Earnings Call Transcript - CNI Q4 2023

Operator, Operator

Good afternoon. My name is Julianne and I will be your conference operator today. Welcome to CN's Fourth Quarter and Full Year 2023 Financial and Operating Results Conference Call. All participants are now in listen-only mode. After the speakers' remarks, there will be a question-and-answer session, during which we ask that you kindly limit yourself to one question. I would now like to turn the call over to Stacy Alderson, Assistant Vice President, Investor Relations. Ladies and gentlemen, Ms. Alderson.

Stacy Alderson, Assistant Vice President, Investor Relations

Thank you, operator. Good afternoon, everyone, and thank you for joining us for CN's Fourth Quarter and Full Year 2023 Financial and Operating Results Conference Call. Before we begin, I'd like to draw your attention to the forward-looking statements and additional legal information available at the beginning of the presentation. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the US and Canadian securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. They are more fully described in our cautionary statement regarding forward-looking statements in our presentation. After the prepared remarks, we will conduct a Q&A session. I would ask that you please limit yourself to one question, so we can get to hear from as many of you as possible. The Investor Relations team will be available after the call for any follow-up questions. Joining us on the call today are Tracy Robinson, our President and CEO; Pat Whitehead, our Chief Network Operations Officer; Derek Taylor, our Chief Field Operations Officer; Doug MacDonald, our Chief Marketing Officer; and Ghislain Houle, our Chief Financial Officer. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Tracy Robinson.

Tracy Robinson, President and CEO

I want to start today by welcoming Derek and Pat to their first call. It's great to have you guys with us. And I also want to extend a warm welcome to Remi, who's out in the field today, immersing himself in the operation. You'll all have a chance to meet him over the next few months. Doug remains in charge of our commercial organization and our growth efforts and he is of course here today with us. Doug will be retiring this year, and there'll be a little more to say on this at that time. But I very much appreciate Doug, your presence and partnership over the last couple of years. And I know that Doug will do a great job in getting Remi set up with our commercial team. Now this transition later this year will be seamless to both our customers and our employees. We are railroading here for the long term. And we're fortunate to have a lot of very strong and experienced talent at CN, and we're going to supplement that now and again with talent with different backgrounds and perspectives. And this is going to make us even stronger, which is important as we continue to refine our path forward and advance our growth mandate. And we're also taking a long-term approach when it comes to our network. We know that our network has always been core to the CN advantage and to our ability to provide our customers with solutions for their businesses. Where it makes sense to add to our network to position us to do more or better of this, we'll do so. Now in the fourth quarter, we closed on the CBNS, which will give us more opportunities to densify the eastern part of our network in coming years. And in December, we signed an agreement to purchase the Iowa Northern. It's a nice addition to our network in the Midwest. It will give customers in that area better market access, and for us, it will deepen our network reach and boost our Ag business. So I want to welcome those who might be listening in for the first time today to our railroad family. We do expect to fully integrate the Iowa Northern property later this year pending a positive outcome of the STB review process. Now, before I ask the team to get into the details, I'll just recap where we are and I'll start with safety. We ended the year with some meaningful improvements in both our accident and injury frequencies, and I am very pleased with both the work that has gone into this and the impact it has had and we're going to continue those efforts. This will be a relentless drive to zero. And on the operation, we came into the fourth quarter a little battle-hardened after a couple of difficult quarters last year where we managed through a freight recession and a number of external shocks. And in Q4, we had the gift of some kinder weather and our operations team took full advantage, posting some really strong on-time and velocity metrics. Now, as we rounded the corner into this year, we kicked off with some extreme winter temperatures across the network. But as we lift out of that, the team is well on their way to getting this place back to that same level of operation. Whatever comes at us, we know that sticking with this model will ensure resiliency, enabling us always to perform at our best. Our full-year car velocity, for example, and this is including the challenges of the second and third quarters, was 213 miles per day, that's a 9% improvement over 2022. We're running a plan. We're getting more out of our assets and this is driving some very consistent service levels to our customers. A strong, consistent, resilient operation is table stakes in this industry and the necessary foundation to move the economy and for us to deliver our growth agenda. At the end of the day, this is about doing what we say we will do. We have a plan, and we're executing it. We've been building up our track record operationally over these last seven quarters and I think I speak for the entire team that it feels really good to have that CN grew back. Now, turning to our quarter and full-year results, our fourth quarter adjusted EPS was 4% lower than last year and our operating ratio was 59.3%. For the year, adjusted EPS was 2% lower and our operating ratio was 60.8%. These are the kinds of results we can be very proud of in a challenging environment. And we said last quarter that we've seen the bottom in volumes and this has played out as we expected. We've seen sequential improvement and our Q4 RTMs were up 10%. Now there remain question marks on the economy as we move into 2024. We're expecting a continued improvement as the year progresses and Ghislain will give you more details on all of our assumptions. But beyond the lift from a strengthening economy, we're also working our growth initiatives that leverage our network, our strong service, and our customer and supply chain partnerships. And these are starting to bear fruit and in some cases more quickly than we planned. Doug will give you some color on this and you'll hear Pat and Derek review the state of our operations and we're ready for the volumes to start to lift. This gives me the confidence in our EPS guidance of approximately 10% growth over 2023. I'll now hand it over to the team to fill out the details. Pat, you're up.

Patrick Whitehead, Chief Network Operations Officer

It's great to be on the call today. I'll begin with safety. In the fourth quarter, our injury frequency ratio was down 14% and our accident rate was down 29%. These results capped a solid full-year performance, demonstrating our progress toward a commitment-based safety culture. For the full year, the injury frequency ratio improved 13% and the accident rate improved 17%. This represents a record-low year for injuries at CN, but we know we can and that we must do better. I'm proud of the positive strides we're making on our safety metrics, but this is a journey and we won't be satisfied until all employees go home safely at the end of every shift. We are focused on our vision of a workplace that is free of accidents and injuries. We are committed to working as a team across all crafts and departments to achieve this vision. Training and development, technology, and behavior-based safety activities are essential to enhancing our safety culture. One of the keys supporting better safety outcomes is running a more predictable operation. Predictability is what underpins our velocity and our resiliency. CN's scheduled operating model has delivered seven consecutive quarters of operational and service excellence. Now, as we've said, the plan is dynamic and needs to adjust to our traffic. So with volumes rising, we have been refining our train package. For example, we added a train start out of Prince Rupert, and we adjusted the Vancouver train plan to accommodate an uptick of volume in this corridor. Departing and arriving trains on time, what we call launch and land, continued to be a key focus of both the network operations and field teams. These are the basics of scheduled railroading. Fourth quarter origin train performance remained solid and in line with prior quarters at around 90%, right where we needed to be to ensure on-time train meets. Q4 destination train performance was 70%, and we know there's room for improvement here by continuing to reduce our train meet delays and making timely crew swaps at intermediate terminals. I'm pleased with how the network and field teams have managed the complexity to crew scheduling introduced by the new Canadian Work/Rest Rules. We continue to learn and adjust train schedules to adapt to this new requirement. Now you're going to hear more from Doug on volumes, but my team is getting ready for the business, making sure we have the right resources in place. We have a number of capital projects that will enable short-term operating efficiency and unlock long-term growth across the core mainline from the West Coast to Chicago. In 2024, we are investing in additional double track along our Vancouver to Chicago corridors, with projects on our Edson Sub and on the former EJ&E around Chicago. We continue to invest in rolling stock. The locomotive modification program is well underway and we are renewing a number of our car fleets. Our training campuses were very busy in 2023. We qualified more than 900 new conductors to cover attrition and meet the requirements of the Work/Rest changes in Canada, and we're now ramping up to align with our growth forecast. So overall, from a resource perspective, we are poised to meet the forecasted demand and grow with our customers. I'll now pass it to my good friend Derek to talk about how the team executed in the fourth quarter.

Derek Taylor, Chief Field Operations Officer

Thanks, Pat, and good afternoon, everyone. The team finished the last quarter of 2023 with strong operational momentum and we started the New Year with a very fluid network. While we benefited from unseasonably mild weather and no major disruptions in the fourth quarter, I give full credit to the team for remaining focused and continuing to deliver excellent customer service. Finishing with positive momentum was key because, over the last two weeks, we've had more seasonal weather across the network with frigid temperatures, significant snow, and blizzard conditions. As we said before our Make The Plan, Run The Plan approach is not just about driving velocity and reliability, it also builds operational resiliency allowing us to bounce back quicker after this kind of disruption. We're talking days instead of weeks. I'll now cover-off some of the key operating metrics. Starting with car velocity, what we view as the all-in metric of how well the railway is running. It averaged 215 miles per day in Q4. That is up 4% versus last year in one of our best Q4s ever. Importantly, we maintained this level of velocity right up to the end of the year, even as volumes were ramping up. Through dwell of 6.9 hours was a 4% improvement over last year. This is even more impressive given our traffic mix had less intermodal volume this year, which we know typically does not sit in a terminal for very long. Continued focus on terminal throughput and collaboration between yards and the operation centers enabled this further improvement. To give you a bit more color on our solid operating performance, network train speed of 19.6 miles per hour for Q4 is flat versus last year but improved 5% on a full-year basis to 19.8 miles per hour versus 18.9 in 2022. Doug will talk about the customers' perspective of our service in a minute, but the metric I keep a close eye on is our local service commitment performance or LSCP. This means getting the customers the right cars on the right day and in the right service window. Our fourth quarter LSCP was nearing all-time highs. I am confident the team will continue to execute and keep it at or above our 90% goal as we go through 2024. Incremental metric improvement is a continuous journey, looking for every gain we can through process and execution. The team is always looking for any types of operational efficiencies in everything they do. Some of our recent performance, as Ed used to say, has hit the sweet spot for this network. Our focus is to have balance in our metrics, not focus solely on one to the detriment of the other and always being mindful of cost versus benefits. Now, I will turn it over to Doug.

Doug MacDonald, Chief Marketing Officer

Thanks, Derek. Tracy already touched on the transition later this year with Remi, who is out in the field getting his boots dirty and seeing the operations up close. I got to hand it to Derek and Pat and the whole operating team who continue to deliver top-notch service. The feedback from customers is that we're continuing to hit the right spot and make adjustments where needed. We continue to deliver core pricing ahead of CN cost inflation. Turning to slide 11 now, fourth quarter revenues were down 2% versus last year on lower intermodal storage fees and a lower applicable fuel surcharge, partially offset by volumes and solid same-store pricing. RTMs, which we view as the best measure of volume, were up 2% in the quarter, driven by record potash movements, strong propane, Canadian met coal exports, and refined petroleum products. We've seen sequential volume improvement since we hit the trough in July, as we said on our last call. P&C volumes were up 12% in the quarter, with the exception of crude oil, all segments were up on a year-over-year basis. We are handling record propane exports and in line with the CN-specific growth initiative laid out at Investor Day. We also saw increased gas and diesel shipments out of Alberta and a modest recovery for chemicals and plastics feedstocks. Metals and minerals RTMs were up 3% with positive growth across all segments, including frac sand, scrap steel, and aluminum except for iron ore where cars were up and RTMs were down due to a shift back to more short-haul domestic shipments. To finish off on merchandise, forest products volumes were down 5%, driven by softer market conditions. For bulk, starting with fertilizers, RTMs were up 85%. We handled incremental domestic and record potash exports using our available capacity in the Eastern and Southern regions. Coal was up 1%, with Canadian coal up 5%, due to strong export met coal from Northern BC and US coal down 9% due to an operational issue at one of our customers' mines. Canadian grain shippers did not use all of the available supply chain capacity in Q4. Weaker global commodity pricing led to a holdback in grain, shifting volumes into H1 2024. Our Q4 US grain exports were tempered by lower demand in China and increased global supply. Automotive RTMs were up 22%, continuing the strong trend that started in early 2023 with dealer inventory restocking. Turning to intermodal, international was down 11%, mainly due to the lingering effect of the port strike, particularly for Prince Rupert traffic. However, imports at both West Coast ports returned to pre-ILWU strike levels by December. We are encouraged by the sequential uptick in volumes in the fourth quarter and with our ongoing discussions with steamship line customers. Domestic was down 3%, mainly in our retail segment. Our efforts in the CN-specific initiatives like Falcon and EMP produced volumes, mitigating some of the overall market softness. Moving to the outlook on slide 12. As Tracy said, we will benefit from a more favorable economy, but more importantly, our CN-specific growth initiatives are starting to deliver. We see lumber and panels coming back gradually in 2024. There is optimism in the economy about interest rates coming down, which should help stimulate new construction permits, and there is still a shortage of approximately 6 million homes in the US. We project more frac sand and LPG shipments due to increased drilling in Northeast BC and this will be supported by the new siding near Fort St. John as mentioned in our Investor Day initiatives. In 2023, crude shipments were at an almost five-year low, but driven - given the forecast for Canadian crude production along with the delay in the startup of the TransMountain pipeline, we see opportunities to handle incremental crude business in 2024. The CN Fuels facility in our MacMillan yard will begin wet commissioning this month and will start producing carloads and ramping up through Q1. We have now sold out capacity in Phase 2 of this project and construction is underway. For potash exports, we expect to see a year-over-year headwind starting in Q1 related to the business we picked up in 2023, while the Portland terminal was down. We continue to get strong rateable volumes with our premium service and utilizing our available capacity in Eastern Canada. In Canadian coal, we have met coal production capacity coming online in the back half of the year related to the new Valerie mine and the Quintet restart in Q4. As mentioned earlier, this year's Canadian harvest is down versus last year, but we are expecting a normal crop for the 2024-2025 crop year and a better Q4 than what we just saw. Recall that this year's inflation index for regulated grain movements is 12% and we will receive our 2024-2025 pricing determination in the spring. US grain will benefit from the acquisition of the IANR pending STB approval, which we anticipate being completed sometime by next fall. We are projecting automotive demand to remain strong and volumes to be roughly on par with 2023, even with some outages related to retooling for EV production. For international intermodal, we continue to work on filling up Prince Rupert and building on recent momentum in Vancouver. We also expect growth in our southern ports in the Gulf, driven by new service offerings into the Midwest. Overall, we see a gradual return to pre-COVID volume levels over the next few quarters. Domestic growth will come from our new interline partnerships specifically targeting truck volumes. We have capacity on the network, in our terminals, and with our fleet to grow volumes as the economy improves. In summary, we've rotated through some of the headwinds, which challenged us in 2023. We have good momentum, CN's customer service is excellent and our CN-specific growth projects are delivering. With that, I'll pass it over to Ghislain and go through the numbers.

Ghislain Houle, Chief Financial Officer

Turning to slide 14, the volume of RTMs increased by 2% year-over-year, while our revenues decreased by about 2%. We achieved an operating income of approximately $1.8 billion, which is 5% lower than last year, with an operating ratio of 59.3%, reflecting a 140 basis points increase compared to last year. There were two non-recurring items noted. During the quarter, we executed a tax reorganization that resulted in about $700 million of one-time income. Consequently, our overall tax situation in both Canada and the US remained largely unchanged, and we anticipate an effective tax rate of around 25% for 2024, which is approximately 50 basis points higher than in 2023. Cash taxes will account for about 80% of our total effective tax, consistent with previous years. We also capitalized on a surplus right of way in Ontario, valued at approximately $130 million. On a reported basis, earnings per share was $3.29, an increase of 57% from last year. However, when excluding the one-time items, adjusted earnings per share was $2.02, representing a 4% decline year-over-year. Regarding expenses, labor costs were 12% higher compared to last year, driven by a 5% increase in average headcount and general wage hikes. Fuel expenses were over $100 million less than in the same quarter last year, largely due to a 17% drop in fuel prices. Looking at our full-year results on slide 15, adjusted earnings per share fell by 2% compared to last year, aligning with our updated guidance. Our full-year operating ratio stood at 60.8%, which is a 90 basis points increase from last year on an adjusted basis. Despite facing significant challenges in Q2 and Q3 from forest fires, flooding, and the West Coast ports strike, which impacted earnings per share by approximately $0.17, we generated nearly $3.9 billion in free cash flow for the year. Our disciplined capital expenditures totaled $3.1 billion, excluding capital recoverable from customers, which represents around 18.5% of revenues. We are investing in our railcar fleet and consistently investing in track maintenance and capacity expansions, aligned with our customers' volumes and continuously focusing on capital efficiency. Return on invested capital, sensitive to income changes, was slightly below 15%. Moving to slide 16, I want to give some insight into 2024. We believe the economic conditions for the year will be more favorable than in 2023, with slight growth in industrial production and stabilizing interest rates. Furthermore, consensus views on the risk of a recession appear to have lessened. However, the environment remains quite unpredictable due to ongoing monetary policy and geopolitical risks. Weak sectors, particularly intermodal, international, and forest products, show signs of sequential improvement and should stabilize to pre-pandemic levels. We expect Canadian grain to return to a three-year average in the latter half of the year. With this context, along with our company-specific growth initiatives, we forecast mid-single-digit growth in RTMs. As volumes rebound, we expect the benefits of operating leverage, especially in the merchandise sector, where we currently have capacity on our trains to accommodate volume increases at low incremental costs. However, we face about $200 million in cost headwinds, mainly due to depreciation, incentive compensation, and pension expenses. We project a foreign exchange rate of about $0.75 and WTI crude prices of US$70 to US$80 per barrel for the year. Given these circumstances, we anticipate around 10% earnings per share growth in 2024 compared to 2023. Our capital expenditures for 2024 are expected to be approximately $3.5 billion, net of customer contributions, and we predict return on invested capital to be within the range of 15% to 17% as outlined during our Investor Day. Concerning shareholder distributions, we are pleased to announce that our Board of Directors has approved a 7% increase in dividends for 2024, marking the 28th consecutive year of dividend increases since our IPO in 1995. Additionally, the Board has authorized a new share buyback program for up to 32 million shares at a value up to $4 billion through a normal course issuer bid from February 1, 2024, to January 31, 2025, aligning with our previous budget before we increased it opportunistically last October. In conclusion, I want to reiterate a few key points. We have achieved seven consecutive quarters of outstanding operating performance, providing exceptional customer service while navigating significant external challenges, leading to strong relative financial results. Although we remain aware of ongoing economic and geopolitical volatility, we anticipate some recovery in 2024. Specifically, we expect intermodal and international sectors to return to pre-COVID levels, and forest products to gradually increase over the next 18 months. Our growth strategy is in motion, and assuming a positive economic environment, we are guiding for approximately 10% earnings per share growth compared to 2023, supported by mid-single-digit volume growth. Our strong balance sheet enables us to leverage that financial flexibility to seize opportunities. Now, I will pass it back to Tracy.

Tracy Robinson, President and CEO

Thanks, Ghislain, and well said. Operator, we'll now go to questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question will come from Chris Wetherbee from Citi. Please go ahead. Your line is open.

Christian Wetherbee, Analyst

Hey, thanks. Good afternoon. Maybe starting on the '24 guide, if you could maybe unpack some of the moving parts a little bit, so RTM guide mid-single-digits. And then I think, Ghislain, you talked about maybe $200 million of some cost headwinds there. You have about 5% coming below the line. So I just want to make sure I understand sort of the operating leverage of the business, is it mostly offset by the $200 million or maybe we can kind of think about how you should be able to generate incremental margins on that mid-single-digit RTM growth?

Tracy Robinson, President and CEO

Okay, Chris, this is Tracy. Let me take a shot at this. So we've got a forecast of 10% EPS and on volume as you've noted, the forecast assumes a gentle kind of recovery economically as we go through the year, but it also assumes those customer-specific growth initiatives that you heard Doug talk about. On margin, as volumes come back, we should see the positive impact of our operating leverage. So as volumes went down, we saw it go down. As volumes come back up, we're going to lift, especially in the merchandise business, where we currently have capacity on our trains. And of course in the pricing environment, you know, as you've watched us over the last 18 months, we continue to both deliver and we continue to expect pricing above rail inflation. So that's all positive news. We do have the headwinds that Ghislain talked about, but that's going to be offset to the extent that will drive the 10% to the bottom line. Does that make sense?

Christian Wetherbee, Analyst

There is still the normal operating leverage on revenue growth, mostly balanced by the incremental costs that help you reach core growth before the buyback aligns with RTM growth. Is that a reasonable way to understand it?

Tracy Robinson, President and CEO

Yeah. You got it, pretty much. Thanks. Next?

Operator, Operator

Our next question comes from Cherilyn Radbourne from TD Cowen. Please go ahead. Your line is open.

Cherilyn Radbourne, Analyst

Thanks very much. Good afternoon. Just wanted to dig in a little bit in terms of international intermodal. And you did mention that the Canadian West Coast market share was back to pre-strike levels in December. Just curious, given what we're seeing in the Red Sea and on the Panama Canal. Just be curious whether you're seeing inquiries at this point that could be incremental to that market share and how likely those volumes might be to be sticky.

Doug MacDonald, Chief Marketing Officer

Thanks, Cherilyn. It's Doug. No, it's a great question. It's obviously an ever-changing environment out there. So we spent a lot of time talking with customers about it. We are seeing obviously some capacity come out of the vessel market with them having to go around Africa now. So we see some tightening overall. And with that, we're starting to hear with different problems at both the Panama and the Suez Canal that the West Coast is looking like a more viable option moving forward. We haven't seen those volumes come in yet, but we're expecting them to gradually ramp up if they do come forward, but so far so good. We've actually just been able to maintain our pre-COVID levels now for the last, I'll say almost eight weeks, and we see that continuing on, moving forward on both Prince Rupert and Vancouver.

Cherilyn Radbourne, Analyst

That's my one. Thank you.

Doug MacDonald, Chief Marketing Officer

Thank you.

Operator, Operator

Our next question comes from Ken Hoexter from Bank of America. Please go ahead. Your line is open.

Ken Hoexter, Analyst

Great. Hey, good afternoon. Tracy, you're just saying, I guess, in the EPS target of 10%, you're looking at long term going up to 10% to 15%. Just want to understand the acceleration, you talked about hiring, I guess, pre-hiring employees. Are you saying you're pre-resourced now because of the work rule changes or are you going to accelerate the hiring? I just want to understand the cost implications versus your growth targets? Thanks.

Tracy Robinson, President and CEO

I'll start at that one, Ken. So we've been hiring through the year to offset attrition, and that's the lever we're using right now to manage our workforce size is hiring relative to attrition. And as we look forward, you'll see our hiring ramp up to match the volumes as we see them coming back. We've got a great line of sight on a number of the areas. Doug kind of took you through them, and so we're getting ready for those.

Operator, Operator

Our next question will come from Scott Group from Wolfe Research. Please go ahead. Your line is open.

Scott Group, Analyst

Hey, thanks. Good afternoon. So when you talk about price above inflation, I'm just wondering, do you see that spread widening or moderating this year? And then just near term, any way to quantify the weather impact we're seeing in Q1? And then any update you can give us on the labor front just with the conductors in Canada? Thank you.

Tracy Robinson, President and CEO

It seems like there were a lot of questions, but I'll try to cover them quickly and the team can follow up after me. We want to focus on one question first. The initial question was about pricing. I believe it varies; it's definitely a tighter pricing environment than we've experienced in the past. However, our team has provided Doug with a strong customer service product to market. As a result, we are managing to maintain pricing above inflation. The margin above inflation will differ across commodities and regions, but we have no reason to think that trend won't continue. What was the next question?

Doug MacDonald, Chief Marketing Officer

The winter weather and I can take that one. So we had a very cold snap of minus 40 to minus 50 Celsius for about a week. We did see some disruption during that period of time as we had difficulty moving throughout that period. But I will say this to speak to the strength, the resiliency of our disciplined scheduled operating plan. Just as we saw as we recovered from the ILWU strike, the wildfires, and the flooding last year in 2023. The way we run the network, and we're always working back to the plan, but that's our North Star. We were able to get our legs back under us, get the operation moving again, and we're regaining our momentum, getting our speed and our velocity back. Metrics are improving already.

Tracy Robinson, President and CEO

Okay, thanks for that, Scott. David or who's next?

Operator, Operator

Our next question comes from David Vernon from Bernstein. Please go ahead. Your line is open.

David Vernon, Analyst

Good afternoon. Thank you for the question. Doug, regarding the mid-single-digit RTM expectations, could you provide some insight into the larger segments and when we can expect them to come in? We've started the year a bit slower, and I'm looking to understand the ramp you know more about. Could you share any information on when we might see an increase in the sequential volumes?

Doug MacDonald, Chief Marketing Officer

Thanks, David. So, you know, I guess like slide 12 is a great indicator, but we're expecting a gradual ramp-up over the year and things like forest products, which we expect to see a gradual recovery in. It's not going to be anything, it's not going to be a straight-up arrow or anything. So we know that's going to happen. Same with most of the products that are on there, and a lot of those are going to tie right into the economy. That gradual recovery, that Tracy talked about, that's what we're expecting. So we're going to see more come in the back half than the front half, but we're working with the customers to do that as quickly as possible. We talked about the two coal mines that are coming on, and those are both in H2 as well. But with the international intermodal, we're seeing that perk up as of last December, which we just talked about. So we're going to see that start to pull right away. And we're expecting a gradual recovery in the domestic market.

David Vernon, Analyst

All right. Thank you. And then the labor costs for accommodating the work rule changes, has that been sort of seasoned now or are we kind of running it at the right level as far as kind of staffing and resourcing? Or are we still kind of figuring out how to make the schedules work with the new hours of service regulations?

Doug MacDonald, Chief Marketing Officer

Sorry, David, we're only taking one per person.

David Vernon, Analyst

I thought I'd give it a shot. Thanks, guys.

Doug MacDonald, Chief Marketing Officer

Thank you.

Operator, Operator

Our next question comes from Fadi Chamoun from BMO. Please go ahead. Your line is open.

Fadi Chamoun, Analyst

Yes. Thank you. Just one clarification. First, the comment around volume back to 2019 level, is that for total RTM or are you talking about intermodal specifically as well? And then my main question is really if you can extend kind of the outlook that you talked about, mid-single-digit RTM, like if we take that into revenues, what are the moving parts? Like from a mix perspective, I'm guessing pricing incremental to that five, that gets you high single digit. But what's your thought on mix and how should we think about all these moving pieces from a revenue perspective?

Doug MacDonald, Chief Marketing Officer

Those are two lengthy questions, but I’ll address them. The second question is especially important. We don't provide revenue forecasts, Fadi, but we do anticipate mid-single-digit growth to continue in our typical manner. We expect the average revenue per car to remain consistent, and I believe you can calculate the implications from that. Overall, we are quite satisfied with our forecast.

Fadi Chamoun, Analyst

And with respect to the comment around 2019 level or pre-COVID level, is that an intermodal forecast for volume to be back to 2019 or is that total RPM?

Doug MacDonald, Chief Marketing Officer

Yeah, I think that was your one question. And you can go to the investor relations team after the call for the other one.

Operator, Operator

Our next question comes from Ravi Shanker from Morgan Stanley. Please go ahead. Your line is open.

Ravi Shanker, Analyst

Thanks, everyone. Tracy or Doug, can you give us an update on the Falcon service, please? What's the operational rollout been like after the first few months? What's had been like selling the product to customers, et cetera?

Doug MacDonald, Chief Marketing Officer

Okay, well, that's a good question. We'll have Derek start off on the operational side.

Derek Taylor, Chief Field Operations Officer

Yeah. Hey, good afternoon. No, it's been a very exciting product we've had with our partners at the FXE and the Union Pacific. It is acting as one seamless service. We're consistently delivering on the published transit time with our customers. And we look forward to continuing to grow that here in 2024. So solid momentum in 2023 and I see that partnership between the three of us only continuing to grow in '24.

Doug MacDonald, Chief Marketing Officer

Yeah. And on the revenues, listen, that we told everyone it's going to be very slow growth of the truck market, and that's what it is. But that's okay, right? We're expecting it, where both the UP and FXE and us are working hand in hand to grow that. The big bid cycle is really only starting up in Q1, where we'll be going after truck business that's out there. And we hope to see some solid growth moving into the rest of the year. Thanks for your question.

Operator, Operator

Our next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead. Your line is open.

Walter Spracklin, Analyst

Yeah. Thanks very much. Good afternoon, everyone. So I wanted to zero in here on the first quarter, and I know you don't typically give quarterly guidance, but I think it's important given last year was such a tough compare and now you've come off to a tough start here due to the weather. Is it possible, do you think, when we frame the 10% over a quarterly basis, is it possible that you can see any growth in the first quarter given how tough the compare is and the weather to start, and therefore is most of it all kind of back end loaded for the 10%.

Tracy Robinson, President and CEO

Thanks, Walter. Maybe I'll just start, I'll hand it over to Ghislain, but I'll start by saying it is going to be a tough compare. We had a big quarter last year and some very different weather than the way we've started off this year. But Ghis, did you want to make any comments on that?

Ghislain Houle, Chief Financial Officer

No, I think that's right. I think we told the market on many conferences that Q1 was going to be a very tough comp. If you remember last year our EPS was up 38% and our OR was 61%, which is not kind of winter-like type of OR. So we know that we've baked that in into our forecast and into our 10%, but we have accounted for regular winter. We did start and as Pat said, we had seven days of deep freeze in the west, hopefully, that's behind us. It’s behind us for now. And hopefully, as we get into February, then we don't get that sustained cold. But yeah, I mean, we know that Q1 was going to be a tough comp, but that's all factored in into our 10% EPS growth for the year. Thanks, Walter, for the question.

Walter Spracklin, Analyst

Thank you. Thanks.

Operator, Operator

Our next question comes from Konark Gupta from Scotiabank. Please go ahead. Your line is open.

Konark Gupta, Analyst

Good evening, everyone, and best wishes to Doug and Remi for their respective roles. The question is for Pat, you said destination performance is improving. But what's your realistic target there, Pat, and what's required from your interchange partners to get to that level?

Patrick Whitehead, Chief Network Operations Officer

So, Konark, thank you for the question. And we desire to continue to squeeze that delta between launch and land. We look to get another few percentage points out of that squeeze, that gap between how we launch trains and how we arrive them into terminals. We originate and terminate the majority of our traffic on our own lines, so we're not as dependent on the other carriers for that metric. And that's where I talked a bit about reducing train meet delays online, which is a product of getting trains out on time. Train schedules make the train meets and making timely crew swaps. So that's really our focus, to continue to squeeze that delta between launch and land. Thank you very much for the question.

Konark Gupta, Analyst

Thank you.

Operator, Operator

Our next question comes from Brandon Oglenski from Barclays. Please go ahead. Your line is open.

Brandon Oglenski, Analyst

Hey, good afternoon, everyone, and thanks for taking my one question. Ghislain, I was hoping you could update us here on the change in the dividend. And obviously, if you were to go to that full repurchase this year, that would be quite a bit of cash flow out the door. So where are you seeing leverage in the near term and especially in the context of that 10% to 15% plan over the next three years? Would you be willing to take it up higher right now?

Ghislain Houle, Chief Financial Officer

Yeah. So, as we said, we're looking at the targeted leverage over time of 2.5. I mean, if you look at this year, we finished at 2.25. We typically grow our dividends in line with earnings growth. You'll see that we're slightly below because we do that over time. And if you remember, in 2023, our dividends were up 8% and our earnings are down 2%. So we have a long-term view, we have a long-term view on these two things. I think that, as we said in the Investor Day, our leverage will be 2.5 over time if economic conditions warrant. So that's why we went back and toned back a little bit of our share buyback to 4 billion. Last year, we wanted to be opportunistic due to the stock price and where it was. And again, I think, in terms of dividend, I'm very proud to say that it's the 28th year that we've increased our dividend, and that's very good. So that's what we're thinking, and we're thinking long-term and without any jerky reaction. Thanks for the question, Brandon.

Brandon Oglenski, Analyst

Thank you.

Operator, Operator

Our next question comes from Tom Wadewitz from UBS. Please go ahead. Your line is open.

Thomas Wadewitz, Analyst

Yeah. Good afternoon. Wanted to ask you a little bit about trained lengths and how you view that opportunity. I think where you're running now is a little bit below where you've achieved in the past. And so would you expect to see that expand? I don't know if you can get to 8,200, 8,300 feet, something like that. And is that, if you realize that, is that a potential driver of upside on what the margin might be relative to your guidance?

Derek Taylor, Chief Field Operations Officer

Hey, Tom, it's Derek. Good afternoon. I think when you look at it, you know, right now we can grow at a lower incremental cost with our manifest business because we can add the traffic on existing trains. Part of a scheduled operation is remaining balanced and turning and splitting the assets. Now, when you look at it from an intermodal point of view, that is something that's been down and that's coming back that will actually help our train length out as that grows throughout the year. So, overall, we're well positioned to grow at a low incremental cost, and that's the key as we look at it going forward.

Doug MacDonald, Chief Marketing Officer

Thanks for the question.

Operator, Operator

Our next question comes from Amit Mehrotra from Deutsche Bank. Please go ahead. Your line is open.

Amit Mehrotra, Analyst

Thanks. Hi, everyone. I have a question about yield. There are several factors that influence yield, including pricing, mix, and fuel. Fuel provided a beneficial impact, at least on a lag basis, in the fourth quarter. Ghislain, could you discuss whether yield decreases when you factor in fuel and when we can expect to see pricing benefits reflected in the yield? This applies whether the yield is adjusted for mix or not. My concern is that yield may drop in the first quarter due to the delayed impact of fuel surcharges. I'm trying to get a clearer view of the expected progression of yield improvement throughout the year.

Ghislain Houle, Chief Financial Officer

So I can open up and then I can let Doug talk more, a little bit about the yield. But on fuel, I mean, I think when you look at the lag in the fourth quarter, it was around $0.04 to $0.05 favorable in the quarter and on a year-over-year basis it was as well. So it wasn't a big deal. And I can turn it over to you, Doug, for the mix piece.

Doug MacDonald, Chief Marketing Officer

Our traffic remains relatively stable, but there will always be variations depending on the specific product line, which can lead to different impacts. I won't cover all of them in this call, but we can discuss it further later. Additionally, I want to emphasize that we should not expect any impact from the container storage fees as we move into the first quarter and beyond. This will have a significant effect. Thank you for the question.

Operator, Operator

Our next question comes from Brian Ossenbeck from JPMorgan. Please go ahead. Your line is open.

Brian Ossenbeck, Analyst

Hey, thanks for taking the question. Doug, just wanted to ask, if you can give us an update on the CN-specific projects, which you quantified at the Investor Day. It sounds like maybe some of them are moving a little bit forward faster than you thought. But how does that shape look like in 2024? Is it back half-weighted like some of the broader economy stuff that you've been highlighting? And I think in the past you'd also given some visibility as to how much of that is sort of contracted or spoken for in terms of those carloads. So an update there would be helpful. Thanks.

Doug MacDonald, Chief Marketing Officer

Thanks, Brian. I have the presentation in front of me. I know I get this question quite often. Regarding the bulk commodities, much of our focus will be on the new canola crush and the new mines that are starting up. For instance, we anticipate some volumes from BHP, but that won't happen until 2026. The canola crush plants appear to have experienced some delays as well, which means that the output will be more concentrated towards the end of 2026. As for renewables, we're beginning to see progress with the crush plants, and some renewable projects, including ethanol, are coming online. However, that too will be more back-loaded, though we expect to achieve some ethanol synergies this year. A significant development is our collaboration with AltaGas for the LPG export, where we have already reached our targeted carloads just from that one contract, marking a substantial win for us. Regarding the Toronto fuel facility, construction for Phase 1 is complete, but we postponed the start-up because we sold out Phase 2, and we're now integrating that construction. Phase 2 is scheduled to begin operations in Q1, which is exciting since we've already sold it out. On the EV supply chain front, we are uncertain at the moment, even though we moved about 800 carloads of lithium from Northern Quebec for export. There have been some delays in EV developments, but we see the battery plants still progressing along our lines, including Norfolk and others, though some projects remain under NDA. Additionally, our Northern BC projects are advancing as we see growth in frac sand and propane movement from there. Lastly, our intermodal expansion is showing progress as volumes begin to recover. We are actively working with our customers across all our ports, including Halifax, Montreal, St. John, Prince Rupert, and Vancouver, with a new service starting in Gulfport as well. Overall, we are making strides, but I'm unable to provide specific numbers yet as we work to finalize those details with our customers. I hope that answers your question thoroughly.

Brian Ossenbeck, Analyst

Yeah, no need for a second. Thanks.

Operator, Operator

Our next question comes from Justin Long from Stephens. Please go ahead. Your line is open.

Justin Long, Analyst

Thanks and good afternoon. You mentioned earlier the $200 million of cost headwinds this year, but could you break that out in a little bit more detail across the three different buckets that you mentioned? And does the guidance assume that you can improve the OR year-over-year despite these cost headwinds or will that be challenging?

Doug MacDonald, Chief Marketing Officer

Thank you, Justin. The $200 million in cost headwinds is roughly split into $100 million for depreciation and the other $100 million is divided between incentive compensation and pension costs. Despite these challenges, we are confident that we will improve our margins. As Tracy pointed out, margins can be affected when volumes decrease, but we expect a pickup in volume. Additionally, we still have the capacity to increase traffic on some of our trains, particularly the merchandise train. Therefore, we firmly believe that we will enhance our margins in 2024.

Tracy Robinson, President and CEO

Let me just add to that, Justin. I have to say that, I have been really pleased with our operational cost performance over the past two years, especially in light of some of the headwinds that we've had over that time. I think our record speaks pretty positively there. And it just spoke to you around you know how we think it'll play out this year. But we'll be managing costs closely and we expect that our margin leverage is going to continue to grow over time as the volume strengthens. So that would be the way to think about it.

Doug MacDonald, Chief Marketing Officer

Thanks for the question.

Operator, Operator

Our next question comes from Jon Chappell from Evercore ISI. Please go ahead. Your line is open.

Jonathan Chappell, Analyst

Thank you. Doug, I want to go back to Rupert, you noted back to pre-COVID levels, but you also mentioned a little bit later you're continuing to work to fill Rupert. So is there any way to quantify what capacity is available in Rupert right now and how much international intermodal can grow if the economy dodges a hard landing and maybe Rupert gets up to the full capacity you envision?

Doug MacDonald, Chief Marketing Officer

That's a great question. Rupert is truly one of our key assets. We're not only increasing our intermodal services but also expanding our propane export franchise and maintaining coal exports. Additionally, we're growing our wood pellet business. The focus remains on intermodal, although international transport has declined to just over 0.5 million TEUs through the terminal, which has a capacity exceeding 1 million TEUs, potentially reaching 1.2 million with some adjustment. Our aim is to collaborate closely with our partner, DP World, and our customers to optimize this capacity. With the ongoing changes in shipping routes, particularly in the Red Sea, Suez Canal, and Panama Canal, we're seeing increased interest in utilizing our terminal. We are committed to being mindful as we plan operations with our team, ensuring we deliver efficiently while keeping terminal dwell time under three days, which is our target. Thank you.

Operator, Operator

Our last question will come from Michael Kypreos from Desjardins Capital Markets. Please go ahead. Your line is open.

Michael Kypreos, Analyst

Good afternoon, and thanks for taking my question. Your fourth quarter grain volumes were down 13%, and you had mentioned earlier that maybe some of the grain farmers decide to hold back on some volume through the end of the year. Do you have an idea what percentage of this grain you expect to be carried over and recouped in the first half? And maybe an update on the discussion with the farmers and the current grain dynamics, I believe. Thank you.

Doug MacDonald, Chief Marketing Officer

Sure. I'll talk specifically about Canadian grain first, and then the US grain is a little bit. Well, I'll just go Canadian grain first, how's that? So listen, the prices farmers have had great pricing in the last couple of years. So they're used to getting a very good price on the market. So this year, the world market actually, there is a lot of surplus from other countries out there. They've had good crops. It's driven the price down. So the Canadian farmer is sitting there saying, I'm going to hold on to grain until I get a better price. So we've had probably one of the lowest Q4 demands I've seen in my history at the company, but they still have to sell, right? So they're sitting on a farm that inventory is there anything that we didn't move in Q4 will shift into Q1 and Q2. So that's great. Now I think you can just really take what we did last year, say what didn't move, and it just moves further out. So I won't give specific numbers. At the same time, I do believe we've had a fairly good crop. The StatCan brought it up to 67 million metric tons in their forecast, finally. And that is actually a good size crop, not as good as last year, but a really great crop. And I think a lot of it was really good on our network. So I think we have a lot of grain to move. We're going to be very busy for the rest of Q1 with Pat and Derek, and I think we're going to have a really good tail into Q2. Thanks for your question.

Michael Kypreos, Analyst

Thank you. Appreciate it.

Operator, Operator

This concludes the question-and-answer session. I would like to turn the call back over to Tracy Robinson.

Tracy Robinson, President and CEO

Thanks, Julianne. So a strong finish to 2023, by capping off seven quarters now of operational and service excellence and a great setup as we start into 2024. So our plan is working. Our Make The Plan, Run The Plan, Sell The Plan approach is driving the right results. And this railroad right now is running as well as ever, and I like the team that we have. Our growth initiatives are ramping up. I'm really excited about the momentum and the opportunities we have over the next quarters. I want to thank you all for being here with us today, and we look forward to talking again very soon. Thank you.

Operator, Operator

The conference call has now ended. Thank you for your participation. You may now disconnect your line.