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

Good afternoon. My name is Margo, and I'll be your conference operator today. At this time, I'd like to welcome everyone to CPKC's Fourth Quarter and Full Year 2024 Conference Call. The slides accompanying today's call are available at investor.cpkcr.com. [Operator Instructions] I would now like to introduce Chris de Bruyn, Vice President, Capital Markets, to begin the conference call.

Thank you, Margo. Good afternoon, everyone, and thank you for joining us today. Before we begin, I want to remind you this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2 and in the earnings press release filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on Slide 3. Please note, in addition to our regular quarterly financials, their supplemental Q4 and full year combined revenue and operating performance data available at investor.cpkcr.com. With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, our Executive Vice President and Chief Financial Officer; John Brooks, our Executive Vice President and Chief Marketing Officer; and Mark Redd, our Executive Vice President and Chief Operating Officer. [Operator Instructions] It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Okay. Thanks, Chris, and thanks, everyone, for joining us this afternoon to review our fourth quarter and full year results as well as what our views are and what we see as an exciting year ahead in 2025. As always, we want to start by thanking the 20,000 strong world-class railroaders as we call our CPKC family for their efforts to produce these results. Over the course of what was the historic first year as a combined company. And I can tell you as the leader remains my honor to represent these results that we're going to cover on behalf of the entire CPKC family. So for the quarter, the team delivered revenues of $3.9 billion, that was up 3% and volume growth of 2% in the quarter, an operating ratio of 57.1% which was 160 basis points improvement, core EPS of $1.29, up 9% versus last year. For the full year, total revenues of $14.5 billion, which is up 5%, volume growth of 3% and an industry best, an operating ratio of 61.3%, 70 basis point improvement, core EPS of $4.25, up 11% versus last year. And I can say all that despite a number of challenges, we delivered on the guidance that we set out at the start of the year to produce double-digit earnings growth, and we did it safely. I can tell you, Mark will elaborate on the points, but I'm extremely proud that CPKC continues to improve with our personal injury frequency ratio. And again, this year, we lead the industry with the lowest transaction of frequency. Looking at the year ahead, there's certainly no shortage, but of uncertainties that are out there from the macro to trade policies, but we're focused on controlling what we can control. From a guidance standpoint, with the opportunities that we have in front of us, opportunities that this network uniquely enables, we expect to deliver another strong year of growth. As outlined in the press release, in '25, we expect to deliver mid-single-digit volume growth and earnings growth of 12% to 18%, which is in line with the multiyear guidance that we set out at our '23 Investor Day. On the initiative side, we continue to invest in safety and service to support the growth in the fourth quarter. I'm extremely happy to say we completed the construction of the second span of the Laredo Bridge. Next week, I'm excited to go to Laredo to host an opening ceremony where we'll christen the Patrick J. Ottensmeyer International railway Bridge. As many of you know, Pat's vision and leadership were instrumental, not only in this project, but also the creation of CPKC, will carry-on his legacy and the work that we do every day at this company. That investment as well as others that we're making across our network will continue to support the growth that we're bringing into the network in a safe and efficient manner. Growth that's uniquely enabled by this network. Growth like MMX-180, 181, again, the fastest and most reliable single-line rail service in Chicago and Mexico in the industry, connecting the origins and destinations across our ECP, MMC and grain portfolios and automotive utilizing our closed-loop service solution, which is creating tremendous value for our suppliers in TPKC. In fact, I'm very happy to share with the group that CPKC was just recently last week, named GM Supplier of the Year for finished vehicles in 2024. Some would say, is that impactful? I would suggest, yes. I've been at this for 34 years, has never occurred in any of my service in the industry and just order magnitude out of 20,000 suppliers, only 100 are picked on an annual basis. So that's a meaningful recognition from a voice of a customer that means a tremendous amount to our team and certainly illustrates the strategic value of strategic partnerships. Credit to the commercial team and the operating team that have marketed and executed this industry-changing solution delivering the service that's unparalleled in the industry. Again, the award is just an example of the many service benefits that our customers are enjoying from this new unique network. So in closing, I'm going to say short-term things are out there, certainly uncertainties from the macro to the trade policies. We've entered into 2025 with a tremendous amount of momentum that we fully expect to build on as we move throughout the year. The long-term fundamentals of the North American economy and trade between the 3 countries this network uniquely connects remain unchanged. CPKC's value proposition is as strong as it ever was. We're extremely proud of the results we produced in '24, and we're excited about those that lie ahead of us in '25 and beyond. So with that said, I'm going to turn it over to Mark. He'll elaborate a bit on the ops. John will bring some color to the markets and Nadeem will bring it back to me after he elaborates on the numbers. Over to you Mark.

Yes. Thank you, Keith, and good afternoon. I'm extremely proud of the performance the operating team delivered this quarter and also throughout 2024. I'd like to thank each one of them for their hard work and dedication in delivering best-in-class service to the customers and their unwavering commitment to safety. As I look at the results in the fourth quarter, we continue to drive year-over-year operating improvements. Just looking at train weight length, both improved by 4%. Locomotive productivity improved by 1%, while our fuel efficiency improved by 2%. These results speak to the efficiency of the network, and they are worth highlighting given the impact of the work stoppages we added, Port of Vancouver and also the winter weather we dealt with in the fourth quarter. Despite these challenges, we rebounded quickly and had a strong end to the year, while we continue to deal with weather across the parts of the network today, our resources are properly sized to meet demand, and we are efficiently handling a strong start of the volumes in this year. Looking at safety. Our FRA personal injuries were 0.84, 26% year-over-year improvement for the quarter, and our FRA training accident frequency was 1.03, which is a 5% improvement year-over-year. I'm very pleased to note that for the second year in a row, CPKC led the industry with the lowest FRA reportable train accident frequency among the Class 1s, building on the legacy of 17 years of consecutive for industry leading for CP. And although we will never stop striving to do better, I'm proud of seeing the results. So turning to capital. In 2024, we made several key investments to drive capacity and efficiency. The engineering team is delivering efficient improvements by leveraging technology to help us more accurately plan maintenance and capital investments across the network. During the year, we in serviced 8 new sites as part of our merger capital commitment to the STB. We also invested in Mexico with new infrastructure targeted toward Mexico capacity and fluidity. These investments are paying off as performance has been stable throughout the year, we are delivering strong service to our customers. Finally, I will share my enthusiasm as well, Keith, with the opening of the Patrick J. Ottensmeyer bridge. The bridge is more than doubling the capacity on what is already the safest and most reliable U.S. Mexican border crossing. The increased capacity is allowing my team to optimize border crosses and improve the efficiency at the border. Now looking at 2025, our plan is to continue to support safe and efficient sustainable growth through pinpointing efficiencies and capital investments across the network. We continue to make upgrades of the legacy KCS locomotive fleet, which will allow more assets to lead trains in Canada and improve our flexibility in directing our power north. We're also investing in new capacity, including merger sidings, merger CTC, along with targeted investments in Mexico and Kansas City to improve fluidity in these few corridors. Our timing to in service these investments is aligned closely with our growth outlook, ensuring that our network performance and growth -- and our volume growth are lockstep. We also are taking delivery of a 100 new Tier 4 locomotives this year that will support our growth, improve reliability and fuel efficiency. In closing, we are carrying positive momentum in 2025. Our network is strong and resilient, poised to deliver mid-single-digit RTM growth, along with the efficient reliable service that our customers expect from CPKC. With that, I'll pass it over to John.

All right. Thank you, Mark, and good afternoon, everyone. The team overcame certainly several challenges this quarter, including disruption at the port of Vancouver, the weather impacts that Mark spoke to, and an uncertain macro to deliver solid growth, strong pricing and unique value to our customers. We closed 2024 out strong and 2025 is off to a good start. Our network is performing well, and I feel good about the setup heading into this year and our ability to deliver mid-single-digit volume growth. Now looking at our Q4 results. This quarter, we delivered freight revenue growth of 3% on a 2% increase in RTMs. Cents per RTM was up 1%, with strong pricing continuing partially offset by fuel and mix. Now taking a closer look at our fourth quarter performance, I'll speak on an FX adjusted basis. Starting with bulk. Grain revenues in RTMs were up 11%, a record Q4 performance. Canadian grain volumes were up 18% with increased grain to Vancouver and Thunder Bay driven by the improved Canadian grain crop. We also saw higher volumes of Canadian grain moving to Mexico as our network continues to deliver on these new synergies. Now looking forward, our comps for the first half of the year remained favorable in this area. That, coupled with our regulated grain pricing of approximately 6.5% and continued synergies has us well positioned for Canadian grain. U.S. grain volumes grew 5% over the prior year. Our U.S. grain franchise continues to benefit from a solid harvest, steady demand and growth in new lanes as we expand our market reach. In 2024, as an example, we moved over 130 trains from legacy KCP's green franchise to market south of Kansas City, most of which are completely new markets for these customers. In potash, revenues were down 4%, and a 7% volume decline. Now despite solid potash demand in the quarter, our volumes were impacted by the strike and the challenging weather. We moved record levels of potash, though in 2024 and with positive demand fundamentals and Canpotex fully committed to strong levels through Q1, we are well positioned for another strong year of growth in 2025. And to finish out our bulk business, our coal revenue was down 3% and an 8% decline in volume. The decline was mainly driven by U.S. coal volumes impacted by a specific customer outage, while the work stoppage and weather impacted our Canadian coal shipments. Now moving on to our merchandise franchise. Energy, Chemicals and Plastics grew 2% on 1% volume growth. We continue to deliver volume growth across multiple commodities in this area. Fuel oils, LPGs, biofuels, driven from a variety of opportunities, self-help and synergies. This growth, though, was partially offset by lower crude by rail volumes in the quarter. Now looking ahead to 2025, we see solid demand fundamentals, coupled with continued wins in plastics, LPGs and renewable diesels, delivering another strong year in ECP. Forest Products revenues were up 1% on a 5% increase in volumes. Now despite a soft base state demand environment, we are delivering unique synergy growth and extended length of haul in this space, including lumber shipments moving from Canada all the way down to Texas. We continue to work with our customers and supply chain partners in this space to deliver unique service solutions that will position this business for accelerated growth as the housing market and broader macro improves. In the Metals, Minerals and Consumer Products area, revenue was down 4% and a 5% volume decline. A softer demand environment, coupled with production challenges at a customer facility impacted our volumes in the quarter. These declines were partially offset with higher volume of the frac sand. Now similar to Forest products with our development of two new aggregate transload terminals and the start-up of aluminum dynamics new facilities on our network in Mississippi and Mexico, we are well positioned in MMC to benefit from these strategic network developments along with further growth as the broader macro continues to improve. Moving to automotive. Revenue was up 16% on a 23% volume growth, another record quarter and a record year in automotive. This team continues to raise the bar, and I'm extremely pleased with our sustained differentiated performance in this space. Benefiting from our unique closed-loop service model that Keith spoke to in key network developments and investments such as our Dallas auto compound, growth and synergies are tracking well ahead of expectation with line of sight to future opportunities. In 2025, despite increasingly tougher compares, we expect our auto franchise to continue delivering steady growth as we benefit from new contracts and the ramp up of market share gains. On the intermodal side of the business, revenue was down 6% on 1% volume growth. Starting with domestic Intermodal, volumes were up 4%, driven by growth in our refrigerated business and our U.S.-Mexico MMX service. Looking to 2025, we have a strong line of sight to continued growth in domestic as several opportunities start to take hold. Our business with Schneider and others on the MMX service accelerated to peak levels in Q4, and we expect continued growth in 2025 as we add our direct service between Mexico, Texas and the Southeast U.S. with CSX. Additionally, Americold's cold storage warehouse co-located in our yard in Kansas City will start ramping up midyear. This facility will serve as the anchor along with new CPKC rail-served co-developments now in Mexico and at Port of St. John, which Americold announced yesterday. This builds -- these projects build on our strategic collaboration with Americold as we further expand our reach of our unique rail-served temp control supply chain. On the International Intermodal front, volumes were down 1%, primarily due to the labor disruption at the Port of Vancouver. The decline was partially offset by growth from a new contract that continues to ramp up and higher volumes for the Port of St. John. Now looking to 2025, we see a lot of opportunity in this space from increased customer utilization of our CPKC ports and growth through our differentiated service offerings. So to close, we rebounded quickly after the work stoppage and weather impacts. Our network is performing extremely well, and we feel good about delivering mid-single-digit RTM growth in 2025. And while the macro remains uncertain, we are confident in our unique growth from synergies and self-help, along with our continued ability to achieve pricing that reflects the value of our servicing capacity. 2025 is going to be an exciting year, and I look forward to sharing success in the coming quarters. With that, I'll pass it over to Nadeem.

All right. Thanks, John, and good afternoon. I'd like to start by thanking the CPKC family of railroaders for their tremendous effort and execution in our first full year as a combined company. Our best-in-class team of railroaders continues to rise to the occasion to produce results that are exceptional. Now turning to our fourth quarter results on Slide 12. CPKC's reported operating ratio was 59.7%, and the core adjusted combined operating ratio came in at 57.1%, a 160 basis point improvement over prior year. Diluted earnings per share was $1.28, and core adjusted combined diluted earnings per share was $1.29, up 9% versus last year. Turning to our full year results on Slide 13. CPKC's reported operating ratio was 64.4% and the core adjusted combined operating ratio came in at 61.3%, a 70 basis point improvement over prior year. Diluted earnings per share was $3.98 and core adjusted combined diluted earnings per share was $4.25, an increase of 11% versus last year. Taking a closer look at our expenses on Slide 14, I will speak to the year-over-year variances on an FX-adjusted basis. Comp and benefits expense was $619 million, or $625 million adjusted for acquisition costs and the tax recovery. The year-over-year decline was driven by lower share-based compensation and efficiency gains from improved train weights, partially offset by inflation, incentive compensation and volume-driven increases from higher GTMs. Looking to 2025, we expect our average head count to be up low single digits, driving labor productivity gains against the mid-single-digit RTM growth we expect to deliver. Fuel expense was $459 million, down 13% year-over-year. The decline was driven by lower fuel price and a 2% improvement in fuel efficiency from running longer and heavier trains, which resulted in $6 million in P&L savings for the quarter. These savings were partially offset by volume-driven increases from higher GTMs. Materials expense was $116 million or $115 million adjusted for acquisition costs. The year-over-year increase was driven primarily by a long-term parts agreement that was put in place last quarter. This agreement is driving higher materials expenses we have in-sourced a subset of our maintenance work, but we are recognizing a favorable offset within PS&O for net savings in the quarter. Equipment rents were $94 million. The year-over-year increase was driven by inflation and lapping against pooled equipment credits received in 2023. Depreciation and amortization expense was up 6% year-over-year, resulting from a higher asset base. Purchased services and other expense was $538 million, or $517 million adjusted for acquisition costs and purchase accounting. The year-over-year decline was driven by savings from the long-term parts agreement I mentioned earlier, efficiency gains in IS as we consolidate systems and lower casualty expense. These savings were partially offset by inflation and increased maintenance expense. We continue to drive efficiency and cost synergy gains with excellent momentum heading into 2025. We expect these gains along with the impact of lower expected inflation to be sustainable and continue improving our cost structure going forward. Moving below the line on Slide 15. Other components of net periodic benefit recovery were $87 million in Q4, reflecting the lower discount rate compared to 2023. Full year 2025, we expect this line to increase by $76 million, from $352 million in 2024. Net interest expense was $203 million or $197 million, excluding the impact of purchase accounting. Year-over-year decline was driven by a reduced debt balance. Income tax expense was $246 million, or $353 million adjusted for a decrease in Louisiana state income tax rate, purchase [indiscernible] and a tax recovery. For 2025, we expect CPKC's core adjusted effective tax rate to be approximately 24.5%. Turning to Slide 16. We are generating strong cash flow this year with cash provided by operating activities of $5.3 billion in 2024. Our commitment to safe and disciplined growth is reflected in our capital investments, and in 2024, we reinvested $2.8 billion. This is slightly higher than our outlook to invest approximately $2.75 billion during the year, with the increase driven by a higher U.S. dollar versus Canadian FX rate. Our discipline and strategic investments in safety and capacity across our network position us to continue efficiently absorbing the growth that this merger has enabled. Looking to 2025, we expect to invest approximately $2.9 billion in CapEx. Again, this is slightly higher than the outlook provided on our multiyear guide with the increase driven by expected FX impacts. We generated $2.7 billion in adjusted combined free cash flows for the year. We have continued to direct free cash flow after dividends towards repaying debt. I was very pleased to see Moody's recently upgraded us back to our target BAA1 credit rating. We certainly are getting closer to be in a position to return to increasing shareholder returns. In review of the quarter, the team continues to deliver discipline on price and cost control, exceptional execution and industry-leading results. We have strong momentum entering 2025. Looking ahead, although the macro and trade policies remain somewhat uncertain, we expect to deliver 12% to 18% core adjusted earnings growth in 2025, underpinned by mid-single-digit RTM growth. We also anticipate generating strong free cash flow while investing in the network and reinstating our share buyback program. Putting all of this together, CPKC offers a truly differentiated investment profile, combining our unique growth opportunities with industry best execution is driving the results that we are sharing with you today, and I'm excited for the opportunity that we have in 2025 and beyond. With that, let me turn things back over to Keith.

Okay. Thanks, gentlemen, for the color. Let's take the balance of our time and open up for questions. Operator, over to you.

[Operator Instructions] And your first question comes from Chris Wetherbee with Wells Fargo.

Maybe we start on the RTM outlook. And so John, you gave us some, I think, helpful color there, but maybe we can unpack it a little bit more and kind of curious how you think about sort of first half, second half cadence of that? And if you can break it out, how much you might be getting from specific new opportunities, KCS related or merger-related opportunities or what you're seeing kind of in the underlying book of business with core customers?

Sure. All right, Chris. So a couple of comments maybe on this. So maybe high level, we think about it in terms of real simple 2% to 3% tied to synergies. And I'd say, 2% to 3% tied to kind of our base organic business and initiatives tied to the base railroad. I can tell you, I'm not really counting on the macro and hoping for maybe a second half tailwind, if we see something there. So it's really about self-help. I'll tell you, probably a little more weighted towards the back half, but I'll tell you this. We're off to a really strong start. And not dissimilar to 2024. I think our setup, particularly the first half of the year, if you think about our bulk franchise, is really good. So to be honest with you, I'm trying to see a path to outperform maybe the first half, and then we'll see what the second half of the year brings. I think we're -- the comps look pretty good on the grain front, as I spoke to, we've got a really strong outlook in potash and also Elk Valley has got a strong outlook for coal. On the initiatives front, or the synergy front, just to give you a little color on that, continues to be really excited for the international space. We're really busy on that front. St. John is going to prove to be a nice bump in improvement for us. Of course, we got Americold's new facility that was announced there. We're going to call some new services from Gemini at Fort St. John. And honestly, that area, combined with what we do, done at Lazaro and growth in Vancouver, I'm pretty positive about that. The automotive sector continues to shine. And I know there's a lot of maybe uncertainty swirling around out there. But you know what, I think we feel, irregardless of that, we're set up well. Our closed loop system is producing results, as Keith spoke to relative to GM. And we see some other partners there coming on in 2025 that they're going to help pay dividends. And maybe last, I'd point to our intermodal service and specifically our new route with the CSX. Not only is that going to provide a lot of opportunity in and out of our new auto compound in Dallas for finished vehicles, potentially even parts. But we're super excited about what it's going to do in terms of our dry van business and refrigerated business in and out of Mexico that we can use on that route. So I hope that gives you a little bit of flavor, particularly sort of high level around the split between synergies and sort of what I consider base initiatives.

Next, we're going to go to Fadi Chamoun with BMO Capital Markets.

Just maybe a follow-up on Chris' question. So the 4% to 6%, I guess, volume kind of band that you've highlighted. Is this kind of how we should think about the volume kind of range versus the S range and just trying to think of what would be required, I guess, to be at the higher end of the range versus the lower end of the range, I wonder it's the volume band or not. And really, my question is, maybe Keith can provide some kind of perspective from your conversations with customers on the potential for these trade policies changes maybe affecting behavior, and do you feel that this mid-single-digit kind of volume growth this year is quite independent from anything that happens on that front?

Let me -- and if I can, let me take a stab at the latter part of your question, then I'll let John provide some color. John and his team has spent a tremendous amount of time as we all have concerns and trying to learn about what may or may not happen to the tariffs. And the bottom line is we don't know. But what we do know is that in spite of that volatile, perhaps uncertain perhaps outcome, we shall have investment that's not pulling back, it's doubling down. I've got one particular customer, strategic customer, that was only enabled and created as a result of this transaction, this merger of single line service where it's a new product to the market that made a commitment to me and he's sense commitment -- many commitments count announced expansions of these facilities that we understand this is a long-term play. This is a railroad built for ever, not a railroad built for 48 months. Now not to say we don't have to navigate that, not have to say we're not going to be close to our customers, but I can tell you this. Trade between these 3 nations has never been, in my assessment, more critical. President Trump, drove a hard bargain in a central to renegotiating U.S. [ATA] back at the beginning of the pandemic. I believe that was finalized in 2020, when they had the pandemic occur. Supply chain, security became an amplified issue that didn't exist before, and that has really accelerated not only the expansion of near shoring and Ally shoring, but the integration of our supply chains. And that's true in all states. You can talk about automotive. I mean if you really got into the details line by line, commodity by commodity, how many engines and transmissions are built in, in the U.S., they go to Mexico, so they can produce the vehicle that comes back to the U.S. that goes to the consumer market because the fact is we've got 75% of production capacity in the U.S. and 25% that's going to come from somewhere else based on what we consume on an annual basis. So that type of interdependence, that type of need is moving into this economy. And I think in the end, the range was responsible. The range bakes in some risk. If it's not as volatile as we think it is, they don't expect us to be at the 12, expect us to be in the number. That's responsible conservatism. We feel it was our responsibility to ensure that our investors understand we don't have our heads in the sand. We're not sitting on the sidelines. We're going to be engaged, we're going to be at the table. We're going to be involved. I'm going to be involved at the table as far as working with the business communities and the government in Canada. I'm going to do so in the U.S. and I'm going to do so in Mexico. We have a vested interest to make sure that our shareholders, our customers, interest and representative. And in the end, the right thing and Mr. Trump's desires to build a stronger America, to bring jobs to America, to balance trade, I think, is going to be accomplished. And we're going to see, I think, exceptional growth between the 3 nations. I just think that. And I think the other thing, a lot of people get wrapped up in this, I tend to listen to what people say. And I know that there's things that are said and unsaid. But when I hear a President that I take very seriously say that what I'm concerned about Canada and what I'm concerned about Mexico is that you take action to address immigration concerns and illegal drug trade concerns that are occurring on our borders. And what I've seen since he said that, it's if you don't, I will impose a very significant number. But what I've seen since then is a very responsible Canada take action. I've seen Mexico take action. I personally went down to Mexico City, and that was President [indiscernible] a week before Christmas, had a very productive discussion with her about all of our business about what our network entails and how we can align and help her achieve Mexico's ambitions. But at the same time, the partnership and the travel out on trade between the 3 nations in a very extreme uniquely. And that resonates. It makes too much sense not to resonate. So at the end of the day, again, we don't know where to put the pin exactly. We think the range is a responsible way to represent that. And I would be extremely surprised if it's not at the higher end versus the lower end, unless there's just some crazy -- some volatility because certain people stick their heads in the sand and I just don't see that occurring. I don't think that's in anyone's best interest that I think a pragmatic approach will carry the day and we're going to come out on the high side, not on the low side.

Fadi, this is John. So maybe I'd just add a little bit to that. I've spoken to dozens and dozens of customers here over the last month or so. And I think the reality is the growth platform and the initiatives that we have line of sight to aren't really going to be impacted. I mean we are going to be focused on delivering those unique, whether it be synergies or base opportunities. We're going to be fostering the base railroad demand and our bulk franchise that I spoke to. And frankly, if you look back to 2018 and 2019 during the last set of tariffs, I think the reality was that these supply chains are very complex. It's commodity by commodity, it's lane by lane. It's customer by customer in ultimately what happens. And I think what we saw is there wasn't a lot of change. It's hard to change these complexities overnight. So we're going to stay laser-focused on the opportunities ahead of us. Just like any sort of volatile demand environment, this team will be ready to adapt and react. If something material does change in one direction, or the other. And otherwise, we're going to be laser-focused on delivering the growth that we just spoke to.

And our next question comes from Brian Ossenbeck with JPMorgan.

Maybe one for Nadeem, you say here looking into next year. Can you give us some of the assumptions or maybe your visibility into the inflationary environment or hopefully disinflationary environment on some of the bigger line items? And maybe also some commentary on expectations for the buyback and how we should think about that starting up and at what pace and at what time?

Sure. Thanks, Brian. So inflation, I think, is something that's impacted the industry a fair bit as far as absorbing the costs the last 2 years and not being able to fully reprice as contracts come up and price above inflation. And so we've been -- we've absorbed a lot of that on the expense side on labor, on purchased services, on materials, with steel prices, commodity prices, and of course, tightness in labor markets. So that being said, we've seen inflation moderate in some areas, kind of nonlabor, closer to 2%, 2.5% in the past year, which is much more normalized. We've seen, particularly in Canada, inflation come down closer to 2%. And then on the labor side, it's moderated to start with something like a 3% as opposed to what we faced with the PAB, et cetera. So with much more normalized environment from an inflationary cost side. I think we anticipate getting pricing in that 4%, 4.5% range for the year. So certainly, we see an opportunity there to see improvement, support margin improvements in 2025 from pricing above inflation. And on your second part of your question, as far as the buyback, yes, we said we wanted to get our leverage back down below 3%, closer to 2.5%. We've accomplished a lot. We've paid back by the end of this week. It will be close to CAD 7 billion of debt post our announced transaction and post our deal. So we've been very successful in delevering. The currency has hurt us a little bit, Canadian dollar depreciating and being at a 52-week low, that certainly hurt our balance sheet and hurt our leverage number. But you normalize for a more kind of long-term average on the Canadian dollar, we are closer to that 2.5, 2.6 points levels. So all that means is, yes, we're excited about being -- returning to the market. You can expect us to continue to invest back into the network this year, about $2.9 billion. I think we want to address the dividend to an extent. Our yield is, I think, 0.7% or even lower at this level. So we'll do something there, but we're going to be balanced in how we return cash to shareholders. And then you can see that the model spits out a significant amount of cash and we'll use the rest to buy back shares. And some more to come. We've talked long term, when you look at our Investor Day, that range of about 3% to 4% is what the buyback kind of splits out when you factor in our CapEx and dividend approach and getting our dividend closer to 25%, 30% payout. So that's kind of what you should expect from us.

And your next question comes from Steve Hansen with Raymond James.

Look, if we think back on to '24, you were obviously hit by a whole host of diversions and disruptions across the network. I don't need to go through them all here. But if I can stick the tariff issue aside for a minute, I mean, how do you feel about the repeatability of those types of events going forward, whether it's strikes at the ports, the terminals, the workers themselves on the railroad? I guess you won't predict wildfires and things like that. But how do you feel about the normalization of that effect into '25?

Well, the way I look at it, I think they're episodic. I think 2024 was especially, the multiple strikes we had with the ports, our labor strikes, I think it was very challenging, especially in [Canada] year with episodic events that I don't see occurring in 2025, reoccurring. And I say that because of a couple of things that are extremely encouraging that have just recently developed. We just literally this week, negotiated an agreement with Unifor, we negotiated an agreement with BMWE. We -- next week, will be with USW. I applaud the union leadership. They're professionalism, the wisdom and allowing us to come to an agreement that's good for our customers, good for our employees at the same time and most assuredly, good for reliability because I can tell you, and I've said this publicly in Canada, there's been so much strike fatigue and labor fatigue that Canada's reputation on the world stage as being a reliable supply chain partner has been challenged and put in jeopardy. And I'm encouraged that those union leaders understand that. I'm encouraged that our employees understand that. Our employees want to be treated well, paid well and be part of a success story that enables growth and prosperity for their families as well as our customers. And we're in a place now pending the ratification of those agreements. We're going to have an award from capital on the TCRC. I see a 2025 with a positive outcome from those ratification votes with no work stoppages. We have labor reliability, with a refreshing thing to be able to say not only to Mark. He's saying, you bet it's refreshing. But to John, go sell this business to the customer. It's going to be a fluid railroad. It's a success enabler, help them win in their markets so we can win with them. That's a pretty good place to be, Steve. And I'll honesty, it hasn't been this way across the board for some time. And so the last thing I'll say about that from a liability standpoint, the terms of those agreements are 4 year terms, they're not shorter terms. So we're talking about 4 years of labor stability with a clean platform and slate for nothing but positive railroading growth. And I think that's a great place to be and especially in light of 2024.

Your next question comes from Daniel Imbro with Stephens Inc.

Maybe to follow up on an earlier topic. So you mentioned in the script, you're well ahead on synergy capture. You have line of sight into some more opportunities. I think you mentioned 2% to 3% extra growth or growth this year from synergies. But can you just expand on what's running better than planned, where you see these opportunities may be increasing? And then while not providing a more formal outlook, do these top line and cost synergies continue into '26 and beyond? Should we expect that there's more than you initially thought? Or are we just finding the synergies earlier in the process?

Yes, Daniel, this is John. So I'd say, first of all, the opportunity pipeline we identified at Investor Day hasn't let up. I feel really good about what's out there. And I think, hence, you've seen us deliver on that. And you're right. We are ahead of where we thought we were going to be at this point in the journey. I think we were pretty open around closing out 2024 in excess of $800 million type run rate, and I'm super pleased we've delivered and a little bit beyond that. As I think about 2025, I see no reason with what I have teed up out there. The team has teed up out there that we can't deliver another $300 million on top of that. And it's across really all the lines of business, and that's what makes us unique and frankly, fun. I'm just thinking about, as I said, we've got a lot of success in our automotive business. But I'm going to tell you we're still early to mid-innings on that. And I see a number of opportunities that exist not only with the OEMs in leveraging some of the capacity in new routes that we've added, but also in the auto parts side of that. We've just kind of scratched the surface there. I already talked about our MMX service and the growth that Schneider have seen on our franchise, but I fully expect that to continue. And we really haven't been able yet to develop because we're waiting on the Americold facility in Kansas City, our reefer business. And as you recall, that's a significant opportunity we laid out at Investor Day that is really targeted at a market that's dominated by trucks. So now you take the combination of our facility in Kansas City, our route into Atlanta, our route and facility with Americold that they will work on in 2025 in Mexico, combined with the new facility in Port of St. John and create this ecosystem that we've talked about in the reefer space that, again, we really haven't scratched the surface on that yet. And then maybe the other piece that I think worth mentioning, and I say this because it helps lend itself to that future that you spoke to and sort of how long these opportunities are out there for. I talked about in my remarks, the new facility with Aluminum Dynamics in Columbus, Mississippi and also down in Mexico. That is an opportunity with both of those that are going to open up in the end of -- or middle of Q3 of this year that are not only going to present sort of base railroad new opportunities in the steel and aluminum side of the business for us, but also tremendous synergies linking some of our production in Canada and also our production in Mexico up into the U.S. So I'm excited about that. And then maybe last, the team and more to come on this, but the team has worked hard in the Dallas market to continue to develop our relationships with the customers in that area. And we've got a number of transload facilities currently in that market. But I think the opportunity to expand ourselves and our footprint there. So I'm excited about that. Again, that will be more of a second half of this year's story, but one, I think, that lends itself into linking these franchises in 3 countries and delivering more goods in and out of the fastest-growing really U.S. city in the United States. So I hope that provides a little color, or more color.

And your next question comes from Tom Wadewitz with UBS.

So I think, Nadeem, you talked a bit about inflation easing a bit. I think you also mentioned pricing outlook is constructive. I don't know me if that's kind of similar to the 4% to 5% similar to last year. How do you think about the pace of OR improvement? And kind of are we getting to like 58%, 59%. And then I guess if you say beyond '25 that sets up pretty well, do you think that keeps going that there's kind of a runway for further 100 basis points a year or something like that? Or is there kind of slows down a bit when you get to 57%, 58%. So I guess you're really looking for some of your comments.