Canadian National Railway Company (CNR) Earnings Call Transcript & Summary

So thanks, everybody, for joining us. Chris Wetherbee, the transportation analyst at Citi. We are kicking off the first full day. We started last night with a few events last night, but this is the first full day of the 2024 Global Industrial Tech and Mobility Conference. And we're very excited to be kicking off a pretty busy agenda from a transportation perspective with Canadian National. So I think this will be a really interesting conversation today. . So joining us from CN, we have Ghislain Houle, who's the CFO; we have Derek Taylor, who's EVP and Chief Field Operations Officer. I want to make sure I get the title exactly right. Stacy is also joining us in the audience as well. So thanks so much for joining us, guys. Appreciate it. I think what we would do is maybe Ghislain I'll kick it off to you to have some opening remarks, and then we'll dive into some questions. We certainly want it to be interactive. So folks in the audience, if you do want to ask questions, just raise your hand, we'll get a mic to you so everyone can hear it, and we'll get the questions answered. But Ghislain, over to you. Thanks so much for joining us.

Thanks, Chris. Thanks for having us, and thanks for everyone in the room taking interest in our company and people listening on webcast. It's always nice to come to Florida when you are from Montreal in the middle of February, and I'm with my friend here, Derek. So let me make a few introductory remarks to your point, and then we'll turn it over to your questions. First of all, recap a little bit on 2023, I'm extremely proud of our performance. When you look at the year, we had lots of adversity at us, whether it was a freight recession that was deeper and longer than we believe there was going to be. And then those guys had to deal with floods. They had to deal with forest fires in the second quarter and the quarter. And we quantified this for investors to have an impact of about $0.17 of EPS. But despite all of this, when you look at our operating ratio, which is a metric that a lot of people are looking at for railroads, we had the best operating ratio in the industry at 60.8%, and that was only 90 basis points higher than the previous year, where we had an operating ratio starting with a 5. So I want to thank the 25,000 railroaders at CN for delivering that performance. I think it was a great performance and despite what we faced during 2023. When you look at this year, obviously, and I think that was a little bit one of your questions, Chris. January, we started a little bit from the back [ tees ]. We had a good, Derek, I would say, 10 days in Western Canada, where we had temperatures that were minus 40 to minus 50 degrees Celsius. And when you get to that, coal, it doesn't matter whether it's Celsius or Farenheit, it just converges to the same thing. We literally, we couldn't move any trains. So that got us a little bit from the back [ tees ] in terms of our cost, obviously, but also in terms of volumes. Our volumes on a revenue ton-mile basis, were down 7%. But that's behind us now. And when you look at February month to date, our volumes are up 2%. I think that's from a workload standpoint and Derek will touch upon it, I think we can see gross ton miles on a daily basis in the [ 1.3, 1.4 ] range, which is very, very solid. So that's boding well. And the good news is as you get into further in February and then into March, these cold spells that last for a week or two will not happen. Like we will have cold days, one or two, but then it will let go, and then we'll get into temperatures that we can railroad. From an overall year standpoint, for people that listen on the call in January, we provided an assumptions of mid-single-digit volume growth. And I'm very, very comfortable with that assumptions. When you look at it and you break it down, half of that volume growth will come from our CN-specific growth initiatives that we walk investors through at our Investor Day. So the good news is those are coming on board. They're coming on, and we can see the volumes. And they're not really those initiatives related to the economy. They are very customer-specific, and we have great visibility on them. The other, as you remember, we had a West Coast ports strike. That was another adversity that we had last year. And it had a lingering effect through the second half of the year that accounted for about a percent of growth that will not reoccur in 2024. So when you look at our volume growth and you break it down, we're not assuming that much of a supportive economy. We are assuming a slight positive industrial production. But if you remember, in our 10% to 15% EPS growth target for 2024 to 2026, we were saying we need at least 2% industrial production. In 2024 we're assuming slightly positive, call it, 0.5%. Hence, why we are at the low end of the range at 10%. So when you put this together, and then I think my buddy here is a bit sandbagging on the operating leverage that we will deliver in 2024. I'm very comfortable we'll deliver at 10% EPS growth for the year. Now let me talk a little bit about share buyback. As you know, our Board approved a 32 million share buyback program, $4 billion of budget. Just to remind everyone that if you look at the share buyback at -- on an after financing point of view, it's not that accretive. Essentially, it's not accretive in 2024. It's a little bit accretive in the out years because you get the cumulative effect but it's not that accretive in 2024. And then finally, I think the team is gelling. The team is coming together. Ed Harris finally retired for the fifth time, and hopefully, he remains in retirement. And then Doug will eventually retire as well, and we put a press release around this. Remi G. Lalonde, who was the CEO of one of our customers in the forest sector is joining us. He's a young guy. He's actually on the trains today. I think in Edmonton, Derek. So he's going to fit well with the team. I'm excited to have him on board. We'll bring him out so that investors can meet him. But I think he's going to fit very well with us. And I think that CN is under a very good position with Tracy as our leader and I'm quite pleased with that. So on this, maybe I'll turn it over to Derek to say a few points on operations.

Yes. No. Thanks, Ghis. And Remi recalls me, this buddy this time tomorrow, I'm off to a good start for the day. But then Chris, thank you for hosting us today. Listen, back up a bit like as Ghislain said, when you look at how we finished Q4 '23, that was critically important. We finished some really strong operating momentum going into the new year in 2024. And listen, we know winter comes in our network every year. So over the years I've been here, which is 24 years now, coming this May, it was one of the best operating times we had going into the new year. So that really gave us some solid momentum to deal with this 10-day snap here, Ghislain mentioned. And when you look at it over the last 18 months or so, you've heard us really talk about or make the plan, run the plan, sell the plan model. And that's something we're going to stick to. It's critically important to who we are and what we do. But a foundational pillar that you may not hear as much about, but this is critically important as the operating plan is sacred. You've heard that from Ed and many others, and you're going to hear it from me, you'll hear it from my good friend, Pat Whitehead. That allows us to do some of the things we do here. So I want to keep that in mind as a bit of a theme as we go through some of my remarks here. But let's go to January real quick. That 10 days, yes, it was brutal. I can talk about a line there. When it's negative 40 or 50 Celsius, the same as Fahrenheit, I always tease my American colleagues. You don't have to worry about the conversion at that point. It's just cold, put it that way.

Yes.

But the impact too, it touched about 70% of our network during that 10 days. I mean, I lived in Memphis, Tennessee for 4 years, where I met my lovely wife. And listen, and my in-laws are still there, they got 8 to 12 inches of snow. It was below freezing for almost a week in Memphis. So it gives you an idea of that impact that goes on. Then you have certain places in the network that you're accustomed to it, but others that aren't. So it was extremely impactful, but listen, it goes back to the plan that's sacred. When you look at it, they have -- we have train length restrictions that go into place. You have to do additional track inspections. You actually have speed restriction because it's so cold out, lots of challenges, which we get paid to manage. But going into it, we have clarity of purpose in what we do. We have what's called tier restrictions. So we reduced our train length by plan. It's not ad hoc to have chaos. It's a very planned out situation that we do. One thing unique to CN is our air cars. So we have a well -- of about 100 change of converted box cars that are additionally air sourced that help propagate the air throughout the train during cold weather to try to -- it's not going to maintain train length to 100%, but it's going to be longer than it would have been without having these. That supplements our distributed power, for example. My good friend, Mr. Whitehead and I, whether it's a resource base, you look at your locomotive plan, what can you do? What needs to maybe come out to supplement for a short term there to help offset some of that, the people situation. So it's a very coordinated effort that goes into this, but it always comes back to having that basic plan. And listen, another piece is, we can't forget -- we coordinate with Doug MacDonald of the marketing team. When it gets that cold, we're not the only one having issues. Our customers have issues even loading the railcars and the different things that go on. So we try to prioritize what is a must-have versus what is a nice to have, for lack of better word, during that 10-day period. But let's fast forward a bit, let's go into -- I believe it was a week of January 22 when we were involved in a full-blown recovery, for example. During that cold snap, our car velocity was about between 150 to 170 miles a day basically, on a daily basis. And that's obviously not where you want to be, but not unusual fighting through that. But within a few weeks, our velocity was back to between 205 and 215. That's, in some cases, almost summer-like numbers. So that recovery happened quickly and effectively, but those are clarity of your purpose. It doesn't matter if you're the transportation manager, the power or operating superintendent, everybody has the same playbook, and there's really good alignment on how we have that recovery and how we enable it, right? You start with cleaning up what's on the mainline and then you work back with Doug's team and you prioritize, okay, what needs to move next. So that recovery and how fast we did it, I'd say that is part of the new CN and we know what's old to new again, we get back to the basics, right? I think it's a really key approach. And you heard Ghislain mention workload. We measure that in terms of GTMs. We are averaging about 1.3. We actually had two 1.4 days, one just this past Saturday. We haven't seen that for a while. So that's a strong sign of the recovery of the volume that we've had to move out of that cold snap. And then you look at it on a go-forward basis to the teamwork -- as Ghislain said, the team is gelling, it's very critical to what we do. Pat and I have spent some time with Remi, for example. He's going to be our new Chief Commercial Officer at some point, but he's immersing himself in the operation. As Ghis said, he's been at Edmonton. He's been at Montreal, in the field. He's doing a whole tour here in getting -- for a lack of a better word, hands dirty on the railroading side of things, which is great to see, and that resonates with a lot of people. And I want to close with this on my comments side. Listen, Q1 of '23, we had very favorable operating conditions, a lot of things went right. We had an outstanding Q1 of '23. Q1 of '24 is a little tougher comparable, but when you get that 10-day stretch in there, it does create some noise, but I'm happy to say the recoverability has been there. And I'll close my opening remarks with this, Ghislain said, I'd like to thank the men and women out there doing it every day. I get the privilege of coming up here with Ghislain to discuss these things, but those folks make it happen day in and day out and what really can be an unforgiving work environment out there, enduring the conditions we work in this industry. So with that.

Great. Thanks very much for that. Appreciate it. It's a good sort of way to get started. And I guess maybe I wanted to key in on, what you mentioned about sort of the tough comps in the first quarter. Obviously, last year was very good. This year, more normal winter, maybe even a little bit worse than normal. But you also have some interesting compares coming up middle of the year when there was strikes, things like that. So I guess if we're thinking about that mid-single-digit RTM growth target for the year, how do you think that cadence plays out where obviously, Ghis said February is plus 2. So we're going to look for some -- probably some pretty big months in the middle of the year. Is that the way to think about it?

Yes. Exactly.

I don't know if you want to do by quarter, how do we think about it?

I think that's exactly it. I think you can -- we have some tough comps to your point in the first quarter. I mean when you look at it last year, our EPS was up 38% in the first quarter, and the OR was 61.5%, which is not really an OR winter like type of OR. Winter like type of OR is more around 64%, 65%. But then we -- Q2 was difficult. The freight recession was deeper and longer than we believed. And then we had these issues that I talked about that impacted us by $0.17 in Q2, Q3, call it, the ports strike, the forest fires and so on. So when you break it down, you will see volume not as much picking up in the first quarter, but you will see it in the second, third and fourth quarter. I'm confident and that's how it plays out. Again, the key on this one because last year, to be honest, we didn't call the economy as good as we would have liked. The key on this one is half of our volume growth is really the CN-specific growth initiatives that we have very good visibility that we're tracking and that we're discussing at the operating committee on a regular basis. So these are tracking and we're following that up. So -- and then that 1% volume impact that we had from the port strike won't reoccur. So we're not banking on that much of a supported economy in 2024. But we'll see. But we are assuming that the economy will be -- will not be like industrial production. We follow 150 economic indicators. But to simplify for the market, we talk about one, which is industrial production. We're not assuming it's going to be negative. We're assuming it's slightly positive. And when you look at the economists, that's what people are assuming out there. So the good -- the other good news, I think, Chris, is our growth is diversified. So it's not -- we're not banking on one commodity, one segment. It's -- some of it is intermodal, some of it is plastics and P&C, some of it is frac sand. Coal, we're going to have two new mines coming on our line in 2024. I looked at the indices yesterday, the indices for both metallurgical and thermal coal are very nice, okay? So people are making money. So it's diversified. So if one doesn't really pan out the way that we're planning or modeling then someone else -- another segment will do better. The two sectors that were weak, as you know, is Intermodal International. I think sequentially, we can see those volumes picking back up. And I would tell you on forest products, Forest products in and of itself is pretty strong. The weak spot is lumber. And lumber, I think, is more or less stabilizing in the 1,900 car orders per week. Just to give you an idea, in the trough, we were as low as 1,600 car orders per week. In the peak, we're at 2,300 car orders per week. We've modeled around 18 to 19. So we're not banking on going back to the peak on lumber. We'll see what happens with interest rates and so on and so forth. There's still a housing shortage in the U.S. But we've been quite reasonable in our assumptions, hence, why I feel quite comfortable with that volume. And then we said, and I want to reiterate and put my buddy on the hot seat here that we will deliver operating leverage, like we have capacity on our trains, especially when we call about the manifest of the merchandise trains, we do have capacity. Within intermodal, we will need to add train starts. But when you look at, and we were talking at dinner yesterday, the three of us. And when you look at Q4, sequentially versus Q3, our volumes were up 10%, and we added 6% train starts. So we're not adding as many train starts as volumes are coming up. So I think -- I'm quite bullish for the year, to be honest. And -- but we'll see. I mean, there's a lot of geopolitical risk out there still that we're all aware of. So we're monitoring those like everyone else. What's happening with Ukraine, what's happening with China, possibly reconciling with Taiwan. Anyway, all of those things that everybody is aware of, these are out of our control, but what's in our control is the way we operate. I mean our scheduled railroad is working and it's working well, and we have the proof points to tell us that that's the way to operate at CN.

So Derek, Ghislain is making some compelling comments here about operating leverage. Let's talk about that. So let's say you get 5%. I guess, what do you think the network is capable of today? And I guess, how do you sort of plan out for the year? So if half is CN specific that you feel like you have a good line of sight for do you sort of model the operations to that half and then there's flex to the upside or downside, depending on what the macro brings you? How do you approach that? And what do you think the network has from the investor standpoint...

Between my good friend, Pat and I, there's different modeling scenarios you do, right? So to Ghislain's point, a good proof point is what we did last year and look at Q4, as [ Ghis ] said, 10% of growth, but with 6% increase in train starts. And I think the key thing to remember going into '24 here is our manifest package has some room for incremental growth. And that's at a low incremental cost, right? And a lot of our growth is very based upon that manifest package. So we're confident in '24 that we can absorb a lot of that. Intermodal, obviously, at some point, as everybody knows in '23, now in some cases, 20%. We did take train starts off that. That's the right thing to do operationally. But as that volume comes back, as Ghislain mentioned, we do need to put train starts back on, but it's not haphazard, right? The mix of traffic you bring on, the destination of traffic you bring on and then how we plan for that Pat and his teams gives you a dense train that can be between 10,000 and 12,000 feet depending where its going on in our network that has the right mix, whether it's U.S. or Canadian centric. So there's other levers even though when you bring back some train starts per se, you maximize that start out to go from as far as you can from say, Rupert to Chicago or Rupert to Montreal to leverage that across the network. So somewhere Ghislain, I'm confident we have the operating leverage on the manifest side going in this year. And then the intermodal side, we'll bring it on. We'll bring it on smartly. But the way we design that is just as important as bring that on.

So let's talk about pricing a little bit because I want to get ultimately to the EPS targets -- your comment about the opportunity there. But let's talk a little bit about pricing. So we're hearing kind of mixed things. So in the U.S., there's a discussion of sort of price on being on the softer side relative to cost inflation. CP has been a little bit more optimistic. So where do you fall in that dynamic in terms of what pricing will look like this year versus where it was last year. Are we going up, we're going down, sideways? How does it feel?

I think overall, on average, we will continue to price above rail inflation. I think we've done that year in, year out. I mean, we're not providing pricing targets or pricing numbers because none of the rails are doing so, but we monitor it very carefully. As you know, all contract renewals come and gets approved by the operating committee where Tracy -- I facilitated Tracy, Pat, Derek and Doug. And now, Remi will be part of. We make sure that we have the right pricing, we make sure that we have the right resources and the right assets to move the business. And first and foremost, we do that so that we have good customer service. Now when you look at our customer service, it's been pretty good. I mean, surveys have been out there where CN has been at the top. So that's always easier for us to get better pricing when you get good customer service and good customer reliable service. Because remember, the notion of the scheduled railroad is you can move the same amount of volume with less assets. And when these assets are owned by the customers. And now the customers can move more product with less cars, they get the car benefit for them, then it's easier for us to go in and get the inflation plus pricing. So now when you look at it from a different region standpoint, definitely, in the Western region, where our capacity is a little bit snugged will push for more pricing. When you look at the Eastern region or the Southern region, where we do have capacity and we can bring on a lot of growth with very little investments, if no CapEx, then we can be a little bit more aggressive on bringing that business on the rail, especially when we do have the space on our trains and so on. So we take it on a case by case, Chris, we take it on a lane by lane. But we know that pricing is important. We know that it falls to the bottom line. And we know that to get good pricing, then it has to -- we have to deliver good, reliable customer service, which we've been doing with our scheduled railroading model.

Are there contracts that are coming up that are underwater from an inflation standpoint where there's a catch-up opportunity?

I wouldn't say so. I mean, as we've said publicly many, many times, we have about 1/3 of our book of business that expires -- any given year. And when that happens, we take the opportunity to look at them. And again, inflation plus pricing. And the ones -- the contracts that are multiyear, they're typically tied to a kind of an inflation index type of thing so that we make sure that the out-years have a pricing that will be above inflation. So I wouldn't say there's catch-up. We're very, very disciplined on our pricing. We've always been and will continue to do so.

Okay. Okay. So maybe tying that back to the guidance for a second and the 10%. So understand below the line, I think you're talking about maybe 50 basis points of EPS -- like 0.5% of EPS growth coming from the buyback, right? I think that's the way to think about the buyback map this year.

Yes. Very small, very small from an accretive standpoint. What we've said to help you reconcile to the 10% is we do have a $200 million of cost headwind. We wanted to make sure that people saw this in terms of incentive compensation, depreciation and pension. Our tax rate is going up a little bit by 50 basis points. And we are assuming some operating leverage in there. And when you do the math with the pricing and the growth in volumes, you get to around 10%. Some could call it that we're maybe a bit conservative. Some could call it that maybe we were -- I wanted to make sure that I gave you the backup on our volume growth because I know some people thought that they were a bit surprised that we needed that much volume growth to hit to the 10%. So I wanted to make sure that I gave you that detail.

Okay. Derek, from your perspective, like in terms of the competitive dynamic with CPKC, I'm kind of curious about that a little bit. And from an operating perspective, are you seeing things on change materially. So you guys have the Falcon Premium service that you have. And obviously, CPKC's got their competitive product there. I guess from an ops perspective, where do you guys think you are in terms of the competitive framework with the new combined company.

Well, listen, all the railroads compete. We know that. A lot of respect for Mr. Creel and the CPKC team. But just like he said, there's enough volume. This is about taking trucks off the road, not share from CPKC or vice versa. It's two different products, two different things. And you look at what we've been able to do with the FXE and UP and our partners, it's not some sort of outstanding. I mean it's a 5-day transit time we hit consistently from Monterrey to Toronto. And its focus have taken trucks off the road. We're a full member in E&P now as part of that with the UP, Norfolk Southern. And we have a product that's not Falcon. But It's similar to with the NS out of the Southeast for example, out of Atlanta heading to Canada. So we've replicated Falcon but in a different market. But once again, it's not a share shift from a -- railway is more of a two or three railways acting as one on an interline basis. And I think that's the key, and you've heard Ghislain say this in the past. If you go where you go and you don't go where you don't go, that's a line I'm going to start using that he does. But it's not just a top of the house talking about this, like my frontline supervisors in Chicago know what the connection times are on Falcon. Know what the connection times are coming from the NS. So it's not just a top to top. This is permitted down through the organization. They understand the importance of acting as a single line. They understand the importance of the on-time aspect of it. So it's been really powerful. And this year its going to be the full season. So I think a lot of the RFPs are going out now, the spring. So we'll see where that ends up. But we're really proud of both of those services and look forward to the future.

My view, and I've said this in the past, I'm extremely excited about that partnership with UP. I think this will become the role model of how railroads need to work together. I mean, to Derek's point, and I've said this, the strength of a railroad is you can't replicate a railroad, like we have 8,000 bridges. But the limitation is, you go to where you go, and you don't go to where you don't go. And to extend your network reach, you can't do it through acquisitions because the STB has spoken that there's not going to be another round of Class 1 mergers in the near future. So how do you extend your reach? Well, you're going to have to do it through partnerships. And when you look at this one, it allows us now to go through Mexico, okay, without having to pay $30 billion and having integration risk. So that's a win-win for us. But it also allows UP to come to Canada, which they don't come. So I'm extremely excited and -- but in the past, those partnerships have not worked out because they were CEOs having dinner together, and they were not operationalized down to the ground, which is what we've been doing with this one. And the fact that Jim is the CEO of UP. He knows us very, very well, and he knows that this is key. So we have CNers across the industry. So I think CN is well positioned to have these partnerships because we have [ ex-CN ] all across the industry. But this one is a key one. And we're quite excited. And I truly believe that it will be the role model of railroads think of partner going forward to extend our network reach.

Okay. I'm going to jump around a little bit. And certainly, if there's any questions in the audience, feel free to raise your hand and we'll get you a mic. I wanted to go back to International Intermodal for a moment and just talk a bit about that. I think on the conference call, there was a comment about maybe some of this. The international market has been disrupted with challenges in the Red Sea, Panama Canal water levels. Even have the potential for some work issues on the East Coast of the U.S. as we get later into 2024. From a customer perspective, how should we think about that? Is that a benefit for you guys in terms of International Intermodal? Does it play out anytime soon?

It's not a big benefit. The issues that are happening on the Red Sea. I can't see -- it doesn't make a big difference for us so far. I think there's one customer that decided to have a call to Vancouver due to that, but it's not going to move the needle. I think that we believe that intermodal international, and that's what the customers are telling us. We'll do better in 2024 than it did in 2023. But it won't do as good as pre-COVID. I know my friend, Doug McDonald on the call said that Rupert was going to come to pre-Covid levels. I'm a bit more conservative than he is. That's why I'm in finance and he is in marketing. We're not assuming -- like if you look at Rupert, for example, Chris, as you know, our capacity in Rupert is 1.6 million TEUs. And in pre-Covid, we did 1.2 million TEUs. Last year, we did 700. What we've modeled for 2024 is slightly above what we did last year. But not at all what we did in pre-Covid. So we've been quite reasonable in our modeling. Now if we do better, that's going to be cherry on the Sundae. So I think it's going to do better, but I don't think we're back at pre-COVID levels.

And if I may, what I would say, too, the unique network reach we have, whether it's Halifax or Port of Montreal, Mobile or New Orleans, Vancouver, Prince Rupert, no matter what's going on, we're well positioned to have opportunities if things do happen, right? You can -- have so much pick and choose, but at least we're in a position to be able to participate in a solution, depending on what's going on in the world.

I want to talk about CapEx for a moment. So obviously, you guys gave your outlook at Investor Day. And I guess maybe first, conceptually, as you think out over this multiyear period of time, you also gave us a volume sort of number that goes with that CapEx to sort of help us understand it. There's going to be some macro dependence on some of those opportunities. Is the CapEx variable to the same degree that the volume might be variable. Meaning if the volume doesn't show up, should we expect the numbers to be lower than what you originally forecasted?

Somewhat, the maintenance CapEx we will do year in, year out. And we've done that in the past and maintenance CapEx, meaning, changing rail and ties. We typically invest about $1.5 billion, $1.6 billion. You could expect that to remain the same. And frankly, when we had volume decline, if you remember in '16, our volumes were down 5% with the energy crunch. We did -- actually the unit cost on rail and ties because it's easier for the engineering forces to get their work blocks. We actually -- our unit costs were better by 15% to 20%. So it's the right thing to do on a maintenance. You don't want to reduce maintenance CapEx in years where the volumes are lower and then have to catch up. That's not the right thing to do. But to your point, on growth CapEx, absolutely. If some of these opportunities are pushed forward, or some of the opportunities just don't happen, then obviously, we're not going to invest or we're going to push our investments later. I mean what we're trying to do is invest as close to when the revenues come as possible so that we don't dilute on the ROIC. And the ROIC is a very important metric for investors and we committed ourselves to deliver 15% to 17%. So we're very cognizant of that. So it's not baked in stone Chris, I would say. Especially on the growth side. Now on the rolling stock side, obviously, when you've ordered the locomotives or we're out there like other rails, monetizing some of our locomotives. And we are -- we have ordered some cars, boxcars and some...

Or some auto racks...

That's right. Some auto racks, et cetera, et cetera. Those are ordered. So sometimes when volumes are lower, we work with our suppliers to try to push these orders out. But sometimes, we have to take the car, but we know we'll have those cars for the next 40 years. So it is what it is. But absolutely, on the growth CapEx, if the growth has been pushed out, then we'll push out our investments.

And I know it's early because it's only 6 months or so plus since you kind of gave some of the volume outlook. But as you sort of sit here today, what's your thought process? Maybe if we can go through some of the bigger categories. I know you have bulk, you have renewables. I think there was a big buckets also intermodal. Do we feel like we're on schedule now? Or is it still kind of we're in an uncertain macro. So I guess as we think about it, maybe we're like a slightly behind schedule. Just kind of curious how you frame it up.

I feel we're essentially on schedule. I feel I would like to have a more of a supportive economy. I think the economy is not where it needs to be, but it is what it is. We don't control that. I think that those customer initiatives that we talked about, I think they're happening as we speak. We're going to see -- we didn't see a big difference in volumes from some of those initiatives in 2023. We're starting to see it in 2024, which is great. I think that the key for us will be to remain disciplined, especially on our growth in Western Canada. And we've said that a few times at the Investor Day, we cannot and will not oversell our capacity, okay? If anything, at CN, we've demonstrated that we can grow, and we've grown too much when you look at '18, '19, and it was too concentrated and what happens, and we were bragging about having the top revenue growth of the industry, but we were lagging on earnings. And what shareholders are looking for is earnings growth. So we need to, especially in Western Canada, grow to our capacity and make sure that, that top line growth comes to the bottom line. That's the key. And then when demand is higher than supply, then you take the opportunity, especially with great service that the team is providing to get more pricing. So that's -- that to me, that's the key is we can get more aggressive on getting volumes in Eastern Canada and the South. We need to be very cognizant of our growth in Western Canada. We invest year in, year out in capacity. I think Derek, we're investing in two double tracks in Edson sub...

On the Edson sub which is our funnel between Edmonton and Jasper going to the West and then on the former EJ&E in Chicago. And as Ghislain says, that's no direct capital. When you're looking at that West Coast to Chicago corridor, that is the growth. So the timings, always you bringing as closer you can, but this is the time to continue invest because that is where the growth is at there. I think, too, when you look at some of the CN-specific opportunities, the fueling distribution center at [ Mac ] Yard in Toronto becoming online. They're doing the wet testing now, if I'm not mistaken, that's going to be a really nice bump for us here. . Frac sand, the Northeast B.C. has been strong. We've got a great frac sand franchise in Wisconsin. I look through that in 2016 with you trying to get some things done. If I remember, but the output of that, though, out of Northeast B.C., is the NGLs are specifically with the propane going export to Rupert, for example, we've been public with the AltaGas stuff. So a lot of good marketing opportunities there, CN-centric, if that makes sense, not GDP-centric, that we're looking forward to really get going forward in '24.

Towards the end. Just making sure that if there's any questions from the audience, feel free. I wanted to sort of break down the 10% to 15% EPS guidance over the long term. So as you think about the building blocks of that. So this year, not much below the line, but maybe over the course of the next couple of years, that picks up a little bit, like you said, the cumulative effect of buying back a bunch of stock. Obviously, the revenue opportunity from a volume standpoint is probably a big piece. But any way you can kind of help us sort of break apart the 10% to 15%.

I think it's as we said to -- at the Investor Day, I think first and foremost, it's the volume growth coming from CN-specific initiatives that allows us to grow more than the economy. I think we need to continue -- and it's not one item, by the way. It's all of these items coming together. I think we need to continue to price above rail inflation. Then we've committed to improve our margins. We didn't give a number, but we've committed to improve our margins on a year in, year out basis. And when you put all of that together, and yes, some buyback. But again, the first use of cash is towards the business, with projects that deliver 15% to 17% ROIC or internal rate of return. But we said that we were going to get to a leverage of 2.5x. We were at 2.25 at the end of 2023, we'll do that over time, and that will help a little bit in the out years. And so when you put all of that together, I think that we're comfortable and can see that 10% to 15%. But it's all of these things coming together. And then you continue to invest in capacity, especially in Western Canada with a view of capital efficiency. You want to make sure that you get as close to 100% of your bucks in the ground. And we know that if you try to do too much, there's leakage. So the engineering team doesn't get the work blocks, you finish the siding under snow, which you don't want. So you do that year in, year out and then you sell to that capacity with good pricing. When you put all of that together, 10% to 15% is a good number, and we're comfortable we can deliver on it.

Should CN be the best OR in the industry? Or does that matter that much to you?

I -- you know it's funny because we don't have an OR as a target. We have it as a result of everything else we do. We know that if we do everything we need to do, then the OR will take care of itself. And we know that at CN with the network that we have, running a scheduled railroad is the operating model that we need. And this is one of the first thing that Tracy did. I mean when you look at what she did, she did two things. First, she clarified the operating model. We will run those trains on time, okay? That was not clear before. And if it's not clear, and I'm in Winnipeg in Symington and I've got a 7,000-foot train, and I know my -- I've got a 2,000 incoming traffic coming that I could tag on to the train. If it's not -- guess, and my train is supposed to leave at 14:00, guess what I'm going to do, I'm going to wait. I'm going to put that 2,000 in, I've got a 9,000-foot train going. I'm optimizing that region. I'm optimizing that train, but I'm suboptimizing the network. Now it's all about the network. We will optimize the network. So she did -- that's what she did, clarify the operating model, and then she made some people changes. To make sure she's got the right team to deliver. And I'm very happy with Derek and Pat. They got a good promotion. I know Derek, for the last 20 years, he was a young superintendent in Memphis. Years ago when we were both...

Under that red hair still...

So you need to have the right people because the team produces. And so we -- she made some changes there. And like I said, that's why the team is gelling and we're having fun together, and that's -- that bodes for results. So maybe just a few points.

Yes, just passing it over to you to wrap up here.

I think I hope that we were able to convey this morning that CN is in a good light. I think that the results are there. I think the results are there last year despite adversity. I think I'm quite optimistic about 2024. I'm quite optimistic about 2024 to 2026. I think the key is we have a great team. The team is having fun. We can challenge each other. We can tease each other, that's what it's all about. And then it makes it easier when you're part of a winning team because everybody wants to be part of a winning team and you get better compensated and everybody's got a smile and that's what we have at CN today. So I'm very happy about that.

Ghislain, Derek, Stacy, thanks so much for joining us. Really appreciate it.

Thanks for having us.