Canadian Pacific Kansas City Limited (CP) Earnings Call Transcript & Summary

All right. Well, thank you very much. We'll go ahead and get started again with another part of the transportation leg of day 1 of the Industrials Conference. We are very pleased to be joined by Canadian Pacific Railway. We have the President and CEO, Keith Creel joining us here on stage. So Keith, thanks so much for joining us.

Always a pleasure, Chris.

Great. So I feel like it probably makes sense to start with current events. Obviously, the NS derailment in Ohio is getting a lot of attention in press. And I don't necessarily want to ask you to opine on the situation there specifically, but maybe ask maybe a bit broader question about your thoughts on what this might mean from a regulatory perspective in the U.S., if you think that there's going to be the potential for some blowback here as a result and sort of what, if any, interaction you've had with regulators, not necessarily pertain to this event, but sort of broadly speaking, in the last couple of months that either make you feel better or worse about the situation in the U.S.

Well, I think you started in the first place. I can't speculate without being there. I don't think it'd be fair to speculate on what might have happened. I'm not going to minimize the impact or minimize what it could lead to, but I think it draws you back to a fact a point, we need to understand the calls. And I think as an industry, once we do, we need to analyze the cause. And I think that if we can identify solutions to make it safer, if it truly was a safety concern, then I think it's our responsibility as an industry to address it. And if we address it in a practical way that could be operationalized and adopted across the industry, we kind of self-regulate. -- there's no need for regulation. And I -- at the end of the day, this is a small industry. It's a very critical industry e-commerce in North America. I need to make sure we don't have [ undertendent ] consequences. I know these other CEOs. I'm going to suggest there's not one that does not want to run a safe and efficient railway. So again, I don't want to get ahead of myself. I want to understand what the calls is, Alan and his team, I'm sure their hands are full with the NTSB trying to figure this all out. But as soon as we do, I think it's our responsibility as an industry and I'll advocate for this. to make sure that we address whatever it is, if it can be addressed and a better, but just got to be careful because right now, you -- in the absence of knowledge, effect, stories, conspiracy theories, fact fiction, what is, what is it? We just don't know. We don't know if it's a track issue. We don't know if it's a car issue, a mechanical issue. We just don't know. So until we do, it's hard to really speculate, but when we do, I think it's our responsibility to take the practical action that we can to regulate ourselves to create a safer network. The way the industry has, for decades, we have not been adverse or shop spending money and investing in technology, in process and in people to make it a safer environment. And if you look at the numbers, we've historically shown that it has become safer and safer and safer. But in light of an accident like this, how can you say that it's safe enough. And again, 0 accidents is the objective but getting there is a journey, and it's something that you should never assume that you've REITs because you won't ever reach it. It's perfection. It's a pursuit. It's a journey. I say that all the time on our railroad. Safety is something that you always work to get better. Technology limit you sometimes, people limit you sometimes process when to choose sometimes. And there's no perfect world that we work under. But at the end of the day, it's our job to try to make it better, and we will as an industry...

Do you think anything that we've heard even just over the weekend around train length or ECP braking that rule kind of was in effect and then came out of effect. Do you think any of those specifically are more or less problematic for you as you're running your railroad?

Let me -- let me speak to the facts because I'd like to speak to the truth. So some would suggest that. And I expect it as soon as I heard about the drama that some of the naysayers about PSR might come out and say, well, it's train length or CCP breaks or it's track inspections, whatever. There's a host of different accusations that might be applied to a PSR railroad. But I'm going to say this, that PSR done the right way is the right way to run a business. And if you look at Canadian Pacific, and I looked at this over the weekend, I went back and looked at the capital dollars that were spent on CP's network in the decade before we implemented PSR and in the decade since because literally, just 2 weeks ago, I celebrate my 10-year anniversary at Canadian Pacific. And we started maybe 6 months before that. So if you compare those 2 decades, we've invested 50% more money in the infrastructure and in capital than we did before. And quite frankly, but only because of PSR, could we do that -- because PSR truly is not about cutting capital. It's about rightsizing assets and controlling cost and then taking that money that you save in reinvesting to hardener infrastructure to create capacity to grow. And that's exactly what we've done at Canadian Pacific. We just celebrated our 17th year leading the industry in train accident ratios as an industry standard. Well, if you go again back to that same period and you look in 2012, when we first implemented PSR, CP was the best then by 29%. If you look at 2022, we're the best compared to the industry average by 69%. So this is a railroad that runs along trains. This is a railroad that runs a PSR, a true PSR. This is a railroad that's invested in infrastructure. It's led the industry through people, process and technology, and it's only made possible because of PSR -- so it's getting a bad route, and it's our job at CP to speak to Archery. And Archery says  that if it's done the right way, it can lead to a better outcome, a safer outcome, a more efficient outcome where all stakeholders benefit.

Okay. And is it too early to think that you've -- anyone from the regulatory bodies in the U.S. are reaching out to people in the industry? I guess maybe the question here is really, do you think the U.S. regulatory backdrop is willing or would be interested in working sort of hand-in-hand with the industry because that's really what's necessary, I would imagine.

I think they're seas with understanding what happened right now. And as soon as that dust settles, as soon as they understand what the calls is, I think they're going to be as aggressive and as eager as we are to make it better, to make it safer to think about what those people are living through to think about what the railroad. It's -- you're talking about human beings that run the railroad to that care about the communities they serve. Perhaps the community may not fill that way today, but I know these people, they're human beings, their employees live in these communities. So this is not a case that people don't care. It's just right now, we need to be seized with what happened, find out what happened. And once we find out what happened, we're going to take appropriate measures to make it better, whatever it is. We just don't need to understand what the true root cause is and not speculate.

Makes sense. Okay. Let's transition a little bit to how things are running on the railroad right now for you. I think you're off to a pretty strong start from an RTM perspective, I know this winter versus last year's winter, certainly different operating environments here. But can you talk a little bit about maybe what you're seeing on the railroad today from some of the commodity end markets that you're serving and where that strength is coming from? Obviously, grains off to a good start and has been strong for a while. What else is working well for you right now?

I think overall, our network is in really good shape. Mother nature has been nice to us compared to last year, which is -- we're thankful for that. But that said, if you look at our book of business, it's unique. We've got a grain crop, that's the fifth largest ever against the backdrop of last year. It was probably the worst drop ever experienced in 3 decades of railroading. We've got strong fundamentals for potash, which is a large part of our business. 40% of our book is bulk, and it's grain, it's potash, it's coal. We've got metallurgical coal that is instilling strong demand with a very weak compare from last year. So 40% of our book is doing extremely well. We see those fundamentals continuing through the balance of the year. The other parts for us that are unique, that are maybe a little bit more sensitive to the macro environment, intermodal, quite frankly, because of our self-help initiatives, the contracts that we won last year that we brought on to the railroad midyear. We still have, from a full year benefit in the first half. We haven't lapped that yet. We'll have that on the back half as a continued strength to offset any negative headwinds from the economy that our domestic -- especially on the Canadian side portfolio remains strong. And I look at it, it's a little bit different animal besides length of haul, our book of business in Canada because of our reliable service and our shortest length of all of the key markets, we are the primary care for Canadian Tire. We are the primary carrier for Loblaws. We are the primary carrier for Nestle. You look at those in Dollarama as they restock their shelves. -- they've sort of normalized some of the oversupply that perhaps the U.S. is not caught up to and we're getting back to a normal restocking run rate. And because we're the carrier that hauls most of that traffic, we're going to benefit from that. So some softness on the wholesale side, but when it comes to the domestic, what I call the retail business, which we handle best, I think, again, that gives us a bit of a tailwind compared to others might see a headwind. And then the other piece is St. John. We bought that railroad to, I guess it's been 3 years ago. We've invested capital to get it to a CP standard. We've created a service offering going to St. John. It's been matched by investment. I think in April, we're going to have the cranes coming with DP World. We're going to be at 300,000 TEU capacity. We added the second train from Apago this past year. So as we grow forward, and as that capacity gets increased, it's going to 800,000 TEUs by the end of 2023 into 2024. So we have the backdrop of the landscape to continue to grow in that space, which is unique to our network as well. And then you get to the second half and you get to CPKC. So again, we're waiting on the regulator. We're in -- the final EIS was filed February 3. There's a 30-day period where the STB reviews that final statement. They're methodical. They're going to do a thorough careful review. 30 days after it was filed, we could get a decision and I would expect and hope that we'll get a decision in the first part of March. And if it is, as we anticipate, and we think it might be favorable, we certainly believe the facts indicate that it should be. This team is ready to go to work. So don't dictate in that decision when the control data is. Historically, it's been 30 days. So again, the STB can do what the STB decides is best. But I would suggest that they believe in the fact that we represent increased competition, infrastructure investment, all the things that we said, make our merger makes sense for the nation. It's never been needed more and our team is going to be ready to go to work. So assuming that, second half of the year, you should start being able to start layering in some new synergies. And I can tell you there are some customers with some excitement that are ready to put some freight on this railroad. And it's not just rail freight. There's a lot of truck freight that we've targeted in creating new markets that we'll be able to speak to at our Investor Day, and we haven't advertised the date yet, but it's going to be in the summer. I'm looking more towards the end of June and where we'll be able to give a whole lot of color to what we see the potential of this network for the next 3 years beyond that. But I'd tell you there's a lot of excited enthusiasm, and this team is prepared to start going to work as soon as we get to that control date.

So as we think about that control date, so 30 days from the EIS and then does the STB mandate the period between an approval and the control date, would that just naturally be 30 days? Could it be accelerated? Or would it be longer potentially?

There's no statutory designation that said it has to be 30. Historically, it has been -- the statutory said 30 days in the EIS. So they get the STB because they have plenary authority. They could say it's 15, they could say it's 30. They could say it's 23. I'm not certain. But again, I get back to the point of if they approve it, it's only because they believe it's in the public best interest, and it's only because they believe it's going to increase competition and it's going to be good for the U.S. rail network. So why delay it why would grade anyone of the benefits from it. And I would suggest this industry needs more capacity investment. I would suggest that customers want better service. And if you're an option to that, not a default, but you have a new option to create competition to create service to create capacity. If you're the SCV, why would you hold back on that?

Do you have an opinion on the DOJ letter that we got a few weeks back. Timing was not in accordance to the common period, of course. And so -- and they aren't technically a party to it in the respect that they make a decision around this. So any thoughts around that?

What I read that letter saying that some of the testimony that came out during the hearings that we had in D.C. some comments were made about -- that might have suggested that the DOJ did not have any opposition to our transaction. Shame on us for ever leaving that perception because the reality is I've always known that they care about competition. And that's why I've always thought about the benefits of this transaction so much because it creates competition. So to me, the way I read the letter is CPKC,CPKCS, we care about competition. And to me, as long as we respect competition and great competition, I'm not threatened by that letter. We apologize. We followed with the SDB listen, we never meant to suggest we left it open for interpretation. We clearly understand your seats with the competition just as we are. And that's exactly what we intend to create.

Got it. For dig a little deeper into the KCS side. I did want to ask a little bit about your thoughts on sort of the economic backdrop that you see here. So I think you mentioned that some of the retail side of the world that you serve feels like maybe they were going to get back into a more normalized inventory scenario here. You have St. John, you have a few of those other things. But when you think about sort of the broader North American economy, is a mild recession or some sort of normalization sort of in your playbook for this year?

Well, we're seeing and reading the same thing everyone else is hearing. It's -- I think people are probably betting on a mild recession. My personal view is perhaps -- but in spite of that, if that were to occur, whatever occurs with its major reminder, I think our -- again, our network is uniquely positioned for all those reasons, especially with our book of business and being not as exposed on the bulk side to a recession because the underlying fundamentals, people have got people got to still produce items. They got to grow wheat. They got to do things that these bulk products allow the world to do. So that's my guess, maybe perhaps. But again, I think the Canadian outcome is a little bit different than the U.S. outcome. I think they're probably in a little bit better position, maybe not as much wage inflation as we've had in the U.S. They don't have the huge imbalance that occurred in the U.S. I think it's going to take a little more time for sort of that stocking to sort of work itself out. Maybe to me, it's going to be second half, first part of next year before things normalize, I think in Canada, it normalizes first half, I think second half or later in the U.S.

Okay. We talked a lot about sort of how railroads are managing resources. And you're in a unique scenario because you also have to plan for the duality of the merger. But when you're thinking about your approach to resources through an economic cycle, has anything changed? We talked a lot about furloughing whether that makes sense or not. Do you have an opinion on how you want to run the business going forward through the economic cycle a there's going to be periods where volumes down. It's just there's ways about it.

I think the reality of today's world and we adjust it a bit. So I -- in my previous slide with the other railroad I worked at had an opportunity to go through a couple of economic cycles. I came to CP, we had at end, none of us have ever gone through a pandemic. But because of the pandemic, as a human being, what I felt the company needed to do for employees, not just doing what we had to do, but doing what we could do. We had a different financial outcome, again, because of some of the success we've created at CP, and we chose to invest in employees. We chose to go a little longer on employees. We chose to replace benefits from employees that we didn't have to replace. And because of that, coming out of it when all this business started to come back, we had created a commitment. We created, I think, an emotional connection with our employees where they didn't feel like just employees, they felt like they're part of our family. And by doing that, it costs a little bit more money. But in the end, doing the right thing, ultimately, that good business, too, because we were able to retain employees. And the other piece, I think, that sets us aside is we have an hourly agreement, especially in the U.S., which has been very problematic and challenging with some of the downsizing that occurred during the pandemic. People come back. They've got alternatives to work other places. There's not enough labor in the U.S. You don't have schedules in the railroad, all the things that were fraught with the challenges of the U.S. collective agreement negotiation in the PEB award. We're not true about CP because we have an hourly deal, and we have employees that are pay more money and they have scheduled days off. So when it comes to attract and retaining employees, if you can make more money and you have a better quality of life, naturally, people are going to migrate to that. So that's something that we benefited for perhaps the other railroads. I say other railways the other big 4 didn't benefit from because they don't have to say a mousetrap on their network.

Yes. Okay. Understood. Definitely want us to be interactive, so if folks have questions in the audience, just raise your hand and we'll get a mic to you. So let's jump back to the deal here and think about if there's any way you can kind of lay out a time line. So we talked about sort of when the control could occur potentially maybe within 60 days of the EIS. What are the things that you think need to happen post that as you're thinking about sort of the integration of those businesses? Are there any major milestones that we should be looking for post that.

To me, the most important thing that happens post control is culture. So getting the culture right, we're bringing 2 companies together that are like-minded cultures. I think both railroads have been the smallest. There's a tremendous amount of history and pride in both networks, recognizing and respecting our identities, but creating a CPKC culture is exactly what I'm going to be ceased with the doing. So from day 1, we're going to celebrate whatever the control data is, it's the date for -- we're going to pause and it's historic, it's iconic. It deserves celebration because it will be, I think, a railroad history, a critical date. But that's the first 12 hours, then we go to work. So I'll be in Kansas City. I will announce the CPKC senior leadership team shortly after we get our decision with STB. So you rest assured, there is a series of actions that will be taking place connect them with our employees, having town halls, letting people understand how we work and why. And it's going to be -- there'll be -- it will be occurring on CP because we can't forget where we came from, but front and center be happening in Kansas City and on the KCS network because in true honesty, given that we're a larger company, a significant amount of change is going to be most felt in the KCS. But that's why we're moving the U.S. headquarters there. That's why I'm going to have an office there. We're going to be their front and center. Those employees are critically important to us. There's a lot of talent on the KCS we're going to create a combined corporate culture so that we can succeed. And then when we do, it's going to be focused on service. It's going to be focused on safety. You do those 2 with this network and the single line network that we're creating, the synergy is going to be a natural outcome of that. So it's culture, it's great to service with the safety influence into it and then they'll start to produce the synergies.

So let's talk about that. So I think you've talked over the course of the voting trust period about some tests that you've been able to do and maybe some coproduction type of arrangements that you've had. What have you been able to sort of achieve during the voting trust period, understanding that you have to keep sort of operational controls off from a KCS perspective. But how does that potentially influence the ability to quickly sort of start to generate some of these new contract wins and that customer excitement you were talking about before?

The upside of the long period, it's been a long journey. We've had a lot of time to think about this. We've had a lot of time to meet with customers and talk about prospective products and what the markets need. So we understand the top 100 customers what they'd like to see happen. So we've been about creating negotiations, mousetraps, regulatory processes. There are several things that we'll expand upon at our Investor Day. And you'll see some things announced after pending our STB approval. So there's some things been negotiated, and we'll be able to start to show. We'll see probably pretty quickly after we get control pending the right SDB decision or pending they approve our transaction, a train start probably in the April time frame. So that will start the process -- and then the second part, the systems piece, given that we've had the time, to me, historically, if you look at some of the challenges of integration, be it our industry, be it other industries, it's computer systems, underestimating the complexity they represent. So we've taken an approach where we're going to integrate first and innovate later. So essentially, KCS, they'll still be using the KCS systems. The customers will go maybe through a CPK interface, but ease of doing business, it's going to be what they're accustomed to. Same thing on the CP side. And then over time, over the next 2 years, we've got a sort of a technology road map that we'll implement and we'll integrate the 2 systems together. But it's only when we're ready. We're not going to destabilize anything initially. So the one thing that we will have, though, from day 1 is on operating plan. So we've already done all the testing. We've already created the system to be able to connect our 2 operating systems so that we have one integrated plan so that we can create visibility to the blocks, perhaps that need to be made in streetwear the blocks that need to be made in St. Paul to create a bigger network instead of just stopping at Kansas City. So immediately, you're going to start to see better asset turns. You're going to see more fluid network. You're going to see less handlings based on the businesses we have at day 1, in line with our operating plan. And then as we grow the network and we bring business on to the network, you've got 85% of KCS business that's interchanged. KCS U.S. 85% total. What percentage of that 85% will our network be able to handle in a better transit time, single line serve cradle to grave that the customer chooses they want to put on their railroad. And once you start to call that sort of decomplicate the network and you start to bring that density back to your network, you can create additional blocking synergies and density to be able to create that service product and also to start taking cost out.

So do you think Mexico poses any unique or interesting challenges to operating, understanding that you haven't operated in Mexico previously, but you've had, as you've pointed out, some time to look at the network and think about things. What's sort of the challenge of Mexico? What's a challenge on the opportunity because I'm sure there's opportunities there, too.

I think the challenge is we've got to respect Mexico's identity. That's a country just like Canada, it's just like U.S. So we're not going to go in and Americanize Mexico or Canadianize America, we definitely want to look at it. So we've got to respect your identity, but at the same time, I've got to learn. I don't know what I don't know. But what I do know is their collective agreements are uniquely different than the U.S. or Canada. There's one union in Mexico. That's not the same in the U.S. and not the same in Canada. And some of the things that are in their agreement could be modernized, but that takes negotiations. It takes time. It takes sitting down with the labor leaders and explain to them what's in it for Mexico, what's in it for them. And those processes are already started. And I certainly expect that those discussions will continue. So if we can modernize their agreement in the Mexican employee can win, the railroad can win, that's how you get change. So we'll take our time. We're not going to force anything. It's going to be an approach where they go on to have to do it. We can't force them to do it. But it would be a negotiated outcome. And as we do that, I think you can create not just something that's in it for the employee, but a lot to set it for the customer because you get more reliability and more efficient fluid processes. You eliminate the complexity with different classes of service, perhaps, distance you can run trains, link the trains, all those things, how many locomotives you have on a train, how many men or women you have to train all those things that you can sort of work out over time that makes what it is today a better product, not only for the customer but for the railroad to and for the employees. There's got to be a balance between all stakeholders. So that's going to take a little bit of time. The infrastructure itself in Mexico, though is in really good shape. And then the other thing that I'm super excited about -- we knew about Deer shoring when we started this transaction. What we knew then is even more powerful now, Ally showing, nearshoring, the announcements that continue to be made when it comes to the industrial investments that are being made in Mexico, and they're all so far the ones I've read about. The ones I know about it all, we have an opportunity to serve those markets. It's close to moderate. It's close to Mexico City. That infrastructure runs down the East Coast, which is what I call sort of the industrial heartline in Mexico. That's our network. So if we can serve that network and bring manufacturing and connect the borders to make them seamless, which our network is going to be able to do. It's good for Mexico, it's good for the U.S., it's good for Canada. So it's going to be my job to make sure that the Mexican regulatory agencies, the Mexigovernment understands that this network can create for them. And I do believe that, that government cares -- I know the President of Andres cares about growing jobs in Mexico. If I can help him understand and I will, we'll do our best to do that, how we can help enable that success. I think that's positive for this network.

So what do you think about the opportunity set, as you noted, I mean, you said some original synergy targets at this point now a while ago, the world has continued to evolve and maybe there's more opportunities, maybe there's less, I guess, as you think about it, how -- I think people are fairly optimistic that there's more as we go forward here. I'm guessing you share that view, not necessarily asking you to front run your Investor Day here, but as you think about through day 1 post approval, what the synergy opportunity feels like to you better than where we were before.

Yes, it's definitely better. I can't put a number on it yet. I can tell you that my convictions are stronger than they were. But at the same time, I'm not going to oversubscribe this network. I can't destroy my service proposition. -- can't allow our zeal and our zest for growth to destroy the operating model. And the operating model is the network can produce what it can produce. You got to understand the capacity and you sell the capacity, that's what creates the service. That's what allows you to control the cost. That's what gives you the money, the OR is how you measure it, but it gives you the cash flow to put back to the network to grow. So we're going to be very smart about how we grow the network. We're going to be at the table. We're going to have, I believe, the most relevant rail network in North America. I think that's what we're creating. And I think the backdrop to Canvas is a beautiful landscape for us that's only getting better. But again, we've got to pick our partners smartly, and we got to play to the strengths of our network, and we've got to play to the natural markets that we'll serve. And I think this network will create new markets that we don't know about today. Just like there's some we're discussing today, I didn't know about 3 years ago. And I think that's what this network is going to create.

Yes. And you've talked about achieving your goals over a 3-year window. Any sort of shape of that, whether it be sort of equal parts 1, 2 or 3? Or do you think it's still too early to kind of put a finer point on that?

No, I think it's still back to the discipline of building out the network in lockstep with the business. It's going to take that period to build the network out and I can't get ahead of myself. So we have a terminal. We've got 30 sidings to extend or build to realize the vision of the merger application that's going to take 3 years to do it. That's covered in that $275 million of investment. We've got outside of the merger application or terminal inventive building. We've got a terminal to optimize in Kansas City. We've got potentially through the synergies, maybe we want to do something outside of that in Dallas, in the Hale area, maybe a lumber transload, maybe an automotive transload. We'll bring a lot more color to this when we get together in June. But again, we're going to be very careful. We step through this thing and make sure that we don't overcommit and underdeliver and disappoint customers because if you do, that's the best recipe of not really building this thing out, not realizing its full potential. So we're going to be very disciplined and methodical about how we do that.

Okay. Understood. I guess I wanted to talk a little bit about operating ratio. There's been a lot of discussion about it in the industry and whether it's as important for other players as maybe it once was and this trade-off between growth and operating ratio, you've done a pretty good job over the years of being able to emphasize both pieces of that. And I know you've talked about OR being an output, right? You manage the business and a better OR is ultimately the output. But when you start to put some of the synergies on paper, the OR output ends up being quite good from an industry-leading perspective. So how do you think about that? And where does operating ratio versus growth that relationship stand in your mind?

I think the key word you just say, Chris, is balance. To me, if you run the business the right way, you've got to have service you size your assets based on your plan, which your operating plans, your service plan is what you sell, you control your costs do it in, you rightsize those assets, whether it's men, women, locomotives, track capacity, car capacity, it's complicated. It's simple, but it's complicated at the same time. If you go and do that and you get a fair price for your service because your capacity matters and reliable service matters, if there's anything that customers have learned especially the last 2 years is capacity matters and service matters. And if you're at the railroad that can provide reliable service and you can do it in a low-cost you can charge a fair price for the service you provide. Customers are willing to pay it if you're the reliable service provider and your cost of being controlled, the output is going to be a low margin. It's going to be a strong margin, you're going to create cash flow to reinvest in the infrastructure to reinvest in the business or at the end of the day, if you've reinvested in the business to return money to shareholders or to pay it out in dividends. That's kind of the model. But you got to keep the balance. You can't be seized with any of that. To me, the true measure of success is earnings growth at the end of the day. But I can't -- again, I've got to make sure that I'm taking care of the customer, the shareholder, the employees, the communities we serve, all stakeholders. That's my fiduciary responsibility. And if I do that right, in the U.S. alone, I know my fiduciary responsibility is to optimize my shareholders' return, that's going to happen, too. That's the healthy way to run a PSR railroad. That's exactly what we're going to do. And if that produces -- because of this growth, the lowest so are, then that's a wonderful thing. I can continue to invest in this infrastructure. But we're going to do the right thing for the business to be able to keep that balance. The second can catch your way to profitability. It's rightsizing assets, it's make money, so you can invest more money, so you can make more money. It's a pretty simple business process. It just takes discipline to be able to do it.

When you think about the capital deployment currently and then over the course of the next couple of years. I guess 2 questions here. First one is how do you see the path of deleveraging? Where are you on that continuum? I think you're pretty much on schedule where you thought you'd be. But can you give us a sense of sort of where you think you need to go before you can maybe take your foot off the gas a little bit in terms of debt pay down? I mean capital can be deployed in other places. And then I wanted to follow up on CapEx and your thoughts around really what the right number is. You mentioned it was a great segue. You mentioned earlier in a conversation about how much more money has been spent in the 10 years post you arriving at CP as opposed to those before. What's the right Number of sustainable CapEx for an operation like you're going to be running here?

Well, it just depends, Chris. But right now, what we're seeing over the next 3 years, we're probably we'll go to around 2.2 is kind of the number we're thinking about. But at the end of the day. No, 2.5% was the leverage. I was talking total spend on capital -- but we're going to get back to 2.5%. That's what we've told the rating agencies and we have a focus on paying down our debt, which we started to do, and we think we can get there by the end of next year, at the end of '24. So that's kind of the glide path world. And once we get there, then we can start discussing the what do we do with this cash that we're producing. Number one, first call of cash is always going to be a physical plant and creating capacity and more customer solutions. And I hope that I can come back and tell you I can give you a better return by doing that. But if not, then we'll look at reinstituting some modest share buyback, and we're going to increase dividends. We're going to, again, balance is the key across all 3. But again, we're going to -- first call on cash is building out our network to optimize it. And I think we're going to have more opportunities to do that. But again, I don't have a crystal ball based on what we know today. That $275 is our number. That $275 million doesn't represent some of the productivity capacity, the capital that we're going to be avoiding because we're going to have more effective asset utilized locomotives, cars, all that stuff that's going to come out of these operating synergies. So -- but that said, that's kind of what the path looks like, and I don't see it changing. And if it does, we'll tell you. And we'll know a little bit more again in June to get this thing together, but that's the way we see it today.

You had mentioned before about not overselling the network post merger. Is there a way to conceptualize how much capacity you think you'll have relative to the volume flows today? And then obviously, when we can all think about what the synergy opportunities might look like to sort of in terms of filling out that capacity. Any way to think about that?

Not yet with -- I can't give you a number. I can tell you, CP, we don't have any capacity constraints in CP. In KCS, I can say this, outside of the network they don't control, which is the route the Houston, through all these service challenges that the industry has experienced, I've seen the KCS hold their own. They've done well. So again, as long as the right size with people, with locomotives, with cars and track capacity, which on their network that they control, they are a bit over. I've ridden the entire route from Kansas City to Laredo. I've ridden from Shreveport to Dallas, they're not bumping up against capacity constraints. And I think if we treat our employees well, we create the growth that we're going to create by unlocking this single line instead of network. I think we're going to be the employer of choice, I think we're going to be the most relevant network. I think we'll have the most progressive collective agreements. And I think we're going to create more capacity even than we have today because of our more efficient way of operating the network.

So I've gotten to 2 minutes left, and I haven't asked you about pricing, so I got to get back there. Obviously, a lot to talk about in terms of the merger, but how do you think about the pricing environment in the railroads this year? We've heard some positive comments from your Canadian competitor about getting contract rates in the sort of 5, 6-plus type of range. I don't know if you have a view on where pricing is kind of shaking out for this year?

I can tell you it's -- historically, it's still strong. It's not maybe as good as it was last year, but it's still inflation plus. And if inflation is at 6.5%, we kind of know where inflation is. So I would suggest that we're not going to be a commodity. We're going to sell our service. We're going to sell our capacity. It's valuable. And as long as you provide reliable, safe capacity and service for your customers so they can grow. We don't have to apologize for charging that. We have to, to be able to stay in business and continue to invest in the infrastructure and provide the supply chain capacity that they depend upon to succeed in their marketplace.

Got it. With that, we are pretty much wrapped up. So thank you very much, Keith, for joining us. Really appreciate your time today.

Thank you, Chris.