Canadian Pacific Kansas City - Q4 2023

Transcript

Operator (participant)

Good afternoon. My name is James, 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 2023 Conference Call. The slides accompanying today's call are available at investor.cpkcr.com. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star two. I'd now like to introduce Chris de Bruyn, Vice President, Capital Markets, to begin the conference.

Chris de Bruyn (VP, Capital Markets and Treasurer)

Thank you, James. 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 two and in the earnings press release filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on slide three. Please note, in addition to our regular quarterly financials, there's supplemental Q4 and full-year combined revenue and operating performance data available at investor.cpkcr.com, which some of today's discussion will focus on. With me here today is Keith Creel, 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.

The formal remarks will be followed by Q&A. In the interest of time, we'd appreciate if you could limit your questions to one. It's now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Keith Creel (President and CEO)

Hey, thanks, Chris, and, thanks, everyone, for joining us today. Give us a chance as a team to, to share our fourth quarter results, as well as our view for this exciting year ahead in 2024 that we have, to create value for our shareholders, for our customers, and, and our CPKC family. So with that comment, let me start by thanking the CPKC family. 20,000 three-nation strong family of railroaders, industry best. Their body of work enabled the results that we get to talk about today, and obviously the work that's ahead of us as we create value for all of our stakeholders. And I can tell you, as a leader, it's my honor to be able to be with the colleagues that are with me here today to, to represent their body of work.

So with that said, let's speak to the results. For the quarter, this team delivered revenues of $3.8 billion, which is up 4%, volume growth of 4%, an operating ratio that represents 220 basis points of improvement versus last year to 58.7%. Core EPS at $1.18, also up 4% versus last year. And for the full year, revenues $13.9 billion, up 5%, volume growth of 1%, a very unique industry story, an operating ratio of 62%, core EPS of $3.84, up 2% versus last year. So standalone, standalone, certainly unique and impressive results. Even more so when you think about this is a railroad in the early stages of an integration, working against a challenging macro environment all at the same time.

So here we are, 10 months into our forever story at CPKC, and I'm telling you, I'm extremely proud of the progress this team has made across the organization, be it operationally, sales and marketing, finance, IS, all areas of the business. This is a team that's committed in creating value. As we said we would, we're doing exactly what we said we would do. And I can tell you, a tremendous amount of work went into preparing for this merger, for this combination, and even more so has gone into executing it. As leaders, I believe this, we're not here to sustain performance, we're here to make it better. We're here to make an impact, to improve the product, and that's exactly what this team has been doing for the last 10 months.

We've launched new services, market solutions across the industry that this transaction has uniquely enabled, be it our 180/181 service, our Mexico Midwest Express, which is the gold standard in the industry, in spite of what anybody else might say, try and imitate it. It's best in class, delivering fast, reliable, single line service across a very fluid and always open border. A closed loop service solution for the automotive industry that provides a differentiated level of service and reliability that the OEMs are embracing and recognize the value that that creates in their reliable supply chains. Connecting origins, destinations with ECP, MMC forest products, again, with a unique single line service across all three nations. We've made gains in operating efficiency, service, reduced assets, we've increased velocity, we've reduced dwell, we've eliminated handles.

We've also made strong progress, I'm very pleased to say, on the labor side. On the U.S. side, we've expanded our very unique hourly agreements, which I believe gives us a unique competitive advantage, not only to serve our customers, but also to attract and retain the best railroading talent in the industry. And in Mexico, establishing trust and respect with our one union that's there, working towards agreements, that it not only improves service, but also benefit the employees. So it's truly a win-win for Mexico, for our employees, as well as our customers that utilize our service. Also through the year, while we're doing all that, we've continued progress on our hydrogen locomotive program. We've now got two low horsepower hydrogen locomotives that are servicing customers every day in Calgary.

Come rain, come shine, come snow, we're reliably producing the zero emissions our Calgary customers in that market, as well as we've fabricated our first high horsepower locomotive, which, we completed late last year. It's completed its first test movement. We'll be putting that into service later this year in a coal loop with a tender car, but cycling coal between the coal mines in British Columbia and the tidewater in British Columbia, in partnership with our largest customer, Teck Coal, creating a green corridor. And above all that, while we're doing that, most importantly, we've improved and continue to make vast improvements in our safety performance as a combined company, building upon CP's long history of industry-leading safety performance. So all that to say, we've entered 2024 in a position of strength, industry-leading results, and we're going to continue to build upon that.

You know, Mother Nature has humbled us a bit in the first month. That said, it's a challenge. It's not an excuse, we're well-positioned to recover. We've regained our momentum, that we started the year with, and we're in a great position to continue that through this quarter and into the balance of the year. So let me close by saying, 2023 was a very special year. We brought two great companies together, CP and KCS, to create a very unique industry-leading, most relevant rail network in CPKC. We've connected a continent in a way that's never been done before, and I would suggest will never be done again. Three continents. Since the combination took effect in April, we've seen a steady build momentum, and I can tell you we're just getting started.

2024 is shaping up to be an even more exciting year than 2023. So that said, let me hand it over to Mark. I want him to expand, speak to some operational points. John's going to bring some color in the markets, and then Nadeem will bring us home on the numbers, and then we'll open it up for questioning. So over to you, Mark.

Mark Redd (EVP and COO)

All right. So first of all, thank you, Keith. Good afternoon. I'd like to just first of all, thank the operating team for their continued hard work in delivering safe, reliable service across this great network. If I think about bringing two networks together, certainly this isn't easy, and there's been still a long list of opportunities out there, but I'm pleased with the progress we're collectively making. Also, I'd like to thank this team's effort to combine CPKC network as we enter 2024 in a place of strength, as Keith noted. But while we've been dealt with some weather for the first part of the year, we're well-positioned to rebound quickly and have done so. As I look at safety, I would remind and I'd like to recognize the entire team for the tremendous safety results that we've had.

I'm extremely proud to say again, 2023, we have the lowest FRA train accident frequency on Class I railroads, building on the CP 17 consecutive years in the industry. This is an impressive milestone, highlights the team's dedication to excellence while ensuring the safety remains as top priority. It also showcases the strong commitment to safety that both KCS and CP brought together in this merger. As I look at the operating performance, year-over-year for the quarter, the FRA personal injuries landed at one point one zero, which is a 15% improvement. Therefore, a train accident frequency was a one point zero eight, which is a 23% improvement. If I look at locomotive productivity, improved 13%, our train speed at 6%, our fuel is 2% better, and our average terminal dwell as well, was down 11%.

Strong indicator of how well our network is performing. As I talk about this, I think about the backdrop of all-time record high, the GTM, 5% year-over-year, and 11% sequentially. From a safety perspective, I think about 27 subdivisions and around 2,600 miles of dark territory is now protected with CPKC's broken rail detection system. We plan on putting eight more additional subdivisions in 2024. So I look at the acoustic bearings, we're looking at an additional five across the network, which will expand on our detection capabilities. So look at our capital projects for the year. In 2023, we in service three new sidings and constructed, we'll construct five more in 2024. This is all part of the $275 million merger commitment that we have.

If I look at the Laredo Bridge, we're 45% complete at this point. We remain on target to be done by end of year. We're also investing in capital in Mexico to increase capacity, fluidity across the North-South corridor between Laredo and San Luis Potosí. All these projects will support growth, further improvement in the network performance, and as I look at 2024, we'll continue to build the momentum that we've generated in this past year in 2023. We continue to work strong with John's team to, to provide, to provide service and generate industry-leading growth that this network can achieve. And with that, I'll turn it over to John.

John Brooks (EVP and CMO)

All right. Thank you, Mark, and good afternoon, everyone. So having now wrapped up our third quarter as the combined CPKC, I'm as excited as ever, I can tell you about the opportunities that sit in front of this company. It's a unique franchise. The year and quarter ended on a strong note, and we are well-positioned to continue delivering differentiated growth in 2024. Now, looking at our results. On a combined basis, we had record freight revenue of 4% on 4% RTM growth versus pro forma CPKC a year ago, in line with exactly what we spoke about during our third quarter call. Since our RTM was flat year-over-year, with fuel and other freight offsetting a continued strong pricing environment.

Now, taking a closer look at our fourth quarter revenue performance, I'll speak to the FX-adjusted results on a comparison versus CPKC, had the combination occurred in 2022. Starting with bulk, grain revenues were down 3% on a 7% decline in RTMs. Canadian grain volumes were down 15% year-over-year, driven by a weaker harvest for the 2023/2024 crop year, particularly in our CPKC draw territory.

Additionally, we saw the Canadian farmer be more price sensitive and hold on to more of their crop, which added to the weakness in this volume on the quarter. While this was a headwind to closing out 2023, ultimately, this grain will still move, and it provides some modest upside into 2024. Now, that being said, we will still expect to see weakness year over year in Canadian grain to persist until we get to the new crop. US grains were up 3% as we benefited from a solid harvest, steady market demand, and growth from synergies, as we continue to connect new origination and destination pairs across our new network. Additionally, we continue to see investment and growth in our 8,500 ft. model.

By the end of 2024, 60% of our franchise in Canada will be 8,500 ft. capable, including all eight of the 8,500 ft. elevators that Richardson International is developing across our network. We continue to roll out this model and work with customers down in the U.S. and ultimately down into Mexico to roll out this high-efficiency operating model. Moving on to potash, revenues were up 16% on 20% volume growth. The volume increase was driven by strong supply chain performance and higher volumes of export potash with Canpotex, as we work together to find additional outlets for volume, given the Portland terminal outage during the first two quarters, two months of the quarter. In early December, the Portland terminal came back online, and we're able to quickly return to a full run rate by the end of the year.

We are positioned well for strong potash growth in 2024. To finish out the bulk business, coal revenue was up 32% on a 33% volume growth, driven by favorable compares following last year's outage at Teck's Elkview Mine. Now, moving on to the merchandise franchise, ECP revenue grew 6% on 3% volume growth. Refined petroleum products and asphalt grew, driven by new market share and growth, also within plastics to the Midwest. We will continue to benefit from the new business wins that started up in Q3 and Q4 of last year, as some of this growth was muted by a facility outage and a slower ramp-up. With solid demand fundamentals, ongoing ramp of this business wins, and continued synergy gains, we are setting up for a strong 2024 in ECP.

In forest products, revenues are up 2% on a 1% increase in volumes. Despite a softer demand in our base business in this area, we have seen nice synergy wins in this space as customers take advantage of our new single line haul network connecting new markets. The metals, minerals, and consumer products portfolio was up 3% on flat volumes. We continue to see strong growth in steel out of our production facilities across our network, supporting industrial and infrastructure growth across North America. This quarter, however, in this area, was offset somewhat by weakness in frac sand to the Bakken and also the Permian Basin, as we saw an earlier seasonal downturn and some growth in basin sand. Automotive revenues continue to be strong, up 22% on 19% volume growth, another record quarter for our automotive franchise.

Our automotive franchise is benefiting from new business, solid continued production from our OEMs, and steady equipment supply, driven by improved operations and cycle times, particularly in Mexico. We are pleased with the new agreements we have developed that enable closed-loop service solutions, providing this industry service reliability it has never had in the past, including the use of our new auto compound in the Dallas metro area and linking customers' traffic between the U.S., Canada, and Mexico via our single line haul service. For automotive, 2024 is positioned to be an exciting year as we see a path to a record volume on our franchise. On the intermodal side, revenue was down 11% on flat volumes. Domestic intermodal, intermodal continued to be challenged by lower retail volumes, ample truck capacity, and some general market softness.

Now, our MMX 180/181, that Keith spoke to, cross-border service continues to perform very well. This is truck-like service with a safe, reliable border crossing between Mexico and the U.S. We saw growth in this service in the fourth quarter, particularly across our northbound volumes. While the base demand in domestic intermodal is something myself and my team are watching closely, particularly across Canada, the opportunity for cross-border intermodal will continue to see steady synergy growth from over-the-road conversion and new customer solutions as we move throughout the year. As part of those new solutions, I'll remind you, we are very excited to break ground in February on the new Americold facility, co-located in our intermodal terminal in Kansas City. This partnership with Americold is another step in creating new rail options for shippers in a market that is dominated by trucks. Moving over to international intermodal.

After a challenging third quarter, this business has picked back up. We ended the quarter with volumes up 2%. Although we remain cautious on our outlook for 2024 in this space, we are certainly encouraged by the recent trends. We are also encouraged about the progress we are making at the Port of Lázaro Cárdenas. In 2023, the terminal saw TEU growth of 30%, while CPKC volumes grew by 35% versus 2022. Our customers are enthusiastic as we continue to develop this service and educate them on this supply chain alternative. When you combine this with our 50% ownership in the Panama Canal Railroad, we are excited about the unique solution CPKC can offer ocean carriers and their beneficial cargo owners. So in closing, despite some early weather challenges in January, we are entering the year with strong momentum.

While we have a known headwind from Canadian grain and the macro backdrop remains uncertain, we have strong line of sight to remain uniquely positioned to deliver long-term growth. Our synergies in 2024, combined with base self-help initiatives and a disciplined pricing approach, will continue to be an exciting story and differentiator for us in this industry. With that, I'll stop and I'll pass it over to Nadeem.

Nadeem Velani (EVP and CFO)

Great. Thanks, John, and good afternoon. First, I'd like to thank the CPKC family of railroaders for working tirelessly throughout the year to bring our two companies together. 2023 was truly historic, and I'm extremely proud of the hard work and dedication that the team has displayed. Looking at the quarter, CPKC's reported operating ratio was 61.8%, and the core adjusted operating ratio led the industry for the second quarter in a row, coming in at 58.7%, which was a 220 basis point improvement versus Q4 2022. Earnings per share was $1.10, and core adjusted combined earnings per share was $1.18, up 4%, which was also industry best on the quarter.

On a full-year basis, CPKC's reported operating ratio was 65%, and the core adjusted combined operating ratio came in at 62%. Earnings per share was $4.21, and core adjusted combined earnings per share was $3.84, up 2% year-over-year. Now, taking a closer look at our income statement, the reported operating expenses for Q4 and full year are provided on slide 14. Combined operating expenses for the Q4 are on slide 15. Similar to what we shared last quarter, our combined operating expenses illustrate the estimated effects of the acquisition for the fourth quarter, as if the acquisition closed on January 1st, 2022, and I will only speak to FX-adjusted fourth quarter operating results in these prepared remarks. We've included full year results in the appendix for reference.

Starting with comp and benefits, its expense was $637 million, up 2% when compared to combined comp and benefits expense a year ago. This includes $7 million of integration-related expenses. The increase was driven primarily by wage inflation, increased incentive costs, and higher volumes. Average headcount was down slightly sequentially in Q4. Looking at 2024, we expect headcount growth to be below volume growth on a year-over-year basis. Partially offsetting the increase was lower current service costs in the DB pension plan, resulting from higher discount rates and lower stock-based comp. Looking at 2024, we expect to have a $16 million headwind resulting from lower discount rates, which is more than offset below the line. Fuel expense was down 8% year-over-year.

The decline was primarily driven by a 10% decline in combined fuel price, along with a 2% improvement in fuel efficiency that Mark mentioned, partially offset by a 5% increase in GTMs year-over-year. Materials expense was down 9%. The decline was largely driven by reduced locomotive maintenance material spend. Equipment rents was $676 million, down 1%. Improvements in efficiency and an increase in receivables drove the improvement. This is partially offset by an increase from inflation and lower use of CPKC intermodal equipment by other roads. Depreciation and amortization expense was up 6%, resulting from a higher asset base. Purchase services and other was relatively flat year-over-year. A reduction in casualty expense and gains in efficiency were offset by volume-related increases in inflation. Before moving below the line, I'll make a couple comments on inflation.

This past year, we were not able to reprice our entire book to offset the impact of inflation on our cost structure, which created a headwind to OR throughout 2023. As we move into 2024, the impact of inflation on our expenses is moderating. Additionally, the pricing environment remains strong, and we will reprice a portion of our contracts that did not renew during the period of higher cost inflation in 2022 and 2023. Putting these together, we should see some catch-up and a tailwind to OR in 2024 from an inflation dynamic. Moving below the line, other expense was up $12 million in the fourth quarter. Other components of net periodic benefit recovery decreased $34 million, reflecting higher discount rates compared to 2022.

We expect this line to increase by approximately $23 million in 2024 from $327 million in 2023, offsetting the headwind in comp and benefits from the current service cost. Net increase in net interest expense was $206 million, or $200 million on an adjusted basis. The decline was driven by a reduced debt balance. On the quarter, income tax expense was $275 million and $315.14 million on a core adjusted combined basis. Looking ahead to 2024, expect CPKC's core adjusted combined effective tax rate to be approximately 25%. Turning to slide 17, we continue to generate strong free cash flow, with cash provided by operating activities of $1.3 billion in Q4.

Our first call on capital continues to be the business and growth, and in the quarter, we reinvested just over $700 million to end the year, in line with our outlook to invest $2.7 billion in capital on a combined basis. Looking to 2024, we will remain disciplined in our approach to capital allocation, and we expect capital spend to be $2.75 billion for the year. This reinvestment in the business builds off of record capital investment as a combined company in 2023, and our network is well-positioned from a capacity perspective to absorb the growth that we have in front of us this year. We generated $785 million in adjusted combined free cash flow on the quarter and just under $2.2 billion in 2023.

Our adjusted combined leverage was 3.4x to end the year, on our path back to our target leverage of 2.5x. We expect to reach this target late 2024 or early 2025, at which point we will evaluate shareholder return, returns with our board. Looking ahead, despite a known headwind in grain, John mentioned, and a still somewhat uncertain macro, we expect to deliver double-digit core adjusted combined earnings growth from the core business in 2024. We also anticipate generating strong free cash flow while making record investments in the network to sustain future growth and getting back to our target, target leverage. Putting all of this together, CPKC offers a truly differentiated investment profile, and I'm excited to continue delivering on the commitments that we have made to our shareholders.

Looking back, we ended 2023 with strong momentum, the best in industry earnings results, with the best yet to come. The network is performing well, synergies are ramping, and we are well-positioned for a strong 2024. It's an exciting time to be railroading at CPKC. With that, let me turn it back over to you.

Chris de Bruyn (VP, Capital Markets and Treasurer)

Okay, thanks, gentlemen. Operator, let's open up the line for questions.

Operator (participant)

Thank you. If you'd like to ask a question, simply press star, then number one on your telephone keypad. If you'd like to withdraw your question, press star two. As previously highlighted, please limit yourself to one question. We'll take our first question from Walter Spracklin with RBC Capital Markets.

Walter Spracklin (Director of Cdn Research and Co-Head Global Industrials Research)

Thanks very much, operator. Good afternoon, everyone. So, on the double-digit earnings growth, I know, Nadeem, when you, when you-- that, that's consistent with what you provided at Investor Day there in July. And on this, I know during later in the session in, in-- at that day, you kind of gave us an indication into a doubling of your earnings growth by the end of that multi-year period, suggesting kind of a mid-teen EPS growth in the early year and then perhaps ramping once you're able to kick in the buyback.

Is that still the case that in the early year, here in the year one, the mid-teen cadence is still holding and then ramping after that, or—or have conditions changed that that would cause you to change that overall view?

Nadeem Velani (EVP and CFO)

Well, you know, since we gave our guidance in June, Walter, nothing has changed other than I'd point out that, you know, we had a grain crop that came in maybe a bit weaker, you know, starting in the grain crop starting in August. So that's gonna hurt us near term a little bit, probably Q2 of this year. Other than that, the model remains the same. You know, we're gonna support the business with safe organic growth. We're gonna have the benefit of synergies, since we're, you know, ahead of schedule on. And then we're gonna see continued margin improvement and then the benefit in the outer years of share buybacks and shareholder returns. So nothing has changed on that thesis.

You know, we've guided to double digits for this year. We're obviously not gonna get a benefit from buybacks in any fashion. We're not gonna buy back stock until we get our target leverage back. So that's, you know, gonna hurt us compared to the other years of that five-year outlook. But that's the only change. It's, I'd say that the macro environment is probably a little bit weaker still in terms of the intermodal side that John mentioned. But other than that, we're right on track, right on our plan to that guidance we gave you.

Walter Spracklin (Director of Cdn Research and Co-Head Global Industrials Research)

Okay. I'll keep it to one. Thanks very much.

Nadeem Velani (EVP and CFO)

Thanks, Walter.

Operator (participant)

Our next question will come from Tom Wadewitz with UBS.

Tom Wadewitz (Senior Equity Research Analyst)

Great, thanks. Good afternoon. Wanted to see if you could give a little bit of perspective on what's underneath the earnings guidance, just in terms of how are you thinking about RTM growth? Are you thinking of, like, mid-single digits? What, you know, kind of what ballpark should we be in? And then, how do you think about the magnitude of improvement in operating ratio that you know would fit into a base case? Thank you.

Keith Creel (President and CEO)

You know, Tom, that's a great question. I'll tell you this, this is what we're expecting: low single-digit RTM growth, double-digit EPS, and margin improvement. Now, tell me what the back half of the year looks like. Tell me what the macro is gonna do.

We've taken, I believe, an appropriate, conservative approach, and if the back half surprises and some of those weaknesses that -

Nadeem spoke of, be it domestic, be it a normalized grain crop or maybe a little bit better, then there's some upside there. But we've taken a modest approach, a responsible, reasonable, conservative approach, and, and we expect to hit these results. And, and again, if we get a couple of things that might turn our way, then we certainly have an opportunity to exceed them.

Tom Wadewitz (Senior Equity Research Analyst)

Okay, great. Thank you.

Keith Creel (President and CEO)

Tom.

Operator (participant)

Our next question will come from Fadi Chamoun with BMO.

Fadi Chamoun (Equity Research Analyst)

Yeah, good evening. Thank you. You know, at the June analyst day, you indicated you had $240 million of kind of actual annualized revenue synergies, and you suggested you had a pipeline line of sight to $950. I'm just wondering, like, as we stand today, what does it look like and how do you feel about the pipeline for 2024 in terms of these revenue synergies?

John Brooks (EVP and CMO)

Hey, Fadi, it's John. So as I said, I feel really good. I think we made great progress in the first 10 months. I can tell you we've got some contracts and some wins in 2023 that we haven't realized yet. They're just starting to ramp up, and I think we're going to see a progression with those. I still think we got a long tail on the 180/181 product as we move through 2024, and hopefully, we see, you know, some of the domestic intermodal trends, macro trends, maybe move in our favor a little bit. Honestly, that includes Lázaro also. You know, it's been quite an educating process with the steamship lines and beneficial cargo owners around what that port potentially could do.

To be honest, I'd hoped that'd be a quicker start-up, but we are starting to gain some traction there. So, you know, we guided to a—we mentioned $350 million we saw as a—we were very comfortable we were on that pace. I would tell you right now that we've slightly exceeded that. We're ahead of that, and well on the way to those numbers we talked about at Investor Day.

Fadi Chamoun (Equity Research Analyst)

Thank you.

Keith Creel (President and CEO)

Thanks, Fadi.

Operator (participant)

Our next question will come from Chris Wetherbee with Citi.

Chris Wetherbee (Managing Director and Head of Transportation and Shipping Research)

Hey, thanks. Good afternoon. Maybe a question on pricing, because you guys noted that there's a little bit of catch-up going on in 2024 in terms of some of the contracts that you didn't get a shot at over the last couple of years, and you have moderating inflation. That's a little bit different than what we've heard from some of the players in the space, particularly some of the U.S. names. So maybe if you could just put a little bit of color around sort of the pricing environment that you're seeing, and is this sort of upside opportunity in the U.S. versus Canada, if there's any sort of difference there, kind of what the contract renewals are coming in around?

John Brooks (EVP and CMO)

Yeah. Chris, John, a couple of thoughts on that. One is, I'll tell you, Q3 and Q4 were quite strong. Some of the best rail pricing that I've seen. And again, I think part of that was us through the year, kind of catching up to some of those inflationary numbers. So we're going to get a tailwind on that. There's been a fair amount of repricing in as we've dug into the book of the new company, and some of those contracts have rolled over. There's been opportunities where we felt that we needed to reprice some of that book.

You know, I'll remind you, we took control in April of last year, so a lot of the contracts, you know, leading up to that time, KCS standalone had renewed on their own. So I can tell you, my team is kind of getting a first look at a number of those contracts that rolled over to start this year. And the results, I think most importantly, the results in those areas continue, I would say, on the trajectory of what we saw in Q4. So I again, my expectation would be the first half of this year remains strong on that front, and we'll see what the back half comes when we get there.

Chris Wetherbee (Managing Director and Head of Transportation and Shipping Research)

Great. Thanks very much.

John Brooks (EVP and CMO)

Yeah.

Operator (participant)

Our next question will come from Steve Hansen with Raymond James.

Steve Hansen (Managing Director and Equity Analyst)

Yeah, good evening, guys. Thanks. Look, your network-wide improvements in speed and dwell have been pretty striking over the past several months, notwithstanding last week or two. I'm just hoping you could point to where these gains have been coming from, more specifically on a geographic basis, and what that might imply for some of the prior congestion issues you've acknowledged in Mexico. And then, I guess, ultimately, what it means for bringing on the revenue synergies down there as well. Thanks.

Keith Creel (President and CEO)

Steve, great question. Let me say this, and I'm going to have the two gentlemen that are driving and leading this every day, both Mark, you know, Mark's part of the story, John's part of the story, and their teams. That's the beauty of this. It's not singular, it's diversified. You know, what Mark has done in Canada relative to driving dwell down, train speed up, our 100 series trains that never ran better. The focus there and the intensity and the opportunity to drive not only train speed, but asset turns and locomotive velocity and fuel efficiency, Mark and the team are doing a phenomenal job. And at the same time, you know, part of the task force, we've taken a challenge which comes with growth.

We've turned it into an opportunity, and John took this team and has turned it into an organization that's focused on process, focused on, you know, PSR principles, where we turn assets, where we get better for our customer. We whiteboard with GM, we whiteboard with Stellantis, we whiteboard with Bartlett, we whiteboard with our customers so that we can identify what's possible, and then we work to strive to achieve the art of the possible. And it's all about asset turn, speed, and velocity. And as a result of that, too, although I said I'm going to let these guys talk, I get a little carried away here. You know, part of what we learned-

...that we're super excited about is, with a little bit of strategic investment, much like in the playbook of PSR in the past, this isn't about cutting costs, it's about strategically and surgically investing money to create capacity and resiliency to eliminate bottlenecks, turn assets more. It's about locomotive productivity, it's about train speed, it's about crew productivity, it's about fewer recrews, it's about turning assets, creating capacity through doing that for our customers so that we can create more loads with less cars. It's PSR 2.0, and John has done a masterful job with integrating and starting that evolution in Mexico, since that task force was created. So, you know, again, a couple highlights, John, a couple of highlights, Mark, you guys have done it. I get-- I'm the proud guy that gets to talk about it.

I love it when I see it happen, but let me give these guys a chance to share a couple of highlights for you, Steve, as well as the rest of our investors, to give you some meat on the bone, so to speak, not just a bunch of rhetoric, but real-life examples of the art of the possible.

Yeah, so if we think about just 100 series in Canada, I mean, we've shortened some of the trains up just a bit, just to get more track speed across the network, and that's been... We've been able to produce locomotives by doing that. We've been able to give a product to John that he can sell to the marketplace. So that's some of the areas we focused on. Large focus on KCSR property, where we've had boots on the ground at the switching yards that we spoke about this in the previous quarters. We spoke about some of the in-train repairs that we're doing at Kansas City and really just ramping up mechanical operations.

Some of the things we haven't spoke too much about, it's not train speed, it's not this other stuff, but it's about, working in diesel shops. We're gonna take 2024, spend some time in the diesel shops and do our own overhauls, where we've had to do that in the past and give it to, third parties. We'll do more of that in-house. We'll also leverage the tire plant that we have in Shreveport, Louisiana, leverage the wheel shop that we have in Winnipeg, and use that cross-border to be able to, in-house our wheels, put the timber in the right-of-way where we need to, and enhance our engineering gains as well, or reduce some of that headcount and engineering gains.

But also, this will be the first year that we can work toward system gains with KCS and also with Soo Line. And with that, I'll hand it over to John to talk a little bit about Mexico.

John Brooks (EVP and CMO)

Yeah, thanks, Mark, and thanks, Keith. I think I'll use the same phrase because we've got the same approach. We've taken a boots-on-the-ground effort to help stabilize and improve Mexico operations in 2023. The task force was a tri-national task force of railroaders who went to the central part of Mexico, around the automotive hub, to really streamline the businesses there, and unlock the potential of the fluidity in the South of Mexico, and worked progressively northward, and improved our dwell in San Luis Potosí, Monterrey, and our border terminal at Sanchez Yard. That all started to really pull together the velocity, the resource utilization, the improvements on locomotive use, locomotive productivity, and even labor productivity.

Since then, the task force has worked to embed best practices that we shared or inherited from the CPKC merger, and now we're turning our attention to improving cycle times on some of the bulk business or some of the more complex, larger customers in the steel and metals sector. We're using the time that we spent boots on the ground to really pinpoint structural improvements, engineering out choke points, and that's reflected in our 2024 capital allotments. As you said, Keith, very precise and targeted to continuing the fluidity, the opportunity to grow the business, and to continue to pivot to growth.

Thanks.

Scott Group (Managing Director and Senior Analyst)

Brilliant, guys. Thanks.

Operator (participant)

Our next question will come from Scott Group with Wolfe Research.

Scott Group (Managing Director and Senior Analyst)

Hey, thanks. Afternoon. John, with everything going on at Suez and Panama, just curious your thoughts if Vancouver or Lázaro are—if one is better positioned than the other to benefit from that? And then just separately, Keith, I know we've got the labor negotiations going on up in Canada. Any update you can give us on how to think about that? Thank you.

Keith Creel (President and CEO)

Yeah, let me start with that one. On labor, I'll give you a quick update and, and maybe steal a little bit of John's thunder and let him add some more color. So on the labor side, listen, I remain cautiously optimistic. I'm a realist with the table. We actually re-engaged today.

Chris de Bruyn (VP, Capital Markets and Treasurer)

Today.

Keith Creel (President and CEO)

We're with the TCRC through the end of this week. I believe CN's doing the same thing, and I'm gonna remain optimistic we can get to a negotiated settlement. That said, if not, you know, as investors, you're gonna have a heads-up. Effectively, the way the process works, if you reach an impasse, either party could file for conciliation, and from the time that happens, it'll be very public if it happens, where we deserve notice or they deserve notice. It's a 96-day process before you would, at the earliest, experience a potential strike. So again, I'm gonna give this thing optimism. I think it's in our best interest, it's in our employees' best interest, in our customers' best interest, obviously, and the nation's best interest to keep everybody working, and I hope that's what happens.

But again, if not, you're gonna have quite a bit of heads up in time to be aware of what's going on. And relative to the Suez, the Panama, Lázaro, West Coast U.S., West Coast Canada. Let me just say this, and I'll hand it over to John. Lázaro is a whole lot closer to Panama than Prince Rupert is. Over to you, John.

John Brooks (EVP and CMO)

Scott, look, Lázaro, Panama, is another tool in our toolbox. And I'll tell you right now, like, I'm really surprised volumes have recovered pretty strongly in Vancouver. And I don't think that has anything to do with the Suez, though. That is a whole different issue, and I don't see that really being a volume driver to our West Coast ports. But I do see our value proposition of multiple West Port outlets, the ability to get through the Panama Canal, utilizing the railroad down there, being an opportunity for us. It just broadens the discussion with all these customers, and I fully expect you're going to see us continue to ramp up some volumes through that terminal down in Lázaro.

You know, honestly, the big thing I'm watching right now is the East Coast labor situation. And that's the area that really could present itself some opportunities for us.

Scott Group (Managing Director and Senior Analyst)

Thank you, guys.

John Brooks (EVP and CMO)

Yep.

Operator (participant)

Our next question will come from Benoit Poirier, with Desjardins Capital Markets.

Benoit Poirier (VP and Industrial Products analyst)

Yes, thank you very much. Good afternoon, everyone. With respect to the situation in Mexico, with the decree now being enforced, and given the fact that you've submitted your feasibility study to the Mexican government, what are the next steps? And if you could talk a little bit about the benefits of the second bridge in Laredo, and the benefits and positive impact we should expect on volume, dwell, and velocity, that would be great. Thanks very much.

Keith Creel (President and CEO)

Benoit, great to, great to hear from you. Let me, at a high level, I'll start with the Laredo Bridge. Obviously, you know, you know, doubling our capacity and the ability to essentially create a double track across the border point that allows trains to pass and not trains to stage and wait in queue. You know, we've driven a lot of improvement, John and team, prior to our acquisition and even in transit. You know, we took windows where they used to have to be in queue 12 hours or eight hours, cut them down to four hours. So there's been dramatic improvement, but four hours in queue versus no hours in queue, it's material. I don't know exactly what number to put on it yet.

We'll see, but I can tell you it gives us, again, it adds to the unique structural and strategic advantage that our network represents to our customers that ship over that border. Shifting to the passenger rail. I'm a bottom line, upfront guy. Let me say this: I have zero expectation or belief that Mexico's ambitions and intent to integrate and initiate passenger rail service in concert with freight rail service will impact our ability to hit our synergies or any of the targets of our multi-year guidance. I think that's an important place to start. Number two, we speak with a bit of experience, and I'm saying this from a place of the utmost humility. We didn't always get this right at CP.

We made a commitment shortly after I came to CP, I don't know, probably two, three years into it. Quite frankly, I got tired of being kicked in the tail by Amtrak complaining about their service, and I said, "Listen, we can do both." As long as you've got the right infrastructure, you have a schedule. We're a scheduled railroad. Those faster trains don't just show up. Run them on time and get them out of the way, and they don't become a problem, as long as you have the infrastructure to be able to handle both. So that said, you know, when I first came to lead this combined entity, I knew that Mexico, different nation, different expectations, completely autonomous, sovereign. The important part to me was to understand and learn what I didn't know about Mexico.

So I made it an initiative, an important initiative, to get in front of the President of Mexico, right out of the gate. You know, Pat and team have built a phenomenal relationship of respect based on performance and, in years of history with the Mexican government regulatory environment. So I said, "Let's go to Mexico. Let's meet with President AMLO." In that initial meeting, and I've shared this, he told me his vision about, you know, creating prosperity in the country, and he explained the need for passenger service in Mexico, and he also said to me that your concession requires it. Well, obviously, I've done a little bit of homework. I had a lot of time preparing to get this merger, number one, get it accomplished, number two, get it approved.

I did a lot of reading, and of course, I read about this concession, and it said that, you know, that's part of the concession. If they say they want to run passenger trains, you got to figure it out. So with that said, when he told me that, I said, "Listen, President, I get it, I understand it. There's a way to do both and be successful. We need to define and understand what capacities we need to be able to succeed at both." So we automatically, and this is May of last year, said, "You know what? I'm going to pay for the study. I'm going to get an industry expert that knows how to define what capacity is required for both, and I'll let you know what the results are, and we can talk more at a later time." Well, we did that.

We initiated an RFP. We selected HDR, which are industry experts in determining the rail capacity that's needed. We engaged in that and started that well before that decree came out in November 2023. So we were not surprised. Now, the decree expanded the scope a bit. That said, it had a date, to your point, Benoit, we had to submit January 15th, what our intentions were, and, and our intentions were to do exactly what we said we would do. We'll work with you, Mexican government, to identify the capacity needed, so that we can protect our growth today, as well as the future growth that's planned for the country of Mexico, that brings prosperity to everyone and great-paying jobs, and our customers are investing in this capacity. And we'll figure out what we need to run passenger trains successfully.

So that was submitted January the fifteenth, and essentially, that's what it says. We're going to include in the additional scope, after we finish this initial study, those additional lines they'd like to look at. But I felt, again, it was important to make sure that not by the written word that was submitted, but our interaction with the president, to make sure that that was represented in its best possible light. So no better way to do that than, again, request a meeting with the president. So a week ago yesterday, myself, John Orr, Oscar, who is the president of our CPKC de México property, we met with President AMLO at the Presidential Palace, with President AMLO. We had the Minister or the Secretary of Interior and Infrastructure, SCT. We had the Secretary-

Benoit Poirier (VP and Industrial Products analyst)

Economy

Keith Creel (President and CEO)

Of Economy. We had the Secretary-

Benoit Poirier (VP and Industrial Products analyst)

Of the Interior.

Keith Creel (President and CEO)

Of the Interior, overall. So we had three secretaries and the president, a one and half-hour meeting. It was our meeting to explain to the president what we intended, what we expected. So I gave him an update on the merger, and we spent one hour talking about what they needed, they being Mexico, relative to passenger trains, what it would take to get it done, and I explained to the president that we had engaged into a study. I gave him the timeline. We expect results, which will define that infrastructure, in May. I explained to him that it's important to Mexico to establish passenger service. It's also important to Mexico and our customers, to make sure that we protect freight service, and we need to do both, and do both well. He committed to me that he's aligned with exactly what my expectations are.

They want to do well in passenger. They want to do well in continuing their economic growth and prosperity in the middle class, great-paying jobs they're creating, and the manufacturing that's coming to Mexico. He does not want to jeopardize any of that. So these are two complementing initiatives that will get executed.

And that said, and one of the last points I'll make, and I said this to President AMLO, I said, "Not only can we create a great passenger service with the right infrastructure and right investment, we also protect that great freight service, and you're not only going to get passengers out of cars on passenger trains, you're going to get trucks off the road on the freight trains." And I said, "That is a win-win, if I could ever put one together for the environment, for the people of Mexico, for the rail network, in general. That's serving all stakeholders' best interest." And that resonates. It resonated with the president then. He's committed. I'm going to go back, I'm going to meet with him again. We're going to go back and represent the results of the study, before the administration changes, likely in June.

So again, to me, it's just more of what we planned for. We're not surprised. We're going to be able to do both, do both well. We'll protect our customers' interests, we'll protect the nation's interests, and we'll get it done, and we'll be proud of the results when it's over.

Benoit Poirier (VP and Industrial Products analyst)

That's a great answer, Keith. Thanks for the time.

Keith Creel (President and CEO)

Thank you, Benoit.

Operator (participant)

Our next question will come from John Chappell with Evercore ISI.

John Chappell (Senior Managing Director in the Transportation Team)

Thank you. Good afternoon. John, you mentioned doing a little bit better than the $350 million of revenue synergies. I assume that's not completely linear. There's probably some areas where you're doing better than you originally thought, and some where maybe there's been a few challenges. Can you speak to the latter part, where there may have been some challenges, and do you think you eventually get to, you know, the initial projections? Or is there something structural that may have kept you from hitting that point, or is it more just kind of the macro headwinds that we keep hearing about?

John Brooks (EVP and CMO)

Let me just first say, it's macro and timing, John. I feel good about the synergies and hitting them. You know, certainly, I think I mentioned earlier, I thought we would see a quicker ramp-up on Lázaro, but it has been an education process with the steamship lines. It's been an education process with beneficial cargo owners, and frankly, it's been a lot of work around making sure that we have a seamless border, a seamless product for those shippers. And I can tell you that it's been a ton of work, and I sit here today with a lot of confidence that the team will deliver, and you're going to see that begin to build itself in 2024.

You know, as much as I'm super proud of the service, the safe border on 180 and 181, the overall environment on the macro, trucking fuel prices, and that have made that a little bit more of a challenge than certainly I think we initially anticipated. But again, in a really good position. You know, Schneider National, our partner there, has had a stronger start-up than we ever could have anticipated. We're working in some specific areas to introduce some retail products on that train. Got some of our partners in Canada, when you think about growth in reefers in that beginning to start up on that service.

So, you know, that intermodal area has been just a little bit tricky, but I'm looking for big things in 2024. To go along with an area of surprise, like the automotive sector, that we've just seen a lot of success-

... in creating, as Keith spoke about that, the closed loop system in that area. So I hope that's helpful, John.

John Chappell (Senior Managing Director in the Transportation Team)

Yeah, very. Thank you, John.

John Brooks (EVP and CMO)

Yep.

Operator (participant)

Our next question will come from Konark Gupta with Scotiabank.

Konark Gupta (Director of Equity Research)

Thanks, operator. Good evening, everyone. Just wanted to understand, if you increase synergies you reported within the 2023 earnings, what would 2024 earnings look like?

Nadeem Velani (EVP and CFO)

Say that again?

Konark Gupta (Director of Equity Research)

So I'm thinking, in terms of passing out the double-digit EPS growth for 2024, maybe more for Nadeem or John. If, if increased 2023 synergies you realize, how much 2024 earnings would grow without growing synergies?

Nadeem Velani (EVP and CFO)

So you want to understand what our 2024 synergy incremental is versus 2023? How much of that of our double-digit earnings is?

Konark Gupta (Director of Equity Research)

Yeah, maybe. If so, is that right? What you think?

Nadeem Velani (EVP and CFO)

Yeah. We're not giving that granular guidance at this point. So we've given you an indication of where we see our synergies. We've told you that, you know, we're at a 400 kind of run rate, and we're gonna ramp up over the course of the next three years. As we initially guided to $1 billion over that first three years, and then we're on pace. So I think you can kinda do the math yourself. So happy to—if you want to follow up with Chris and Ashley after the call, maybe-

Konark Gupta (Director of Equity Research)

Yeah. Thank you, Nadeem.

Nadeem Velani (EVP and CFO)

Get your questions before Konark.

Konark Gupta (Director of Equity Research)

Thank you.

Operator (participant)

Our next question will come from Ken Hoexter with Bank of America.

Ken Hoexter (Managing Director)

Hey, great, good afternoon, and thanks for the detailed answers so far. Maybe Nadeem, if I can follow up on the cost side synergies there. There's been a lot of questions to John on the revenue side. Can you talk about how well you've executed to your target so far, where you see that going, where you can see some of those synergy goals on the cost side? And then, thinking about headcount, how do we think about that going forward, relative to your RTM? I think Keith threw out there a low mid-single digit RTM growth as part of the double-digit earnings growth. How does headcount play in that? Thanks.

Nadeem Velani (EVP and CFO)

Yeah. Great, Ken. So if you think about what we had guided to on our, on the EBITDA synergies, on the expense side, we had talked about $180 million in the first three years. So it's very much on target. You know, the headcount piece of that initially was a big part of it, just given, you know, near-term attrition, as the team combined, some people chose not to be a part of the team. And so you can imagine that at the more senior level, some of those costs were a little higher. So from a G&A type of headcount, we're fully on track, a little bit ahead of schedule.

From an operating synergies, we're gonna see that increase in year two. Certainly, that's gonna ramp up. If you think about, you know, the early on focus on the U.S. part of the network, think about where some of the challenges on the network were more on the Mexico side. So we weren't getting a huge amount of operating synergies near term, as kinda day one.

But as you've seen the results this quarter, and we've talked about the huge improvements both across the network on the former KCSM and the KCSR, the synergies on the cost side are really starting to ramp up on that front, and that's what's given us the ability to deliver the ORs that we have in the back half of the year and lead the industry. So I'm really bullish on where we see the operating synergies coming in. You think about some of the procurement, some of the sourcing synergies, you know, those take time as contracts come up and you can negotiate with your vendors. We're on track in the first year, actually slightly ahead of pace.

This year, we'll start seeing additional synergies on that front as additional contracts come to the table. So all in all, we're slightly ahead of schedule on the expense side. Again, it's a smaller piece of the total synergy pie, but we're slightly ahead of pace, and I think this year, we're gonna see more of the value come in as we run this network as well as it can. So very excited about that.

Ken Hoexter (Managing Director)

Any thought on the headcount versus the volumes going forward?

Nadeem Velani (EVP and CFO)

Headcount, you know, we're talking low single digit type of RTM assumption. You know, I see a flattish type of headcount for the year.

Ken Hoexter (Managing Director)

Okay. Appreciate the time. Thanks.

Operator (participant)

Our next question will come from Justin Long with Stephens.

Justin Long (Managing Director of Equity Research)

Thanks, and good afternoon. And Nadeem, you mentioned the assumption for low single digit RTM growth this year. I'm assuming that includes a benefit from synergy. So is there a way to think about the organic volume growth that you're assuming for the business? And then, Nadeem, it would also be helpful to get a little bit of color on first quarter OR, if you can, just given some of the weather disruption we've seen thus far. I know you said you could make up a good bit of it, but curious how you expect that to net out to margins.

Nadeem Velani (EVP and CFO)

Yeah. So think about this year, you know, the headwind on grain, the Canadian grain side is gonna be made up on kind of base growth. So I'd say almost flattish on the base organic side from a volume point of view, and then the synergies driving low single digits. And, you know, as Keith mentioned, we're being conservative, and I think, you know, that's appropriate at this point in the macro, and at this point, not knowing what specifically intermodal looks like in the back half, and where the grain crop comes in. So that's our view.

I think, you know, more of the, the growth on, on the revenue side, we feel very good about the pricing, and that just, you know, is a, I think, a good output as far as, what that brings to the earnings cadence. As far as the Q1 OR, yeah, you know, January started off, great, and then winter hit, and, you know, some of these, challenges that we had in, in -40, -45 ambient temperature without even the wind chill. So, you know, the network is recovering, the network's recovered quite well.

There's a lot of business to be moved, and, and depending on what February looks like and, and how we close, March and, and Q1 on the weather side, we think we could make up a lot of that volume and get back to, to kind of a more normal, environment Q1, as far as weather. That's, that's gonna help us deliver, I think, a, a better year-over-year OR, and, and strong earnings growth. So more to come. I, I think, we'll have to see how winter plays out, but demand is there, the network is there, and we plan on executing.

Justin Long (Managing Director of Equity Research)

Very helpful. Thank you.

Operator (participant)

Our next question will come from Cherilyn Radbourne with TD Cowen.

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

Thanks very much. Good afternoon. I was wondering if you could give us some color on crude by rail volumes in Q4, and whether you think that's an area which can have some upside for you, just with the completion of the TMX expansion running into another issue here?

John Brooks (EVP and CMO)

Yeah. Well, thanks, Cherilyn. It's John. I think our Q4 numbers were off a little bit. We had some facility issues that really drove that. I can tell you, we've got a 2024 plan that is stronger in the crude by rail space. You know, we expect our DRU business to continue strong, and we've picked up a couple other business opportunities. The phones are ringing a fair amount, Cherilyn, around TMX and those issues, but it's just really not an area we're chasing. If the right opportunity presents itself, we'll go after it. So I think all that, you put that into the mix, probably is a little bit of upside in 2024, but not massive.

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

Thank you.

John Brooks (EVP and CMO)

Yep.

Operator (participant)

Our next question will come from Brian Ossenbeck with JP Morgan.

Brian Ossenbeck (Managing Director)

Hey, good afternoon. Thanks for taking the questions. Just wanted to see if you could give us an update on the COFECE. We saw the headlines a little while ago. I'm not sure if we've seen the final scope of that review yet. Obviously, something that KCS went through a few years ago, didn't have much of an impact, so just wanted to see, get updated thoughts on that. And then, John, maybe give us an update on just the fluidity of the border crossing. You mentioned that a couple of times with the 180, 181. Is that actually showing up in conversions? Are shippers willing to move some freight, especially as they see the second bridge of Laredo coming on towards the latter part of this year? Thanks.

Keith Creel (President and CEO)

You know, again, bottom line up front, you answered the question. The COFECE, to me, it's the government, the government regulatory body that's charged in Mexico with protecting and making sure competition exists. There have been two different historical COFECE engagements with KCS de México. Nothing has came out of those. I can tell you this one is not targeted at CPKC. We've not been served. This is an industry-wide review. And in our case, I know this, the facts don't support anything but pro-competitive. We said we're going to create competition. We've done nothing but create competition. I can also say this, now that we have control, I've looked at the rates. We might be guilty of not charging enough for this premium service, but certainly not guilty of charging too much.

So again, whatever that rescope is, whatever that review is, I have nothing to tell me that any indication that we're going to do anything but be supportive of our case, not dilutive of our case. And let me be quick about the border as well, in the interest of everybody's time, as far as the way we've executed. That border's been fluid. That border's not been shut down, not just because it's the best route going into Mexico, but also because it's the most secure route. That didn't happen because of CP. That happened because of the hard work and effort over many, many years of investment, multi-layers of security, by the KCS team that have established a very secure border that's only getting more secure as we progress into this.

You build a second bridge, you got more capacity. It's even more secure, more reliable, more fluid, in spite of what might be happening, happening at other borders that don't represent those same value propositions or securities, elsewhere coming into Mexico, between Mexico and the United States. So again, another unique value-creating opportunity for us to go to the marketplace. You know, and I kind of look at it this way, and I've said this, I actually was talking to my board, obviously, they asked some of the same questions. You know, "What does this all this mean?" And I say I look at it this way: there's a lot of trucks every day. There's 1.8 million, there's 10,000 a day.

However you do the math, there's gonna be truck capacity going across that border, there's gonna be train capacity, and you got a choice. It's a value proposition. You know, you can ride the Falcon, you can ride the Gemini, whatever you want to call the other alternative services. There's a value proposition. If you're prepared to risk some of those very obvious, undeniable experiences that our shippers, your shippers have experienced, and price doesn't matter, then you know what? I kind of look at that as, that's your value proposition. But that's not ours. We're going to provide a reliable, premium service that warrants and commands, and we're never going to apologize, expects a premium price. It costs a lot of money to provide the reliable service. Our customers that have rewarded us with business have demonstrated it matters.

I can tell you, this last little episode of challenges that the border has experienced, ours has not experienced the same thing, and as a result, those customers that have chosen to move with us have expressed their deep appreciation, and they're rewarding it with business. So again, I make a choice every day. If my product's got to get, get from point A to point B, I've got a, a rate I can pay if I want to put a U.S. Postal, and I'm saying this in American terms, and I've got a rate if I want to pay FedEx or UPS. You've got to decide what matters to you and your value proposition and where you choose to put your freight and make your decision. And I believe that this value proposition matters even more so than it ever has.

Brian Ossenbeck (Managing Director)

Understood. Thanks, Keith.

Keith Creel (President and CEO)

Okay.

Operator (participant)

Our next question-

Keith Creel (President and CEO)

We got one more? All right, here we go.

Operator (participant)

Our next question will come from Brandon Oglenski with Barclays.

Brandon Oglenski (Director and Senior Equity Analyst)

Hey, thanks, Keith, for letting me sneak my question in here. John, maybe this, I'll, I'll close out with you on the low single-digit growth outlook this year. I mean, I get it, there's a lot of uncertainty in the macro, and obviously, you've talked about intermodal and grain, but I think that the commentary is pretty upbeat on merchandise. Can you talk about the incremental customer opportunities you see there, you know, playing out in 2024 and maybe where you see positive variance to where the industry is going to see growth rate in merchandise?

John Brooks (EVP and CMO)

Yeah, Brandon, so, you know, historically, the legacy CP franchise wasn't blessed with, you know, particularly the strongest merchandise ECP franchise, but this new combination is, it's an area of strength. And I'm super pleased with what the team has been able to deliver in that space early in 2023. Honestly, if you think about the synergies we've talked about, that's been an overweight area. That's an area that we've achieved more, and it's on the backs of strong trip plan, good local service, getting those cars and steel cars cycled and tank cars cycled. So as I said, we had some good wins the back half of the year in terms of share and synergies in that merchandise ECP space.

We haven't even felt the benefits of the bulk of those agreements. We're going to see that ramp up, and I'm really bullish on our steel franchise between not only our Mexico production facilities supporting the growth down there in the automotive industry and other industries, but also our steel facilities in the U.S. and Canada. So that's an area, keep an eye on it. I think you're going to see some strong growth. Thanks, Brandon.

Brandon Oglenski (Director and Senior Equity Analyst)

Thank you.

Operator (participant)

We have reached our allotted time for Q&A. I would now like to turn the call back over to Mr. Keith Creel.

Keith Creel (President and CEO)

Great. Thanks, thanks, operator. And listen, again, thanks for joining us this afternoon. I hope that you leave this call understanding what we said in the very beginning. We're in the middle of creating history. We've created a very unique network, bringing these two wonderful companies together. We've got a unique value-creating opportunity that is going to prove the test of time. You know, in a hard macro environment, we've shown growth. In the middle of integration, we've shown growth. And when I say growth, I'm not talking about just RTM growth, RTM growth, earnings growth. And we've shown an ability to improve margins all at the same time, while we've never invested more to create more supply chain resiliency at a time our three nations have never needed it more. This formula works. It's standing the test of time.

It's going to be here for generations to come. We're on a journey with the best railroaders in this industry, a very unique value-creating story for our employees, our communities, our shareholders, all stakeholders, that again, will become, in time, the most relevant rail network in North America. We thank you for your trust. We fully intend to reward you for it, those that trust us and make your investment decisions with us. Have a safe and productive day, and we look forward to sharing our first quarter results, in the months ahead.

Operator (participant)

This does conclude today's conference call. You may now disconnect.