuel up double digits and can accelerate operating ratio. You talked about the top end of your target despite the fuel impact, or I'm sorry, in that range, in line with historical sequential improvement average. Buyback, 5% done within the next 12 months. Anything else you'd wanna throw in in a wrap-up?
No, Sounds terrific, Ken.
All right. Awesome.
You summed it up perfect.
Nadeem, Mark, thank you so much for joining us.
Thank you for having me.
Appreciate it.
Yeah.
Good morning. Next up, we welcome CSX and Kevin Boone, EVP and CFO, as he reclaims his CFO seat in October that he held from 2019 to 2021, with a quick step into the CMO seat in between. We welcome Kevin for his 5th time at our event, along with Matthew Korn up here in the front row, from Investor Relations, also for his 5th time, and CSX for the 18th consecutive year attending the conference and 23rd time in the 25 years we've hosted the event. Truly thank you for your steadfast commitment to the conference. What an outlook for CSX, right? New CEO Steve Angel continues to press the culture of the organization to be better.
It has easy comps against some of the Blue Ridge subdivision work and Howard Street Tunnel project for about CAD 150 million in easier cost comps. Let's dig in and see what's going on. Kevin, I'll turn it over to you. Just understand you have a few thoughts and updates to start, but, you know, maybe please include three key thoughts or takeaways you want us to walk away with as well.
Yeah. Well, first of all, thank you for having us. Also have Angie Williams here in the audience. That's with the company. She's our Chief Accounting Officer. I've been coming to this conference for a long time, even when you had it in Boston, even as an investor, before I moved over to the corporate side. Thank you for having me. You know, when we came into the year, we put a plan together pretty quickly with Steve coming on board and, you know, we obviously guided to low single-digit revenue growth and, we also had a very ambitious plan, aggressive plan around improving our margins. 200, 300 basis points of margin improvement.
As you saw, we delivered on, at least in the first quarter and continue to have a plan to deliver on that. We took up our guidance on the revenue side. You know, we adjusted mainly due to the fuel surcharge and what we've seen with the war outbreak and what that's done to the price of oil. We've also seen some favorability in some specific markets, mainly tied to the energy markets and what's happening there, some favorability, chemicals and other areas. You know, on the cost side, despite some of the margin headwinds that fuel surcharge does create from a margin perspective, we did take that guidance up to the higher end of the range. Very happy with what we did in the first quarter.
One quarter doesn't make a year, a lot more to do. You know, three things that I think about as a CFO coming back into this role, obviously on the revenue side, you know, Steve's been very clear that we need to go out there and get value for the great service product that we're delivering. A lot of focus by Mary Clare and the team around that. Revenue growth is about volume and price, that's important to cover our costs, cover our cost inflation. As we deliver a better service, we expect to get value for that. That's been a big emphasis, I know, since Steve's been on board and really pushing the team in that area. On the cost side, I got into it.
You know, we had a great performance in the first quarter, really across the board when you look across mechanical engineering, our transportation cost. Mike and the team fully engaged. What we're trying to do as a finance organization is give them the visibility and the tools to really go after those costs and really measure them and create processes around it. Once we find the efficiency that we don't let it creep back into the system. A lot of great work there, a lot more to do. We're building the pipeline already for 2027 in terms of the cost initiatives that we want to deliver.
I think some of the success we've had has given us the leeway to start thinking about you know, the next year and years ahead and really putting a plan together and being really thoughtful about it. Really, we always want to make sure the service, safety, and all those things are prioritized when we do all these cost efforts. I think we've done a great job so far of doing that. Finally, you know, capital is part of that as well. Capital efficiency, I think you'll see a multi-year strategy around how we get better about maintenance capital, using a lot more data analytics to really inform our decisions out there.
I think, you know, today and historically, we've replaced and a lot of the railroad, or a lot of track and rail based on going out there and looking at it and less based on data. I think Mike is a data junkie, and so some of those tools, and obviously with the AI and all of those things that are coming our way, it's giving us more visibility. As you can imagine, if you can extend the life of your railroad withObviously preserving safety and making sure safety continues to improve.
There's huge, you know, returns, impacts, when we think about ROIC is a, is a metric that is very much aligned to our compensation going forward and something that Steve has used previously in his career, and it's something that we talk a lot about internally. There's a numerator and denominator, and if you can affect both, you're gonna make a lot of progress. That's what we're really focused on.
All right. Not much is what you're saying. Great stuff. I appreciate that. As an in, I'm gonna change subjects from kind of results to what's going on in the backdrop. As the industry looks to potential consolidation, obviously CP was here just arguing their view pretty hard on it doesn't need to be done. How does CSX position itself competitively in the Eastern U.S. in light of what's going on?
Yeah, you know, I think a lot of the things that you've seen us and some of the success we've had recently has been, I think, wrongly tied to the mergers. I think the team, well, you know, I was obviously part of the sales and marketing organization. Some of the things where we talk about the southeast business on the intermodal side, that had been in the works for 18 months. I would argue that had really nothing to do with the announcement on the merger. You know, we're always looking for ways to grow. Similarly, the SMX, very, you know, that was in play.
That was a discussion that happened long before the announcement of the merger. You're gonna continue to see us as an organization lean into those opportunities where we can grow our volume. That hasn't changed, and nothing with the merger is gonna change that, you know, our goals there. We will continue to find, we'll work with all the partners that are available to us, short lines, other Class ones. If there's more volume, if there's truck conversion opportunities out there to add new service that has a return that meets our thresholds, we'll go after it. I think you can continue to see us do that, and that strategy hasn't changed.
Let's talk about your, your network performance right now. You mentioned Mike Cory a couple times, you know, just the result of what's going on. I guess your car loads are up 4.5% quarter-to-date, about 200 basis points above our target. More importantly for CSX, last week, 132,000 car loads. That was, I think, the second or third best week since week 25 of 2018. You're talking about 8 years of, you know, catching up on car loads. Talk about what's driving that performance. Is it, you know, is it weather? Is it better ops? Is it winning share from peers? Is it, you know, now easy comps against the construction you did last year? Maybe just talk about what's going on.
I think it's a lot. You know, I would first tell you that Mike's not satisfied where the railroad is today. I mean, obviously, year-over-year we've had improvement, but he would say there's a lot more to do. A lot of optimism around there to continue to improve the service product and that will lead to more wins. You've seen a number of things that have happened, you know, post-war. You've seen the trucking market tighten. Certainly that is helping on the domestic side. We're seeing a tough comparison year-over-year on the international side. Imports are slightly down in our business right now, but domestically, supply, you're finally seeing that coming out of the market after, what, the worst trucking cycle that you probably witnessed in your career.
The first one certainly that I've seen. We're seeing some of the benefits even beyond intermodal areas like forest products where they can make a decision daily whether they use rail or truck. We're seeing that start to convert over to rail. With our service product and what we're delivering, we're pretty optimistic that can continue here. You know, there are some benefits that we're seeing from low cost energy in the U.S. that advantages some of the chemical producers here in the U.S. globally. We've seen an initial pull and demand from the domestic customers for their domestic customers and we anticipate that there'll be some international pull on some of those products.
When we have, you know, natural gas-based production versus the world where the world is mainly oil-based, when you look at Asia and other areas, that really advantages the U.S. from a production standpoint, and we're the beneficiaries of that. I'd also say we're very optimistic. We talked about it on our earnings call on the industrial development side. Look, in this environment where you have secure energy, low cost energy, I don't think there's a better place in the world to invest in today. Labor, you know, I call energy the new labor, right? People used to chase labor cost around the world. From a manufacturing standpoint, I think they're gonna chase energy cost and having secure energy, cheap energy, definitely advantages our network.
We have a great, you know, the Southeast, other parts of our network in the Midwest have the great work base to handle some of those projects. We're optimistic. We see some of those coming online and ramping up over the next year or so and into 2027.
When you think about some of the volume wins right now, right? Your peer in region, maybe a little discord, employees don't know what's going on, and so that might affect service. You're winning some, I presume, some relative share just given that status, right? How do you ensure when whether the merger goes through or not in a year and a half when they settle down, that you don't give back that share?
Yeah, I think, what we've seen a lot of it is, we wanna grow the pie. I don't think, you know, we're not out there. We certainly will win with service, but we think we have a unique value proposition that we're delivering. We're not out there to undercut our service, and discount our, you know, the things that we're doing and all the hard work that Mike is doing. We're out there. We're very much, what you think you've seen is some depressed markets. We have some, leading market share in some areas that have been, hurt over the last few years. You look at the chemical producers, some of those, you just look at their stock price, right? Year to date, what they've done.
They benefited from what has happened in the world and their advantaged kind of supply cost advantage versus the global producers, and we're benefiting from that. We don't, we don't see major share shifts occurring within the rails. It's more about growing the pie and going after that truck volume.
Let me take a step back. In your opening comments, you talked about kind of the underlying market. How would you define the freight environment today? Is it still uneven demand or are you seeing more consistent recovery across some of the end markets?
Yeah, I, you know, I would call it cautiously optimistic. Coming into the year, it was hard to tell in the first quarter. We had a lot of weather impacts that created a lot of volatility in January, February, and then coming out in March. We saw some better trends, you know, almost across every market that we had. When you look at our merchandise today, almost every market is in growth, with the exception of forest products, where we saw some rationalization in production last year, and obviously there's a lot of exposure to housing there as well. That market, while better, you've seen some sequential improvement and less negative growth, I would say. That one is still a headwind.
I talked about the tough comps on the export side. On the coal side, you know, with utility demand, AI, all those things, we're seeing strong demand out there. We'll see if we get a hot summer. That always helps as well. We had an unusually cold winter that helped from a demand perspective. The unfortunate part was when, you know, coal gets frozen, can't move it as much. We'll catch that up as well. The international markets I would say are stable. We haven't seen a real uplift there. I do think, you know, where you see Australian coal prices and where you see the U.S., it's the largest gap we've seen in a long time. Hopefully, that converges and it converges upwards. We'll see.
We certainly don't have that in our outlook, that's an opportunity for us to and as well. We have 2 mines, as you remember, that were down last year that are now back up. We're seeing incremental volume from both those mines. I would say internationally on the coal side, stable, and pretty We'll see if we get some better pricing as we move into next year.
We're gonna blame the groundhog for that extended cold weather because it's not been fun up here. Talk about the culture change brought to CSX by Steve and what's different in the organization, right? Obviously, we know you've moved back to CFO and Mary Clare into CMO seat. What else do we not see that's going on?
Yeah, we have a Rizwan Chand who just joined us. You know, I think he's been on the job for a few weeks here, you know, on the CHRO side, so leading our human resources, that area. Talent's still a huge focus for Steve and developing talent across the organization. Very excited to work with him. He's bringing a lot of great ideas. He has some railroad experience, but he also has a lot of experience outside the industry that he's bringing to the organization and really making a best-in-class organization around how we develop people, how we think about that, how we compensate folks, all of those things to align to our goals.
In terms of Steve and the culture he's bringing, he continues to say almost every week, "Make the important things the important things." It starts with delivering financial results because that allows us to do a lot of things. It allows us to invest in our people. It allows us to invest in our network. Allows us to invest in customer service and serve our customers better. Those are the things we're focused on is as you drive financial results and you get more competitive in the market, you have the ability to go out and get more volume and grow the business. Those are the things. It starts with delivering results and being part of a winning culture. I think we're all excited about that. It's nice to win.
It's nice to put up a good quarter and you can feel the energy around the building. Certainly that's been fun. Now we got to sustain it.
Yeah.
That's the challenge for all of us, and I think we're up for it.
Let's talk about some of those financial goals then, right? You target revenue growth in mid-single digits. That's what you talked about. Is that solely a bump from fuel or does that allay to what you were talking about in some of the underlying industries?
Yeah, I think, largely, you know, right now it's from fuel, but there are a few markets where we've seen some better, we're more optimistic than we were coming into the year. I would point to chemicals. We were optimistic on the aggregate side, but we still see a very strong market there. Pipe on the metal side has been very strong. You can imagine LNG export projects, all those things with what's happening in the energy world. We're seeing a lot more activity in that area, and the metals market is pretty solid. Tariffs, all those impact those markets. Domestic coal, you know, fairly strong. Winter will go into the summer. Expect that to be doing well.
Across the board, you know, there's a volatile market out there, a volatile world, you don't want to get ahead of yourself. We're going to control the things that we can control and continue to focus on those things. There's existential things that are out of our control, like energy prices and those things. It is something that, you know, at least in the near term, we see some positive trends for us.
Okay. let's talk about core revenues, right? revenue per car were slightly negative in what first quarter, turned positive to low single digits in two Q, I think was your comment. now with fuel kind of up, maybe talk about the contribution of fuel versus core pricing.
Yeah, you know, Matthew reminded me we didn't actually guide yield into the second quarter. Obviously from a fuel surcharges perspective, we will see some favorability versus where we were in the first quarter. There'll be a slight fuel lag. Remember on the merchandise side, two-month lag that we'll experience. This should be the last quarter where we see a significant fuel lag, unless we get, you know, CAD 150 oil, and nobody wants that. What Mary Clare said is that we expect better core pricing this year versus last year, and I mentioned that in my opening comments. It's a big focus of the team for us.
We've had a highly inflationary environment over the last few years, and we want to make sure we're recovering that inflation through price. You target. Well, I guess let's take that, right? If core pricing is doing well, volumes are trending a little bit ahead, you target operating margin gains at the top of your 200-300 basis point annual target despite pressure from higher surcharges. Maybe talk about what's leading that update focus on costs. Yeah, we had really great performance on PS&O and, you know, really across the board, a lot of focus across the organization and a lot of people involved in some of those efforts. You know, a lot of focus on the energy cost. Mike put up a record fuel efficiency number and a record for first quarter.
From a fuel efficiency standpoint, we continue to see favorability there from a fuel efficiency. There's fuel efficiency outside of locomotives. We have a lot of emphasis on our vehicle fleet out there, over 300 vehicles, trucks. Within the first quarter, we saw 20% less miles as we focus on that fleet and the usage and utilization there. Now we're looking at the utility spend, right? We have a pretty significant utility spend. How do we get that down? It only magnifies the benefits when, you know, energy costs are this high right now.
You know, I look around what Mike's been able to do and his team and Doug and Gary and everybody around just looking at the workforce and finding opportunities to drive efficiencies on that end. I would say engineering, we're in the very early stages. We did have some leadership changes there that I think we're all excited about and what can happen on the engineering side and the value that can come. I think that's a multi-year journey, particularly around the capital as I talked about earlier. A lot of efficiency opportunities around how we spend dollars in that organization.
Technology is with everything that's happening in the world and a lot of discussions and we're trying to prioritize the things that can have the most value near term from an AI perspective and all those tools. When you think about a network where there's a lot of unsupervised, you know, people out there working, the more tools you can to manage a network, the better we off we're gonna be. You know, if we can centralize some of that decision-making and make the best decision for the network, those are huge. The benefits are very, very, very, very good. Then we're using AI on the pricing side as well and, you know, using those tools.
I know Mary Clare is working on a project here and, you know, early signs are very, very encouraging on giving us more visibility on pricing and how we go to market and being more thoughtful around that. A lot of different categories. I think from my perspective is how do we prioritize the ones that can deliver the most value? Where is technology going? What should we be doing now? What AI can do today? What should we do, you know, next year? Because every month you wake up and there's a new model that can do more. All those things we're trying to figure out. It's an exciting time.
You know, technology will unlock a lot of the future, I think, benefits, that we can experience, across almost every part of our business. I don't think there's a, you know, an industry that's more ripe, for using some of these tools to really manage a network that's, very complex.
Let me bring that in near term for a second, right?
Yeah.
That was kind of a good view on kind of the potential long for the year and maybe even beyond. You typically generate 410 basis points of margin improvement from first quarter to second quarter. You know, given the robust performance in the first quarter, which was beyond targets. You know, are we looking at half that level? Can you come close to normal? Is there a guide that you've talked to in terms of relative to historical performance where you'd pan out?
Yeah, I wouldn't, you know, I think, we covered this a little bit on the earnings call, but we did have a very good first quarter. We continue to believe we'll build some of that momentum. Obviously, higher fuel prices, from a margins perspective, that will start to flow through and that, obviously, we're gonna do everything we can to offset with efficiencies on fuel, but that can have a negative pressure on your margins optically there. We've talked about some of the other costs. Incentive comp will go up a little bit sequentially after delivering a pretty positive first quarter. We talked about these other costs related to the transaction.
Unfortunately, we're having to pay advisors, consultants, other things to obviously give us the best perspective and a lot of smart people working on the transaction that's pending out there in the market today. Those things are nuances. We always expect second and third quarter to be our best quarters from a margin perspective. That doesn't change. That should continue. There's just this, you know, from a sequential basis, there's a few things that we pointed out.
That will hit 2Q results.
Yeah.
Level of improvement.
Hit, yep. That's right.
Okay. Service levels, you opened up kind of talking about how well things are running. I mean, seem to be generating pretty robust levels. Velocity is up 10% year-over-year. Dwell down 6%. How directly, as CFO do you see that translating into cost savings?
You know, I think, you know, I've, you know, obviously got the experience in 17, 18, 19 as we ran better, the costs that just naturally drop out when you have less recrews, when you have you know, you're using, you're utilizing your workforce much more efficiently, costs just naturally come out of that. There's, and, you know, you know, across mechanical, even engineering. You just see costs fall out as you're running a better network. That, that will continue. We have very discreet items that we're going after, and I talked on the first quarter call, there's over a 100 kind of initiatives that we have across the organization to drive cost improvement. You know, we're really checking a lot of those boxes today.
You know, the other one that you know, it's hard to measure, it's hard to put a dollar value up against it, but I know it's there, is as you run a better network overall, costs just naturally have an ability to fall out. The better, Mike and his team perform, you'll see that cost performance come out.
You mentioned in your last answer on the cost, AI and the potential, and also you mentioned it a couple of times on coal demand and things. Maybe talk about, you know, we saw the importance of technology in the CPKC merger a year ago in the summer. How are you using AI to lower costs? You kind of threw out a couple of things. Maybe are there specific projects you would highlight so we can understand the scale and speed that you're deploying?
Yeah, I think, you know, one of the ones that Mike's particularly excited about right now is crew management, right? Managing that workforce, they're our most valuable asset, and making sure that we have the people in place to run the trains on time, all those things are important aspects. There's a lot of data involved in that and understanding how the workforce is trending, you know, retirements, all those things that AI is just really right for. You can put a lot of data in there, and you can get a lot of insights. You know, using Excel for that is not always the ideal tool.
I know Mike's probably working on it right now as we speak, but he's been pretty amazed at what the early signs and the visibility that he's gaining from using some of these tools out there in the market. The other area, sounds like a small, but it's actually a larger cost area for us, is how we monitor our vehicles, our vehicle fleet that I talked about earlier. We have GPS devices on there. We're really using data tools on how we maintain them. You know, last year, we spent over CAD 13,000 per truck in maintenance. It's a crazy number to me. How are we looking at that? Are we selecting the right vendors? Are we not getting ripped off?
I can tell you we're getting ripped off on an oil change every once in a while. A lot of oil changes. How are we putting more tools around that we can hold, you know, our vendors accountable? How we can hold our employees accountable for how they drive? When we first started monitoring vehicles, we had a lot of people that were driving 90 miles an hour and over. Last week, we had 0. That wear and tear on the cars, but more importantly, safety, right? From a safety perspective, these things are good. You know, you can go after it. You can talk about it.
I've seen us do this before, where you go after a cost area and you talk a lot about it, and then you move on the next one, and then the costs creep back into the system. That's the important thing that we're building these tools and this process that you don't have that, those costs come back into the system. Those are 2 areas where we're using a lot of data and, I would say AI capability to monitor, you know, those processes and give us more insights as a leadership team in how we manage those costs.
Headcount's at just shy of 23,000. Thoughts on headcount through the year. Is it flattish despite the mid-single-digit volumes?
I think we see opportunities. We do have some people in training, and we'll continue to replenish where we have upside in demand. Where you're seeing a lot of demand occur right now is in our manifest. You know, we have capacity on our trains. When you look at our train length today, Mike would tell you almost across the board, we have the ability to grow. If you see, you know, some of our chemical customers go from 10 shipments a day to 12, 14, 15, you know, that's pretty easy for us to handle as a network. Well, it's easy for me to say. The ops folks probably would tell you it's not that easy, but it's easier.
You know, still the same switch, still going out there, you know, getting that volume. That's where we see the upside versus where we were today, that fits nicely into the network when we think about it. I'll say on the intermodal side, it's been Carrie and her team have been phenomenal handling the additional volume that's come through our network. Obviously, with the Howard Street Tunnel opening up, we just ran a double stack train last week. In that market, we're incredibly excited about what we can do there. We had previously outlined 75,000 to 125,000 of additional loads.
You know, Mary Clare will tell you that will take 2 to 3 cycles in term bid cycles to deliver that kind of growth. We're optimistic, and we've already seen initial wins in that area. Then, you had Nadeem here a little bit earlier in SMX, right? That's another area on the intermodal side where we see a lot of opportunity to grow as they market Mexico into the southeast. That service is second to none in terms of speed and the investments we made from a train speed and efficiency there. We're excited about that. A lot of growth opportunities kind of across our network right now.
What was the number of intermodal loads from the tunnel was 75 or?
Seventy-five thousand, a hundred and twenty-five we-
Two. Oh, yeah, you can range. Okay.
Yeah. I've kind of given a range. You know, it also gives us the capability and, you know, we have a unique position in Baltimore at the port, and there's a lot of investments happening there. You'll see, you know, from Baltimore to Chicago is the fastest route.
Yeah
today. We have a lot of customers that are excited about utilizing that ability and capacity.
Let me step back and, I guess, go back to in CSX just conception. I know coal has changed dramatically and some other things, but CSX used to run 7.5 million car loads about 20 years ago on an annual basis. We're targeting about 6.5 million this year. I get coal declines, PSR, elimination of equipment, employees are down 25% from the peak, yet up 20% from the lows. How do you think about capacity availability on CSX's network in today's market, given the stuff that Mike has done, and where do you expect the flows to come from?
Yeah, you know, I think, you know, Mike would tell you, I know Mike would tell you that we have room to grow almost across every corridor that we have. We continue to make investments in some yards that are low-cost investments, like continue to wring out capacity there. You know, you talk about a lot of the car loads that are down are the coal side. We are seeing opportunities across almost every market. When you think about what's happened during that time period, we had a, you know, continue to have the industrial, you had offshoring on the industrial economy. I think that we're really optimistic. You, you know, Steve's got a lot of perspective from his previous life on the industrial gas side.
I mentioned it before, you know, I think we're hearing from customers there's no better place to invest. Now policy-wise and other things, we got to get out of our own way and create a little more certainty, right? The worst thing for investments is having uncertainty. Tax policy is very, very positive right now from a being able to fully depreciate structures on your CapEx. You also have the energy supply, and everybody's looking for energy. You know, when we talk to, we have a great industrial development program. When we talk to customers, it's energy's first, second, and third on the list in terms of making sure that that's available, and we have opportunities across our network for that.
When I think about the trends that have occurred over the last several decades, you've had, you know, offshoring of our industrial base, you've had coal declines. I'm optimistic that a lot of these secular headwinds that have faced the railroads, particularly our network, we're uniquely positioned. Southeast is where people wanna develop a lot of the projects. Midwest, we have two of, I would say two of the three largest growth areas in the U.S. in terms of industrial production. Texas being the other, which we obviously don't have a position there, but we're uniquely positioned to take advantage of it. We happen to have two-thirds of the most valuable consumers in the world on our network. All the products wanna go to where we have our railroad going.
Those are opportunities for us to take advantage of. I think we have a lot of opportunities there. We got a great sales team. I'm gonna go after that, but I do think some of the secular headwinds that we've faced are changing.
Let's talk about some of the financials, right? At 3 times leverage, I think give or take right at the end of the quarter, what's your target? CapEx was down, I guess your CapEx target is CAD 2.3 billion, down 20% year-over-year, and now it's 16% of revenues. Is that the right run rate? Two questions, one on leverage, one on CapEx.
Yeah, let me take CapEx first. There is a lot of opportunity on CapEx to get a lot more efficient. I will continue to say this. Mike is a believer. We're all a believer within the organization. We gotta do it in a thoughtful way. How do we deploy capital? Safety is gonna be always the primary focus. You know, the way we distribute capital. We've made a lot of, I gotta tell you, Doug's come in there, you know, shared a lot of perspective. We've had a lot of efficiencies that we've gained already, but we're gonna be really thoughtful in the next 3 years in how we spend capital.
We wanna, you know, the more efficient we get on maintenance capital, the more we can reinvest in growth in other areas and technology and other things that make us even more competitive and allow us to go out and deliver more growth through those investments. This is a multi-year journey. I do think there's a lot of opportunity, just as much as there is on the OE side. I would say there's, on a % weight basis, there's probably even more on the capital side. On the leverage side, you know, we had been on, I would say 3 times is on the higher end of where we would like to be. Given our success this year and our guidance, you'll see that come down pretty substantially.
We've always said, you know, the credit rating agencies like you in that 2.5 to 2.75 times. That's probably an area where we'll operate in over the long term. We have some debt due later this year. We'll make a decision whether we just go ahead and pay that down or we'll be opportunistic given where the interest rates are and all those things and make that decision. A lot of opportunities. The great part is, as we drive CapEx lower, have those opportunities, our free cash flow conversion, we also took that guidance up, as you will see. We have a lot of opportunity to get in the, you know, near 100% is always my goal.
Probably won't get quite to that level. But traditionally, you'll remember in the years prior, you had 50%, 60% cash conversion on net income. We expect that to be much higher going forward. It's a big opportunity, and the quality of earnings goes up with that. Hopefully that argues for a higher multiple over time.
You bought back CAD 200 million, just over CAD 200 million in the first quarter, which was double fourth quarter's level, but below CAD 750 million in the first quarter last year. What's the right run rate? Is it a CAD 2 billion buyback run rate?
I think we'll be opportunistic in the market.
Okay.
You know, we're gonna continue to be in the market every quarter. You always will want to have firepower when you have market dislocations that are out of your control and be able to step in.
Okay.
in those moments. We've done a really good job over the year. You know, we updated our board on our buyback history. You saw that we re-upped our authorization there. We'll continue down the same path that we delivered over the last few years. When you look at our average share price that we've repurchased our stock at, we've been highly successful.
You mentioned when I asked about the operating ratio, you mentioned kind of incentive comp ramping up in the second quarter. Have you put a CAD number on that or cost CAD number on cost coming back into 2Q?
We haven't. You know, that's a little bit of a catch-up item. That'll normalize through the remainder of the year.
Okay. If I were to try to sum up here, I guess volume's trending in mid-single digits. I don't know if that's a target for you for the full year or not, but that's kind of where you're trending now, a little bit well ahead of our target. Southeast, a growth area in the U.S., you talked about core pricing, staying strong. I think you said 3 to 4. Did you give a number on the core-
On the core pricing? No.
You don't. Okay. core pricing.
Better year-over-year.
Above inflation, you said, right?
Yeah. Improved over year-over-year.
Improved year over year. Costs, you're working on the 100 projects still. Would you put a CAD 100 million number on that too, or was that just 100 projects?
We didn't put CAD 100 million. It's, you know.
Just 100 projects just to make sure.
You would expect our efficiencies this year to be in excess of that.
Excess-
what we're driving.
Okay. 100 projects that you're still working on and looking now at 27 to see what the potential future projects are. CapEx, really a big focus on controlling the costs, getting that free cash flow up, leverage target down to 2.5 times. Anything else you wanna kinda highlight in that quick?
No. You know, again, highly focused team. We're focused on delivering results. You know, one quarter doesn't make a year, so still a lot of work to do. I'm excited about all the things that we have going on. I'll just say that, you know, I've never seen such alignment at the top in terms of the team coming together, whether it's Mike, you know, Michael Burns from our legal department, you know, just across the board, Riz, who's just came on board, and obviously Steve and Mary Clare. Just, you know, we have one common goal and we're all working together, collaborating, challenging each other. Wanna drive results, and it's a good start.
Awesome. Appreciate you being here. Thank you.
All right. Thank you.