Canadian Pacific Kansas City Ltd/Cn Q1 FY2024 Earnings Call

Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to CPKC's First Quarter 2021 Earnings Conference Call. The slides accompanying today's call are available at investor.cpkcr.com. I'd now like to introduce Chris de Bruyn, Vice President, Capital Markets, to begin the conference.

Thank you, James. Good morning, everyone, and thank you for joining us today. Before we begin, I want to remind you this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on Slide 2 in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on Slide 3. Please note, in addition to our regular quarterly financials, their supplemental Q1 combined revenue and operating performance will be available at investors.cpkcr.com, which some of today's discussion will focus on. With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, our Executive Vice President and Chief Financial Officer; John Brooks, our Executive Vice President and Chief Marketing Officer; and Mark Redd, our Executive Vice President and Chief Operating Officer. The formal remarks will be followed by Q&A. In the interest of time, we'd appreciate if you limit your questions to one. It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Good morning. Thanks, Chris. Before we dive into the results, I want to express, on behalf of our CPKC family, our heartfelt prayers and condolences to Jim Foote's family and friends. As many of you know, we lost him last week, and many of us in the industry had the honor of serving Jim during his decades of dedication. Personally, I will cherish the memories and experiences we shared. He was a wonderful man, devoted to his work in this industry and to the people we serve. If you knew him, you would agree that he had an undeniable love for his friends, family, and the companies he supported. This is a profound loss, and his contributions will be remembered. Best wishes to his family. Thank you all for joining us today to share our results. I want to start by acknowledging the 20,000 strong family of railroaders who make these results possible. We just celebrated our one-year anniversary of this historic combination last week, and today in Calgary, we are launching our final spike steam tour. It's an exciting day, and after sharing these results and holding our AGM, we will celebrate with our employees and begin this historic journey across three nations. Over the next 35 to 40 days, we will appreciate the communities we operate in from Calgary to Mexico City. Thank you to the employees who have been crucial in bringing this vision to life that we created two years ago. Reflecting on the past year, I am very pleased with our progress. We have kept our commitments to foster competition, provide safe and efficient service, and grow our customer relationships in new markets, all thanks to this historic combination. I'm pleased with our quarterly results, showing a strong start to the year in terms of revenue ton miles and operations. Although January was challenging, Mark and the operations team recovered quickly, outperforming the expectations set during our Q4 earnings call. In the first quarter, we achieved revenues of $3.5 billion, a 2% increase, with an operating ratio of 64%, which is a 50 basis points increase from last year. Core EPS was $0.93, up by 3%. Despite a tough start to the year, our volumes increased by 1% for the quarter. I'm very satisfied with how the network rebounded from the January challenges, and the team showed impressive resilience and momentum throughout the quarter. Locomotive productivity improved significantly in Mexico, with key metrics such as Car Miles per Car Day and locomotive productivity up over 20% year-over-year. Active cars online decreased by 15%, and overall productivity is improving. These gains in Mexico have allowed us to optimize our asset base by parking and redeploying up to 60 locomotives to other parts of the network to manage winter weather and meet stronger-than-expected demand. This demonstrates the effectiveness of our precision scheduled railroading model, which we refer to as PSR Prime. Importantly, these improvements come during a period of record GTM performance in Mexico. In March, we made a change in our leadership by releasing John Orr from his commitments to CPKC. I want to thank John for his contributions and leadership. His challenge was to leave things better, and he succeeded in serving both KCS and CPKC until his departure just last month. We are fortunate to have a talented team of PSR railroaders. The decision to release John was not taken lightly, but it was facilitated by the strength of our teams at CPKC. The plan was always for the Mexican operations to eventually report to Mark as our COO, and given the strong performance in Mexico, it made sense to accelerate that plan. Credit goes to the entire operations team since John's departure; they have continued to execute, drive improvements, and provide excellent service to our customers. In closing, I am happy with our start this year, and our performance in the second quarter looks strong as well. We are positioned to become the most relevant rail network in North America, uniting the continent, enhancing competition in the industry, and delivering safe and efficient service to our customers. Now, I will hand it over to Mark to discuss the operating performance, followed by John, who will provide insights into the markets, and then Nadeem will conclude with the financial details before we open it up to questions. Mark, it's all yours.

Thank you, Keith, and good morning. I am very proud of the operating team and their achievements this quarter. I appreciate their ongoing hard work in providing safe and efficient service. Throughout the quarter, I spent considerable time on the network, and I am impressed with the talent and dedication at CPKC. I want to highlight the Freeport terminal, which has been named CPKC 2023 Terminal of the Year. This team has demonstrated exceptional performance. Having worked at this terminal earlier in my career, I am thrilled to recognize them for their remarkable achievements. I also visited Mexico this quarter, where we have a strong team of experienced railroaders. As Keith mentioned, we are continuing to make significant, sustainable improvements. For the quarter, thanks to the team's efforts, we quickly recovered from the extended cold weather in January, achieving strong volumes in the Western corridor and reaching record levels of GTMs in Mexico while posting solid year-over-year operating metrics. This morning's metrics show an 8% increase in locomotive productivity, a 13% increase in average train speed, and a 10% decrease in dwell time, all indicating a fluid network. Fuel efficiency dropped by 2%, primarily due to weather conditions earlier in the quarter, but I anticipate an improvement as the year progresses. In terms of safety, the FRA personal injury rate increased by 3% year-over-year to 1.15%. FRA train accidents remain the lowest in the industry at 0.89, up from 0.71 a year ago. While we aim for continuous improvement, safety is an ongoing process. We are focused on cultivating a safety culture, which is crucial for maintaining CPKC's leading safety record. Notably, we have implemented the Home Safe initiative throughout the KCS network and are continuing this effort in Mexico. Regarding Mexico, we are progressing with key initiatives identified last year to enhance productivity and capacity. During the quarter, we streamlined operations by shutting down switching operations at a specific yard. We are also working to improve cycle times and streamline operations for various commodities and customers. This success allows us to free up locomotives and equipment for use in other network areas, creating synergies and accommodating more loads. On the capital front, our shared plan continues to focus on growth and safety. During the quarter, we serviced three additional new sites as part of our $275 million merger capital commitment. We also put two sidings into operation in Mexico to enhance capacity and fluidity. Currently, the Laredo rig is 5% complete, and we remain on track for completion by the end of the year. All of these projects support growth and further network improvements. In summary, we have had a strong start to the year, and the network is in excellent condition. We are well-positioned from an asset and resource standpoint, and the team is committed to delivering the service excellence required for industry-leading growth. Now, I will turn it over to John.

Thank you, Mark, and good morning, everyone. With the full year as a combined company under our belt, I'm extremely pleased with the progress we've made so far and all the opportunities I still see ahead of us. We've built on our momentum from Q4. Despite some of the early weather challenges we faced starting the year, we have started strong and are gaining momentum. Looking at the results on a combined basis, we delivered freight revenue growth of 1%, based on 1% RTM growth. This is slightly ahead of the flat to slightly down outlook for RTMs that we provided to the market in January. The RTM was flat year-over-year, with strong pricing offset by a 3% fuel headwind, along with a negative mix. Carloads in the quarter were down 3%, and I fully expect carloads to continue to lag RTMs. This is a result of our network unlocking longer lengths of haul as shippers take advantage of our seamless three-country franchise, with RTM growth and average length of haul up 8% versus last year. Additionally, we've also seen a lower-margin short-haul intermodal business running between Mexico and the border shift off our network, opening up further capacity for growth in our strategic long-haul lanes. Looking more closely at our first quarter revenue performance, I'll speak to the FX adjusted results on a comparison versus what CPKC would have had if the combination occurred in 2023. Starting with bulk, grain revenues were up 2% on 1% RTM growth. U.S. grain volumes grew 19% over the prior year. Our franchise is benefiting from strong export corn shipments to the U.S. and Alberta, along with more shipments of wheat and soybeans to Mexico, which is a new area of growth for CPKC. Canadian grain volumes were down 15% year-over-year. Volumes decreased due to a weaker 2023 harvest in our draw territory. However, they still came in better than anticipated, as on-farm supplies remain stronger given softer shipping in the fall peak. While we may see better-than-expected volumes this summer, we still expect overall year-over-year compares in Canadian grain to be a headwind until we get to the new crop. However, the strong performance in our U.S. grain franchise essentially offsets the Canadian grain headwind, showcasing how this combined network is adding resiliency within our book of business. Moving on to potash, revenues increased by 4% based on a 2% volume growth. Despite a very slow start in January, we rebounded quickly and ended the quarter with growth driven by solid export and domestic shipments. We are well-positioned for solid potash growth in 2024 as demand remains steady, and we lap the comps from the Canpotex outage at their Portland terminal that occurred from April to December of last year. Coal revenue and volume decreased by 7%. Cold weather in January negatively impacted production and exports, while lower natural gas prices weakened the demand for U.S. coal. We expect a good run with coal as we look to recapture tonnage that didn't move in Q1. Moving on to merchandise, Energy Chemicals Plastics revenue and volume grew by 2%. Volume growth in the quarter was driven by higher fuel oil, DRU shipments, and plastics. This strength was partially offset by multiple customer outages we faced as a result of the cold weather. Looking at this portfolio, we are excited about the synergies we are capturing, particularly with new wins in plastics, renewable diesel, and refined fuels as we connect the markets between Alberta and the Gulf Coast in Mexico. Looking forward, with customer production now stabilized at our facilities on our network and the ongoing ramp-up of synergy gains, we are set up for a solid year in Energy Chemicals Plastics. For Forest Products, revenues were down 4% based on flat volumes. Forest Products volumes were flat despite the broader economic headwinds we all face and the softening in the paper space. We had a record quarter in lumber driven by strong synergy conversions with new line-haul solutions connecting Canadian producers with strong demand in the Texas market. The Metals, Minerals, and Consumer Products revenue was down 1% on a 5% volume decline. Volumes in the quarter were largely impacted by weakness in frac sand to the Bakken and Permian Basins. However, this was partially offset by ongoing strong demand from our steel production. Automotive had another record quarter, with volumes up 8% and revenues up 10%. Despite this record performance, I was not pleased. The results came in well below our expectations due to numerous production holds for quality and parts availability. However, with those issues largely resolved, we expect to see growth in automotive continue to accelerate through Q3 and the rest of the year. I'm excited about our new Dallas auto compound opening in June, located at our Wylie terminal. This compound is part of our playbook that unlocks an entirely new supply chain model for the OEMs, giving them service, reliability, and capacity certainty like they’ve never seen before. Proudly, this new compound is largely sold out and will handle many of the top-selling vehicles within the Texas market, including those built by our anchor tenant, General Motors. On the intermodal side, revenue decreased by 1% despite a 7% volume growth. Starting with International Intermodal, volumes increased by 14% on strong growth through the ports of Vancouver and Lazaro. The strength through Vancouver was driven by a return of volumes after the work stoppage last summer and some impacts from the Red Sea and potential looming East Coast labor disruptions. Although these stronger-than-forecasted volumes did drive some temporary congestion at the port, we successfully worked with our customers and the port to manage this excess volume. We are also encouraged by the ongoing trends at the Port of Lazaro Cardenas. Through February, TEUs through this terminal grew by over 40% year-over-year. In domestic intermodal, volumes were flat this quarter. Our Mexico Midwest Express cross-border service continues to perform extremely well with truck-like service across a safe, reliable border in Laredo. Growth on this flagship service has helped offset the shift in the short-haul business. Since February, we have seen weekly volumes grow by over 24%. We expect our density on this product to build through the year as we grow our volumes of reefer traffic between the U.S. and Mexico. Pending STB approval, we will start operations with CSX and Schneider from Texas and Mexico into the Southeast U.S. In closing, Q1 volumes came in better than expected, and we are off to a good start in Q2. Looking at the past 7 months, we've seen year-over-year volume growth in each month, excluding January. While we still have a headwind from Canadian grain, we continue to be very cautious about the macro environment. Our line of sight to synergies, self-help opportunities, and a disciplined pricing approach presents a unique opportunity for CPKC. I'm pleased with what we've accomplished in our first year as a combined company, and I look forward to sharing continued progress with you as we go forward. With that, I will pass it to Nadeem.

Thank you, John, and good morning. Looking at the numbers, our reported operating ratio was 67.4%, and the core adjusted combined operating ratio came in at 64%. Earnings per share was $0.83, and core adjusted combined earnings per share was $0.93, up 3% year-over-year. As a reminder, these core adjusted earnings exclude the non-cash impact of purchase accounting for the KCS merger, primarily related to depreciation and amortization, along with interest expense and acquisition-related costs, which continue to gradually decline. Similar to what we shared last quarter, our combined operating expenses illustrate the effects of the acquisition for the first quarter, as the acquisition closed on January 1, 2022. I will speak to FX-adjusted combined operating results in these prepared remarks. Looking closely at our income statement, reported operating expense is provided on Slide 13 and combined operating expenses on Slide 14, where I will focus my comments. Excluding adjustments, company and benefits expense was $676 million. The increase was driven by wage and benefit inflation, along with a $23 million headwind from stock-based compensation, driven by the increase in share price over the course of the quarter. Stock comp amounted to a 70 basis point or $0.01 headwind on earnings. We also saw higher current service costs from our defined benefit pension plan of $4 million due to a lower discount rate at year-end 2023. Looking to the rest of 2024, we continue to expect average headcount to be roughly flat on a year-over-year basis. Fuel expense was $458 million, down 5%. This decline was primarily driven by a $28 million or 6% decline in fuel prices. Overall, net fuel price was a $61 million drag on operating income for the quarter, about an 80 basis point impact to the operating ratio. This amounted to a $0.05 headwind as well to core adjusted combined earnings during the quarter. Materials expense was down 5%. The decline in the quarter was driven primarily by timing of track and locomotive maintenance as activity schedules across the legacy CP and legacy KCS network are aligned. Equipment rents were up $12 million or 17%. The increase was due to a 2023 receivable along with higher intermodal car hire as CPKC lane shipped a longer length of haul. This increase was partially offset by higher efficiency from improved cycle times and increased network velocity. The depreciation expense was up 6%, resulting from a higher asset base. Purchased services and other was up 2% year-over-year. Higher terminal service costs, an increase in bad debt expense, and cost inflation were partially offset by cost synergy savings from combined insurance premiums and the recognition of a onetime noncompetition waiver fee payment of CAD 34 million. Moving below the line, other income was $2 million, reflecting the impact of settled foreign currency hedges and higher equity earnings from increased container volumes through the Panama Canal Railway. Other components of net periodic benefit recovery were $88 million, reflecting the lower discount rate compared to 2023 and partially offsetting the headwind to company and benefits expense. Net interest expense was $206 million or $201 million on an adjusted basis. The decline was driven by a reduced debt balance. Income tax expense was $259 million or $289 million on a core adjusted combined basis. We still expect the CPKC core adjusted effective tax rate to be approximately 25% for the year. Turning to Slide 16, we are generating strong cash flow with cash provided by operating activities of $1.015 billion in Q1. Capital investments in safety and growth remain our priority, and this quarter, we reinvested $527 million, in line with our plan to invest approximately $2.75 billion in 2024. As Mark discussed, we are making strategic investments in safety and capacity, positioning our network to continue efficiently absorbing the growth that this merger has enabled. We generated $555 million in adjusted combined free cash flow in the quarter and continue to repay debt. We still expect to reach target leverage in late 2024 or early 2025, at which point we will evaluate shareholder returns with our Board. I'm also very pleased to report that during the quarter, Moody's upgraded CPKC's credit rating outlook from stable to positive. In review of the quarter, our ton miles came in ahead of expectations communicated on the fourth quarter call despite weather challenges earlier in the year. Our operations were resilient, and we made progress on key growth investments across our network. We're also seeing the benefit of a lower inflation environment and disciplined pricing on our cost structure. This sets us up well for margin improvement as we move through the rest of the year. I'm pleased with the start to the year, and we expect to continue gaining momentum from here. With that, let me pass it over to Keith.

Thanks, guys. Let's open it up, operator, for questions.

Your first question comes from Ravi Shanker with Morgan Stanley.

All right, operator, we should go to the next question.

Mr. Chappell, your line is open.

I guess that's me. John Chappell from Apicore. Mark or John, we've seen a real acceleration of Chinese imports into New Mexico of late. The reasons vary, and we won't get into that. But as it relates to what it means to Lazaro and what it means to the new services that you've created, are you seeing any impact from those yet? Is that moving mostly on truck? And I guess, is that a real big opportunity for you as you continue to see that new trade line open up?

Thanks, John. This is John. Yes. We saw a steady growth platform at Lazaro starting in the back half of last year, and that trend has continued. I think I said we're up 40%. That was through February, but that's continued here in March and April. It's a pretty good mix of truck and rail. Currently, that volume is, at least primarily right now, more intra-Mexico than cross-border. I can tell you, we have continued to improve our product out of Lazaro. I appreciate all the efforts of the state of Michoacán and the efforts at the port between Mark and the team down there to provide a good, safe product into Mexico. I believe you'll continue to see that volume build on itself. We'll begin to see density build into our cross-border business into Texas and the Gulf market. I believe we see a good opportunity there as we move into the second half of the year and into 2025 to grow that volume.

John, I would just add that we stay pretty close to each other, me and John, and we've got capacity. We have the ability to relocate locomotives and personnel in place, so we can move whatever business we need at Lazaro while maintaining communication with each other.

Your next question comes from Brian Ossenbeck with JPMorgan.

Keith, I just wanted to get your thoughts on the latest regarding the TCRC union negotiations. There were some comments made by CN last night. Just want to get your perspective because from our standpoint, it sounds like there's quite a few moving parts in terms of changing potentially to at least offering an hourly agreement, and the unions, obviously, are, I think, pushing back on that at least for the time being. So I wanted to get your thoughts on that. And then, John, if you could just clarify what you meant about the Texas, Mexico into the Southeast pending STB approval. Is that related to the MB&R and through the Speedway?

I'll start with that, and that's exactly what it is, Brian. As far as the STB application, we fully anticipate a favorable ruling based on the facts and the competition it represents and creates, hopefully, in the very near future. I don't know if it happens next month or the following month. But when the decision comes, we're prepared and ready within a month's time of the notice to take over operations of that piece of railway and start the work in partnership with CSX to create a new Class I alternative to the Speedway it is today to complement the service that we provide to NS over the Speedway today. So I’m very excited about the future of that. The TCRC, may I say, tempered excitement or expectations. I'm a realist and an optimist. I can tell you now that we've been negotiating with the TCRC for months, and we were forced to file for conciliation. We were with the TCRC this week. I believe the positions have not changed a lot. We have two options on the table: one is a status quo deal with only one what I would call pay relative to change, not a work rule change, and the other is a progressive hourly deal. I believe that progressive hourly deal addresses what our employees want and need. They want a better quality of life. They want higher wages, which is certainly understandable. Those expectations. Our ability to provide that is found in the terms and conditions of that hourly agreement. The customer wins, the employee wins, employee retention wins — it’s really a win-win scenario, but it requires change and leaders that are willing to see the wisdom in it. At this point, that has not happened. Again, I'm optimistic, but realistic. That leads us to the weekend of May. The drop-dead time is going to be May 19 at 12:01 AM. At that point, if we don’t have an agreement, I’m hopeful we can reach one, but if we don’t, which is what we obviously want, but we have to prepare for the worst as well. If that were to occur, a strike notice or lockout notice could happen within 72 hours — so May 22 at 12:01 AM would be the earliest that a strike could actually come into existence. Unique to our network, CN faces the same deadline. It would involve our running train employees operating across the network. It’s damaging for any uncertainty to arise and for it to be prolonged; it would happen at the worst time for Canada. As I've told our customers and the government, if we are going to have a strike, the uncertainty of that in and of itself is damaging. For it to be prolonged is far worse. I'm hopeful we can avoid it, but this railroad will be prepared in the event that we can't because we will not do a bad deal. We must balance the needs of our shareholders, customers, and fellow employees, not just the TCRC we have negotiated with historically.

Your next question comes from Walter Spracklin with RBC Capital Markets.

I wanted to go back to your volume guidance. When I look at what's happening in Vancouver, obviously, a surge of containers coming into that part, you're poised to benefit significantly. John, you mentioned Mexico, where Lazaro Cardenas is up 40%. That's not a small number. It’s catching its stride. Macro trends. In your prepared remarks, you indicated Q1 came in better than expected. I think many would say we’re, perhaps from a macro perspective, in a better outlook here in April going into May than we were in January. So just curious, when you look at your low single-digit volume guidance and all the positive macro and company-specific opportunities, where do you frame that low single-digit? Is it just overly conservative? Or do you see upside to that guidance for 2024?

Walter, you made some very good observations. I would frame it as responsibly conservative. There are uncertainties out there. Certainly, we're in a good place. The network is running well, the demand is there, the synergies are coming, and new markets are being developed. However, we also have a responsibility to look ahead. We've got a potential union strike. I don't yet know what the macro is going to do in the second half. If it goes better than what we assume, then sure, we could see upside. If the strike isn’t as long or doesn't happen at all, then we have upside. If we have a normal grain harvest or a bumper crop, or if we face a drought, those are the levers we’re looking at. Once those become clearer, I could responsibly say, yes, Walter, we have potential upside. I'll close by saying we're in a good position. We've worked hard to get here. This team is prepared for all possible outcomes, and I believe that come this summer, by the end of the second quarter, we'll be better positioned to confirm the opportunities you see.

Your next question comes from Fadi Chamoun with BMO Capital Markets.

Yes. Maybe just one follow-up question on the volume. In the second quarter, we're starting off strong. I'm thinking grain potentially could wind down a little bit as we move into the quarter. Could you provide guidance on what you think the right framework for Q2 volume would be? And on the pricing side, the pricing environment is quite good, unless you're competing with trucks in some markets. What are your thoughts now with a year into this merger about the service-related pricing opportunity for CP? Will it take time to realize, or are there triggers in terms of contract changes or renewals that you can use to drive price improvement based on the service level?

Let me — Fadi, I'm going to let John provide some color on pricing. But conceptually, regarding pricing, we’re selling a valuable service, not a commodity. There’s value in it. There's a value proposition for the customer. The level of service, the capacity we have on our railroad and the way we run it — it has worth because it allows reliability for customers to succeed. That will always be our message. As for volume, we’re starting strong. We're over 9% on an RTM basis, which is really what matters most, not carloads. However, looking at the potential strike, we’re modeling again conservatively for the quarter, aiming for around 2%-3%. I've already outlined how those things might change.

Yes, Fadi, in terms of the quarter, certainly, there may be upside in May and June. As for the grain business, it has been better in the last 30 days. But as we enter the seeding period in May, we expect that to decline. I just met with all the grain companies in the last couple of weeks, and they're optimistic that if we see rains in May and early June, we might see decent push this summer. So we're watching that closely. And that could provide some upside. As for pricing, I’m super pleased with the execution and discipline we've maintained in Q1. We held steady and delivered on the top-end of our efforts from late 2023. This discipline will carry on. I had previously mentioned a number of legacy KCS agreements that hadn’t been repriced, and we’ve focused on those contracts during the first half of this year. We're making sure we're getting value for the service and capacity we provide, and I expect that to continue in Q2. If I were to call out one area where we’ve seen softness compared to others, it would be in the domestic intermodal front due to overcapacity challenges in the truck market. However, we are seeing signs of life as we approach the second half of the year.

Your next question comes from Scott Group with Wolfe Research.

Sorry about that earlier. Can you hear me?

Absolutely.

You keep referring to a potential strike. It almost feels like your guidance assumes we will have a strike. If we have a normal short-lived one, do you still feel confident about achieving double-digit earnings growth this year? And bigger picture, when I look at Q1, revenues increased by 2%, operating income is flat. Are we at the point now where the story should show up in the model, in terms of better revenue growth, meaningful margin improvements, and significant earnings growth?

I think we're at an inflection point. As this plays out, I believe you've captured that accurately.

If we have a strike that’s not extended, I’m comfortable that we can still hit our double-digit EPS guidance for the year.

Your next question comes from Tom Wadewitz with UBS.

I guess there are several things to discuss regarding growth drivers. How do you think about the new service pending the STB approval with Schneider? Are you targeting new origination points or expanding connectivity for new volume? Or is some of it shifting from Norfolk to CSX? How should we think about this opportunity and how much is new business versus shifting business?

All the noise about the agreement over the Meridian Speedway is just that — noise. At the end of the day, we’ve taken potential disputes off the table. This opens opportunities to compete in partnership with NS and CSX. This isn't about share transfer; if anything, it's nominal. It's about growth; it opens competition in new markets for CSX customers, and conversely, within NS, they are no worse off. We can uniquely partner with both railroads, enabling investments to create an alternative route. The true competition isn’t the railroads; it’s the truck traffic. That's where the growth will originate. If anyone wants to see the facts, look at the STB filings and you'll see exactly what we've conveyed.

We aren't seeing shifts, it’s focused on truck lanes, whether it's from Mexico or Texas. The market is very competitive, and I can't put a percentage on it. Overall, Texas might have a slightly larger intermodal market, but competition is fierce. Our focus and attention will be on Mexico where we can generate length of haul. We've got over 40 active projects mix that represent significant volume growth opportunities in intermodal over the next 2 to 3 years, fitting into that service model for the southeast U.S.

We are partnering with the right folks and are very excited about the partnership with Schneider, especially regarding the growth of the MMX services. That will unlock enormous opportunities when we talk about this new gateway.

Just to come back to the previous question, there's a lot of momentum at Lazaro with a 40% increase in volume. How much does this relate to the overall volume increase and the impact of potential tariffs introduced by the Mexican government to protect the Mexican economy? Additionally, regarding cargo diversion, have you seen any impacts from the recent labor issues? An update on St. John would also be appreciated.

I’m not going to speculate about the Mexican government managing Chinese imports versus domestic production. We have seen surges in business coming into Mexico, but Lazaro has capacity and is well positioned. Lazaro is recognized as an alternative choice along with our partner, Hapag-Lloyd, to provide this value to our customers. Regarding the St. John volumes, they have settled and moderated lately. We are monitoring the potential impacts of labor disruptions at the Port of Montreal, which could present opportunities for St. John as an alternative.

Taking a step back, can you discuss long-term guidance and the conversion of the $5 billion pipeline outlined at Investor Day? How much do you feel is idiosyncratic versus reliant on macro trends?

I would say we're ahead of plan in delivering across our categories. Some projects may progress faster than others. A prime example is Lazaro, which will have cross-border opportunities that become evident in late 2023 and into 2024. I remain very confident in achieving a $350 million revenue run rate while doubling that as we exit 2024. While the macro isn't supportive now, we are focused on controlling what we can, and if macro trends improve, it will benefit our overall results.

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

Thank you for joining us today and allowing us to provide an update. This company is in a strong position, poised to achieve the guidance we've laid out in our multi-year plan, and we are set to meet our current year's plans. We must navigate the potential work interruptions ahead of us and monitor the macro environment. This unique story unveils an unparalleled network that we’ve created, and we are only a year into our journey to form the most relevant rail network in North America. I couldn't be prouder to be part of this team and serve alongside these accomplished personnel who make this happen day in and day out. We will continue to work hard to meet and exceed our investor, employee, and customer commitments. That, I believe, is the recipe for success, and I am confident this team will achieve, if not surpass, those expectations.

This concludes today's conference call. You may now disconnect.