Canadian National Railway Co

TSX:CNR

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the CN First Quarter 2018 Financial Results Conference Call. I would now like to turn the meeting over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

[Paul Butcher, Vice]

Thank you, Patrick. Good afternoon, everyone, and thank you for joining us for CN's First Quarter 2018 Earnings Call.I would like to remind you about the comments already made regarding forward-looking statements.With me today is J.J. Ruest, our Interim President and Chief Executive Officer; Mike Cory, our Executive Vice President and Chief Operating Officer; and Ghislain Houle, our Executive Vice President and Chief Financial Officer. [Operator Instructions]It is now my pleasure to turn the call over to CN's Interim President and Chief Executive Officer, J.J. Ruest.

[Jean-Jacques Ruest]

Thank you, Paul, and good afternoon, everyone. And welcome to our first quarter results. You're joining us here in Toronto where CN is going to be holding our Annual Shareholders' Meeting tomorrow morning. It's a beautiful week in the north and the winter is finally over. But before we get started on the earnings call, we would like on behalf of the CN family, to take a moment to say our thoughts and prayers with all of those affected by the tragic event here in Toronto earlier this afternoon.Returning to the earning call, first off, I'm very honored to be here with my colleagues, very experienced railroaders, all of us having decades of building CN from the ground up. This is not our first test, this is not our first mission. Our service has been challenged since last fall, but I want to salute the huge personal efforts of our team of operating railroaders who have dealt with strong demand and with harsh winters.Our Q1 results reflect those challenges. We delivered basically flat revenue, and volume, as expressed in RTM, was down 4%. The March recovery was good but not quite enough to cover the volume weakness of January and February. On the cost side, a slower network, the cost of onboarding additional train crews and low network resiliency resulted in higher operating expense. Adjusted diluted EPS was down 13% for the quarter, our operating ratio came in at 67.8%, which is 600 basis points higher than last year, but March showed definite progress. Today, we also are updating our guidance. Ghislain will provide those specifics in a few minutes. Our team of railroaders is definitely not throwing the towel on the year-end results.I will now provide an update on our top line on the commercial side, followed by Mike's review of our operation and Ghislain will follow up with the financial performance and our momentum going forward in the next few quarters.The first quarter revenue was in line with the available capacity. Demand was strong -- remained strong and it looks also very broad-based for the remaining of the year. Volume as expressed in RTM was down 4%. Same-store price in the first quarter came in at 2.7% on the 2.4% that it was in the prior quarter. Core pricing from recent renewal concluded in the last 90 days, averaged about 4.8%. You will recall that same-store price is a backward-looking -- measure of price on the full book of business of the -- executed in Q1. While core pricing on recent renewal is a forward-looking measure of price trend for the -- being included in the last 90 days.The strong Canadian dollars was a negative headwind of $80 million on reported revenue, and the fuel surcharge program was a $70 million positive tailwind.We experienced significant increase in [ MP ] export containers volume in this quarter to the West Coast, which is the main driver of our mix, explaining the major gap between our carloads and our RTM. CN's ports are fluid with normal ground count and inventory and the dwell time being back at the target range. Our 2018 outlook is to operate at near-port capacity on the West Coast of Canada.Prince Rupert revenue was up double-digit and continue to grow ahead of schedule. Montreal was up double-digit as well and Vancouver was up mid-single digit. Track [ center ] revenue stayed solid. Refined petroleum product was up, mostly from the new Northwest Upgraders around Edmonton.Coal revenue grew by 13%. The winter operation limited our ability to move more Canadian export than last year. However, the outlook for coal export for 2018 is quite positive on both the Gulf Coast and the Canadian West Coast.Canadian grain volume was down 10% from last year as the prolonged extreme cold weather reduced our train length in the prairies and impacted export. In the last 7 weeks, we made quite significant progress and we are now running current with weekly car orders as placed on us by the grain companies. CN's spot is 5,700-grain hopper cars per week in March, up 40% from the run rate of February. The export season of grain will extend into the second quarter.In light of our capacity challenge, we've reduced our crude-by-rail business the last 2 quarters. Crude carload was reduced 25% versus last year and in Q1. Since our progressive replenishment of network capacity, meaning the construction work we'll be doing this summer, we will ramp up volume in the second half and we will reenter -- have reentered that market for the second half.Concluding on the commercial review, pricing trend is up at renewal and as well as for new deal, reflecting tighter supply and reflecting the value of our fresh investment capital of this year.On volume, growth will progressively return and it will be in line with our new siding and double track investment as these things become online. And this will pursue the capacity required for us to do the year-end results on RTM. I will turn it to Mike. Mike, if you want to take it away.

[Michael A. Cory, Executive VP & COO]

Thanks very much, J.J. And first, I want to thank all the railroaders of CN for their efforts in the challenging first quarter.From an operational perspective, the results were a combination of 2 things. We had low resiliency in some high-volume areas going into winter. This made maintaining fluidity very challenging. Fluidity is the most important thing. This low resiliency, coupled with extremely harsh winter conditions in those same areas, resulted in a decline to service levels and an increase in cost for our operation as evidenced in our operating metrics.After an extremely difficult February, conditions began to subside and we started to make progress. Our focus since March is centered on catching up on volume, gaining back the confidence of our customers and sequentially improving our operating metrics in line with reducing our costs. Although we have months to go before we regain our rightful standing as the operational and service leaders in the industry, our work since the harshest part of the winter has produced some very good results. We've made positive strides in reducing our port dwell at the West Coast, bringing back in line terminal dwell and the velocity for our international container business. This has allowed us to reduce the amount of intermodal fleet we require and has provided port operators the fluidity they need in order to keep the dwell in line with the customer demand. On grain, we've delivered consecutive strong weeks of grain car spotting, meeting the demand of the industry.Across each commodity business line, our team is focusing on every opportunity to achieve the same results. As an example, we more tightly control the private cars getting on the network, working with our customers to reset the size of their private fleets. As a result, our terminal dwell has improved in key locations where mainline resiliency is still at a premium.The relationship between terminal dwell and network train speed is much like a highway ingress/egress point during rush hour. The lineup to get on the highway is longer and it takes more time to enter while at the same time, the offramp and disbursement of the city streets also takes longer. During nonrush-hour periods, movement across and onto and off the highway is much faster. To improve these areas of constraint, we are adding capacity. We're building infrastructure to increase our fluidity and resiliency on both our busy highways and major terminals.In addition, we are hiring and training employees and purchasing locomotives in line with that demand. This work will deliver service and productivity improvements. Overall, the bulk of our infrastructure investments are directed to our Western Canada corridor, with some investments taking place in our Winnipeg to Chicago gateway and across our intermodal inland terminals. Let me give you some color on how some of our infrastructure additions in 2018 will help us with capacity, overall fluidity and resiliency.An example of capital we are deploying on our main line is the addition of double-track sections across the prairies. Currently, that portion of our railway is primarily a series of 12,000-foot sidings that have return grids of around 15 to 25 minutes. These return grids are between 10 and 15 miles apart. We do have some double-track sections on this portion of our network though. As we add trains to the mainline, we slowed the overall speed down any time the flow was disrupted and trains have to stop or it's a rush-hour scenario and the subdivision has a heavy flow of traffic. With the disruption or very heavy levels of traffic, crews in particular, due to their regulated hours of service, can run out of time to complete their trip. In either of these scenarios, trains can be required to stop back 5 to 6 sidings in order to meet another train or trains. This decreases the overall speed of the subdivision and increases the likelihood that they won't reach their destination where the next crew gets on. On a best-case scenario with continuous movement, additional volume results in trains traveling slower over the corridor, leading to an unproductive use of the asset.What transpires in the winter in this landscape example is far more extreme and results in crews running out of operating hours. The demand for crews then increases and eventually you run out of crews and trains sit. This also ties up the other existing mainline capacity, which is a place to meet or pass a train and makes the return grids even longer due to the wait time of the train before it can leave. What a stretch of double track does is reduce and eliminate return grids so trains can move up behind each other closer. The recovery is much faster when there is a disruption, resulting in the assets being more productive as the time they are stopped is decreased. As well, it allows for more balanced flow of traffic over the subdivision during normal periods and reduces the rush-hour effect of a highway. In the end, the commitment made to the customer is fulfilled and the productivity of the asset drives the reliability the customer needs across. Our deployment of these stretches of double track are in our Edmonton to Winnipeg corridor where volume growth and the need for resiliency is the highest in our network. From a regional performance perspective, both the Southern and Eastern regions have bounced back to normal levels with small pockets of exception. The Western region has improved from the depths of winter. High volumes are currently being moved. However, mainline capacity constraints remain present, resulting in lower productivity of our assets.Looking ahead in Q2, operating metrics will continue to be under pressure as compared to 2017. It should be flat in Q3 as we will have additional crews and more reliable locomotives but still limited additional track infrastructure.In Q4, new crews will be more experienced, new locomotives will be online and most track infrastructure will be completed, leading to positive operating metrics year-over-year. I have experienced growth and capacity constraints in the past and I know that we have the right plan to regain our rightful place as leaders of operational and service excellence.Back to you, Ghis.

[Ghislain Houle, Executive VP & CFO]

Thanks, Mike. Starting on Page 11 of the presentation, I will summarize the key financial highlights of our first quarter performance. As J.J. previously pointed out, revenues for the quarter were flat versus last year at just under $3.2 billion. There was no impact on EPS related to fuel lag on a year-over-year basis in the quarter. Operating income was slightly over $1 billion, down $194 million or 16% versus last year. Our operating ratio came in at 67.8% or 600 basis points higher than last year, driven by challenging operating conditions, including harsh winter weather and low network resiliency. Higher fuel prices accounted for 60 basis points of this increase. Also the new GAAP pension accounting reclass resulted in a 250 basis point increase to the operating ratio in the quarter.Net income stood at $741 million or $143 million lower than last year, with reported diluted earnings per share of $1 versus $1.16 in 2017, down by 14%.Excluding the impact on deferred income tax recovery from the enactment of a lower provincial income tax rate in 2017, our adjusted diluted EPS for the quarter was down 13% versus last year. The impact of foreign currency was unfavorable by $24 million on net income or $0.03 of EPS in the quarter.Turning to expenses on Page 12. Our operating expenses were up 9% versus last year at $2,164,000,000 impacted by higher fuel prices, low network resiliency and harsh winter conditions. This was mostly the -- expressed on a constant-currency basis, this represented a 12% increase. At this point, I will refer to the variances in constant currency.Labor and fringe benefit expenses were $714 million, 10% higher than last year. This was mostly the result of higher wages driven by increased training cost for new hires, partly offset by lower incentive compensation. Purchase services and material expenses were $481 million, 11% higher than last year. This was mostly the result of a higher level of activity in trucking and transload services and higher material cost.Fuel expense came in at $393 million or 20% higher than last year. Higher fuel prices accounted for $60 million of the increase, while lower volumes were $9 million favorable variances versus 2017. We delivered lower fuel productivity by 2.4% or $7 million in the quarter versus last year, mostly driven by lower network velocity.Depreciation stood at $323 million, 2% higher than last year. This was mostly a function of net asset additions, partially offset by the favorable impact of some depreciation study.Equipment rents were up 16% versus last year driven by the slower network, car hire expenses and the added locomotive leases.Finally, casualty and other costs were $140 million, which was 22% higher than last year mainly driven by an increase in the provision for legal claims and higher incident costs.Now moving to free cash flow on Page 13. Free cash flow was $322 million in the first quarter. This was $526 million lower than 2017 and mostly the result of lower net income, higher cash taxes and higher working capital, mainly driven by advance ordering of material to get a head start on infrastructure capacity investments as soon as weather permits.Finally, let me turn to our 2018 financial outlook on Page 14. The demand environment is solid in a number of different sectors, and we're optimistic that the North American economic conditions will be supported with favorable consumer confidence. We continue in our plan to hire crews, taking delivery of 60 new locomotives starting in June, and began construction on our aggressive infrastructure capacity investment plan, which is now projected to be completed in the fourth quarter of this year.With this in mind and in light of lower-than-expected RTMs in the first quarter, we are revising our 2018 financial outlook and now expect to deliver adjusted earnings per share in the range of $5.10 to $5.25 versus 2017's adjusted diluted EPS of $4.99. This compares to our previous financial outlook, which was for EPS to be in the range of $5.25 to $5.40. We continue to assume that the Canadian to U.S. dollar exchange rate will be around $0.80.This environment should translate into volume growth in terms of RTMs in the range of 2% to 4% for the full year versus 2017 compared to our previous expected volume growth of 3% to 5%. Overall pricing is trending up.On the capital front, we are committed to investing in our business to support safety, service and organic growth. Given the strong volume growth we have experienced in 2017 and to continue to support future growth opportunities with superior service, we are further increasing our capital envelope for 2018 by $200 million to approximately $3.4 billion versus a previous outlook of $3.2 billion. This increase continues to step up our capacity infrastructure investments to accommodate strong demand and restore our network fluidity and resiliency. This increased capital envelope is supported by monetization of surplus noncore assets. In April, we closed 2 transactions that generated over $150 million of cash that we will redeploy in the business to more productive use. We will continue to consider other asset sales to redeploy capital and improve asset efficiency.Furthermore, we continue to reward our shareholders with consistent dividend returns, and we're on track with our current share buyback program of approximately $2 billion, having repurchased over 9 million shares for an amount of $925 million since last October.In closing, we remain committed to our agenda of operational and service excellence with our supply chain focus, and we continue to manage the business to deliver sustainable value today and for the long term. On this note, back to you, J.J.

[Jean-Jacques Ruest]

Well, thank you, Ghislain and Mike. And operator, before I turn it back to questions, I'd like to make 2 important comments. First off, the support of the change is very strong inside CN, and the people are very energized about the plan that we have. People are buying in and we all want to get this done. Regarding the operation, we will continue to get sequentially better. We're getting better in the second quarter for the month of March, but also the third quarter will be better than the second quarter. And by the time we get to the fourth quarter, our network is going to be quite capable. Entering 2019, we're going to be very fit to compete and we will have very excellent service to offer in the marketplace. We're investing in our future, CN is coming back, back and better. So operator, Patrick, we'd like to turn it back to questions.

[Operator]

[Operator Instructions] The first question is from Brian Ossenbeck from JPMorgan.

[Brian Patrick Ossenbeck, Senior Equity Analyst]

If I can just, I guess, start with the CapEx. It's up a bit from the last outlook. Could you tell us if anything from 2019 was pulled forward into '18 if I'm reading the release and the commentary right? It seems like it was additional equipment in spending that you're making for this year? So maybe you can give us a sense of what changed since the initial update? And also why it seems like it's taking a bit longer than expected for the construction period this year?

[Ghislain Houle, Executive VP & CFO]

Yes. Brian, thanks for the question. This is Ghislain. Yes, we're increasing our capital envelope by $200 million. The $200 million is an increase in capacity investments. So again some of this will be more infrastructure that Mike is looking for in the West. So previously, if you remember, we were targeting $250 million of infrastructure investments in the West, now that's going to be up to $400 million. And then, the additional $500 million will be -- part of it will be terminal. Some of it is grading, some of it is track and some of our intermodal terminals, that accounts for $100 million. And then $400 million is locomotive, that's the same locomotives as we had, plus we're adding some intermodal equipment. So all in all, it will be $900 million of the capacity investments. To your second question, again, we were targeting, as some of you know, and Brian, you probably -- we told you that we were targeting to have most of our infrastructure investments done by the end of September. Again, we have more capacity that we want to put in the ground, number one. And number two, we all have houses and sometimes when we build, we have a target to get it done in a month and then it takes a little longer. Again, this is outside work. This is out there in the elements and so on. And we feel that essentially, most of our capacity investments will be more in the ground in the fourth quarter versus a very, very aggressive schedule of the end of Q2 before. So when you consider all of this, including the fact that the volumes in the first quarter were a little lower than what we expected, I think that's the reason why we increased -- we reduced our guidance on EPS for the year.

[Operator]

The next question is from Cherilyn Radbourne from TD Securities.

[Cherilyn Radbourne, Analyst]

Wondering if you can sort of elaborate on the tenor of your discussions with customers. And I guess what I'm driving at there is just trying to get an idea of how much damage was done since the fall? And whether you're starting to get recognition for these sequential improvements you're making?

[Jean-Jacques Ruest]

Well, thank you, Cherilyn, this is J.J. So yes, there's been a lot of discussion with customers since last fall. Regarding where we make -- made the most progress in some of the service recovery, one of the areas was on the grain. As I mentioned in my comments, the last 2 weeks, including this week, this week would be the third week, we are meeting all of the orders being placed on us. It doesn't mean that there's no backlog. There is still a backlog of grain to be moved in the second quarter. But right now, for the last 20 days, we are 15, 20 days we are in cadence with the supply chain with the grain companies with their program. And in terms of the port business, which was another area of concern, all of our 4 terminals that we serve in the West Coast, the ground count is quite low. And the dwell time of the containers after ship discharge is running below 3 days. It has been below running 3 days, average throughout for the last 2 or 3 weeks. So that situation is resolved. We've also resolved the situation in our inland terminal where we have congestion from time to time regarding the truck drivers coming in and out. Most of our dwell -- most of our [ carload time ] at our terminals are now really within the KPI, service KPI of 45 minutes from gate in to 45 minutes to gate out. Where we still have backlog to deal with, in fairness, it's mostly in Western Canada and it's mostly on the world of carload. And lumber is one area, for example, where there's still quite a bit of lumber product in Western Canada that's trying to find its way into the U.S. market. We are going to be getting more centerbeam this year to address that more long term. We're leasing 150 in the lease market, and we will be -- we actually have sanction from the board to add 350 centerbeam that will be constructed sometime this fall. So I think the sentiment of the customer is just getting better definitely. They are seeing the impact and also seeing the goodwill and also seeing definitely the whole capital program that Mike was talking about this year. What the track -- the section of double track and the siding that we will install this summer from basically this month to the end of October would have a huge impact in kind of service we can offer to the trade and those who export come late this year and early next year. So still works -- more work to do, but by the time we get to the end of the year, things will look pretty strong and pretty solid.

[Operator]

The next question is from Brandon Oglenski from Barclays.

[Brandon Robert Oglenski, Vice President and Senior Equity Analyst]

So J.J., I just wanted to ask if we go back to 2014, I think the network was running at similar levels of activity and the CapEx profile of the business was obviously quite a bit lower. So can you just help, in Mike's comments around what's been happening were very helpful. But can you just compare and contrast to the challenges you're facing today versus maybe where the network was a few years ago?

[Jean-Jacques Ruest]

Yes. So I'll -- Mike will help me with that. But you when look at 2014 versus today, you have to take the total business on the network. The first thing you should look at is the different mix, right? The business in the East is not as strong as it was. And some of that workload has been shifting to the West, plus we have had total growth. But Mike can actually expand on today versus 2014.

[Michael A. Cory, Executive VP & COO]

Yes. Brandon, we're seeing probably upwards of 10-plus percent volume growth versus '14 in the pinch points of the Western corridor. The -- and I'm just trying to think of the first part of your question how can I explain it best. To J.J.'s point, there's a mix difference. But we're not -- we did not really spend, after '15, a lot of capital in that corridor. And so that's why after a winter like this, it's just a matter of catch-up. And we don't have the resiliency when things do fail out there to catch up as fast as we want. So it's a different railroad, certainly, more volume and the mix, the higher amount of intermodal, which demands more track capacity, to be honest with you, priority has really affected us.

[Jean-Jacques Ruest]

So much more intermodal from Rupert, from Vancouver. Much more Canadian coal, who wants to go more mostly to Rupert. Our grain business has been steadily increasing because of the size of the crop every year. So our network has become a little more of a Western network and therefore, those ton-miles from the East out of the West, they need sidings, they need sections of double track. And we're also investing, just to meet the demand of this year, the whole capital program that we have is also to look for 2019. And I think -- I'm not sure if I said that in my note, but we already did a very detailed granular forecast for 2019, almost like a budget level. And we have very high visibility where that business growth will come in. We believe it will be very strong, and it will be especially strong in the West where we are adding these sections of double track and siding. So it's partly to meet the demand of today, but also the demand of 2019, and we're very optimistic about 2019. I hope this helps.

[Operator]

The next question is from Fadi Chamoun from BMO Capital Markets.

[Fadi Chamoun, Managing Director and Analyst]

CN spent many years building trust relationship with customers. And I'm just wondering, just kind of when you look back at this operational issue that kind of you've been going through, does it change how you think about capacity overall for the rail not to -- to kind of avoid these kind of issues in the future? Do you build more in order to allow for your kind of unexpected volume or volumes [indiscernible]? The other related question is, are you able to build kind of all the capacity you need? Do you think you need given volume outlook this year? Or should we think that there's going to be a little bit of overflow into 2019?

[Ghislain Houle, Executive VP & CFO]

So I can start, Fadi, with...

[Jean-Jacques Ruest]

We're all going to get in...

[Ghislain Houle, Executive VP & CFO]

And we're all going to get on this as a team. In terms of what we've learned, we've learned some lessons. We're humble about this. And we've learned some lessons from 2017 for sure. And one of the lessons I've learned from a financial standpoint is that in some key corridors, for example, where you're talking Edmonton and Winnipeg, all of our commodities in the business go through that corridor. We need to build ourselves a little bit of buffer because frankly, and I always look at it, at the cost of being wrong, if we've overinvested in that corridor, then at the end of the day and we're wrong, then it's the time value of money. Now we don't like to invest too early. But if we believe -- and we truly believe that we will grow this business, then we will need that infrastructure at one point in time. If on the other hand, we manage these key corridors too tight, which typically railroads have a tendency to do and we've done a little bit in the past, and we underinvest and we're wrong, then you have what we saw in the first quarter of this year where you've got a lot of unhappy customers, you've got a lot of pressure being made to Ottawa and the like. So one of the things that we have learned out of this is that, and then I'll let Mike and J.J. jump in, from a financial standpoint and some of the key corridors we need to build a little bit of buffer, like we -- we can't build a church for Easter Sunday, but certainly, we need to build ourselves a little bit of a buffer so that we don't get -- or we don't get into that type of situation going forward. Mike or J.J., you want to add anything?

[Michael A. Cory, Executive VP & COO]

If I can jump in before J.J. First of all, we've got a responsibility to our customers that are growing their markets through us to be there before it happens, that's number one. And so I can tell you from an operating perspective, the alignment between our team, the marketing and sales team and the finance team and J.J. said it earlier, on having the granularity of the volume, that line of sight being really clear is really what's key for us going forward. So we're not out of the woods on that yet. We've got a lot of work to do for not just that portion of the forecast of the volume, but it's the modeling of capacity. And if you look at the type of growth, the mix of growth that we've had and the amount, there is not really -- I don't if you could pick another railway, Fadi, that's like this. So we're going to develop this ourselves and that's really what we're working on so that we have the capacity, the service delivery in place, in line with what the customer needs and we do this very productively. So that's a big part from my end. J.J.?

[Jean-Jacques Ruest]

Yes. So we're -- being a company whose organic-growth oriented, we will -- and we will invest in our business. And we need to build back the resiliency that we used to have back in '15, '16, but lost in '17. Because in order to be able to grow organically and provide the level of service that actually attracted this kind of growth in the CN network, we have to have the capacity to respond to it at all time or most of the time. I mean, one can be off on Easter Sunday because Easter Sunday Church is one day out of 365, but we can't be off for 3 months in a row. So we need to have the capacity, enough capacity that's actually in line with what we said we would do, which is that we will outpace the economy and we will have organic growth. In order to do that, you have to have a service that's above the industry average.

[Fadi Chamoun, Managing Director and Analyst]

Okay, that's great. And the part about are you able to build the capacity you need this year or is it going to kind of overflow into 2019 as well?

[Ghislain Houle, Executive VP & CFO]

No, I think we've never been as close -- tied to the hip between the finance team, the transportation team and the engineering team. I think we have a very detailed plan of how we're going to build this infrastructure before winter hits. And I think we're monitoring the build actually on a weekly basis. And we're comfortable that we'll be able to build what we have in the plan. And that will really help us, as J.J. mentioned in the fourth quarter, but also give us tons of momentum to enter into '19.

[Michael A. Cory, Executive VP & COO]

Make no mistakes, Fadi, as we grow, like we suspect, we will be continuing to build capacity in the next year.

[Operator]

The next question is from Jason Seidl from Cowen.

[Jason H. Seidl, Managing Director and Senior Research Analyst]

So I wanted to focus a little bit on sort of just the pricing dynamics and compare and contrast to the current environment that you're in for service. [indiscernible]

[Jean-Jacques Ruest]

Yes, for the pricing environment, I mean, the pricing environment is always typically a factor of 2 things. One is the factor of supply and demand. Is the supply of our services tighter than the demand. And if that is the case, transportation service capacity right now is more limited in total than it was a year or 2 back. And then two, the quality of the service. So rebuilding the capital plan that we're putting is not only to be able to offer organic growth, the one that we're chasing at CN but also to provide a service that allows us to grow and grow at good pricing. But in the meantime, really where most of the discussions are taking place in some of the pricing is basically the basic of supply and demand like in any other market. And the supply of transportation services is tight, and you'll see that reflected in our pricing performance, either the same-store price or the core pricing going forward. And you see that especially in some segments which are maybe more volatile than others, crude by rail, frac sand and the likes where you have the biggest spike in volume up and down. And I think it's only fair that those segments where the volume has been quite volatile the last few years, that this business is repriced or priced in a way that reflects that environment. But we're very bullish going forward. Going back to our customers, including when we discuss price, I mean, our relationship with customers, by and large, is very strong, they understand what we went through. We're humble and honest about the fact that we've all learned. We are all responsible and accountable around this table here about what we did last year and didn't do. I think in hindsight, we should have probably triggered a lot of this action plan sometime in April or June of last year. It would have given us the time to execute. But having said that, we're very energized and we each have a sense of urgency to get it done soon as possible. In some segments, we're really back. In some of the segments, we need more time. On the grain for example, today, the board has approved, contingent on some conditions, that we can rebuild our Canadian grain fleet and place orders in 2019 and '20 to refurb -- to getting to 1,000 new build -- new-generation hopper cars, something that would really help us rebuild our reputation, but also create a good position for CN in the Canadian grain trade. This is all contingent on Bill C-49 to go through the House the way it was originally written. But all these things really are very tangible actions. I mean when you hire as many people as CN is hiring and you deploy the capital we're having, I mean this speaks loudly with our customers, and they see that it's more than just words that we are going to provide a better service. They actually see the capital, the time and the effort that we're putting behind it and also the progress already in the last 8 weeks. So the pricing discussion is -- price trend is up and will probably be up most of this year if not all of this year.

[Operator]

The next question is from Steve Hansen from Raymond James.

[Steven P. Hansen, Senior Vice President]

Just a quick one from me on the labor side. I don't know how much you can tell us just yet, but given the turmoil that we've seen at one of your primary competitors of late, I was hoping you can give us an update on your recent agreements with the TCRC. I believe you signed a tentative agreement back in March, but I don't believe it's been ratified just yet. So any update on that process would be appreciated and whether or not you think it will ultimately be ratified?

[Jean-Jacques Ruest]

So Mike will take that one.

[Michael A. Cory, Executive VP & COO]

Yes, certainly if you will. We have a tentative labor agreement with our locomotive engineers. It's being voted on right now, we expect to get the results, I believe, around, say, the end of May. And really we've got a very constructive labor environment that we're working within, so no issues here.

[Jean-Jacques Ruest]

Yes, that should be in good hands.

[Operator]

The next question is from Chris Wetherbee from Citigroup.

[Christian F. Wetherbee, Vice President]

I wanted to touch a little bit on the guidance if I could. Just wanted to get a sense of maybe the cadence of the improvement. So you have a pretty challenging comp in the second quarter and then maybe it sort of tails off as the year progresses. But just wanted to get a sense of maybe how quickly you can sort of right the ship from an earnings perspective? It would seem a decent amount of growth is embedded here. Maybe you can help us with some of the puts and takes to better understand it.

[Ghislain Houle, Executive VP & CFO]

Yes. Listen, thanks, Chris. We don't provide quarterly guidance, as you know. But what we've said and I'll reiterate a little bit what Mike has mentioned. So as you know our operating metrics are -- have been challenged, and everybody knew that for the first quarter. But we've seen some sequential improvement. We are going to continue to see some sequential improvement in the second quarter. We still believe on a year-over-year basis that the operating metrics are still going to be challenged. However, I think when you look -- as the new locomotives come in and we're hiring new people, again, coming in as train conductors, in the third quarter, should be flattish give or take. And then the operating metrics should be humming and even be better in the fourth quarter. And that will translate into -- our costs are going to be again back online because as you see -- and this is what happens when the network is a bit of a sham the way we have it today. Look at the first quarter results, our revenues are about flat, but our expenses are up by 9%, which means that because everything is slower and because we're catching up on hiring crews, then our costs are just out of whack. So as the operating metrics come back online towards the second half of the year, then these costs will come back in line, and you'll see operating ratio and EPS reflect that. And we're very optimistic. But again we've said it before and I'll reiterate, we need that track. We need that third lane of the highway. And yes, we are seeing sequential improvement, but it's limited because, again, we need that infrastructure. And that infrastructure will come online, mostly at the end of Q3 and mostly -- [ might more ] in Q4. So we need that so we'll show sequential improvement. But I think, the second half, including Q4, will be, in our view, quite strong.

[Jean-Jacques Ruest]

Yes. So as these sections of double track come in service, unit costs improve, and obviously, we're going to be in a better position to do revenue ton-miles and GTM and revenue will consequently -- will go up as well. So we'll have the 2 levers at that time.

[Operator]

The next question is from Walter Spracklin from RBC.

[Walter Noel Spracklin, Analyst]

Just coming back to pricing, J.J., 4.8% on renewals is very significant. And I'm just curious how -- if you're seeing that in certain lines? And is that lifting the average? Or is perhaps the tighter trucking capacity having an impact on intermodal? And if you could speak, I know you've touched on it a little bit already, but the customer conversations after a fairly challenging quarter, frankly, I was pretty surprised to see you get that level of pricing. So just curious to hear how that was achieved and how sustainable you see it in the next, call it, 6 to 12 months?

[Jean-Jacques Ruest]

So the pricing discussion is an across-the-board discussion. Any situation today where somebody would insist and -- there'd be no reason why they would be wrong, but they insist that they had a better offer than somebody else than from us, we will not reduce any price on any condition. And so we don't have any drainage in our price calculation or price going forward. And if there is, we would rather lose a little business than do otherwise. In terms of where the pricing comes in, it comes from different pockets, some pockets stronger than others. The stronger pockets are those who are already really trying to ramp up their volume -- frac sand, crude by rail and the likes stores where -- those where the value of the commodity is short term and midterm is such that they would rather pay a market price to be able to move more volume as opposed to be very cost focused on the unit and then at that point also sacrifice very profitable sales where their market is doing well. And then in the case of intermodal, some of these contracts are long term. Some of these contracts are fairly short term. In the world of domestic intermodal, that's more of a short term world. That's also the world where what's happening in the trucking environment and some of the capacity's pricing is quite relevant. And it's also in the case of the world of domestic intermodal, the mandate that we have for our team is very simple. One is we want to fix the service to make it as strong as can be and to make it a leading service if it's not back at this point. So number one is service. Number two is to get pricing -- good pricing for the capacity that we have. And number three, we're not adding capacity before the next few months or the next few quarters before we have, a, fixed the service and get the value pricing that we need to have. And then when we have these things, then we'll talk about whether or not we run more trains for domestic intermodal. So when you put these things into order -- and remember again, today, we only have so much capacity to offer in Q2 and Q3. So we take that into account in how we roll out these different programs. This is how we add up to the 4.8% core pricing, for example, that we've had in the last 9 days.

[Operator]

The next question is from Scott Group from Wolfe Research.

[Scott H. Group, MD & Senior Transportation Analyst]

So when you said the $150 million of asset sales, what's the gain there? And can you say if that's included in the guidance or not? And then just bigger picture maybe for you, J.J., so 1 quarter only, but your first quarter operating ratio I think is going to be second worst of -- in the industry. So as you think about the long term under your watch at CN, how important is it for CN to get back to having the best operating ratio in the industry? Or is that potentially less of a focus for you and more of the focus is on the resiliency of the network and things like that? Or maybe they're not mutually exclusive?

[Ghislain Houle, Executive VP & CFO]

Hi, Scott. This is -- I can take the first part of the question, and then I can let J.J. or Mike take your second part. So on the asset sale, this was a Q2 transaction. So again -- and we got $150 million cash. From a gain standpoint, again these are one-timers. I mean, we're trying to find -- and always did, and we -- these opportunities of monetization of surplus assets. But again, these are -- this is onetime other income, and that will not -- that's not part of our guidance. That's not part of our adjusted EPS and our $5.10 to $5.25 guidance. That's not part of it.

[Jean-Jacques Ruest]

Yes. Regarding the question of OR, as you know, the Canadian National railroad have adjustment this year in terms of the pension. In the case of CN, it's basically a permanent step-change of 2.5 points of OR. So you've got to take that into account. The way the accounting is done up for pension is -- meaning we will have a higher OR than historically. In our case, we're talking 2.5 -- 250% -- 250 basis points. Regarding -- I mean, the model we have, if we are continuing to be able to grow it at the -- more than the economy and more than the other railroads, we need to deploy capital, and also we need to hire people. So as we hire people, namely train crews, we will always have kind of an ongoing basis, as long as we grow very strongly in number of employees who are so-called nonproductive. They're in training. They're on the payroll. And the first 6 months of their -- of being on the payroll, they don't move GTM. They don't produce revenue. But they are part of a unit cost. In the case of 2018, as we replenish -- because we ended up last year being short, and we intend to finish the year to be fully ready for the next winter. So we're adding more people right now than even the growth because we'll be catching up, and also we want to be sure that the winter of 2019 is a solid winter. So we have more unproductive people on the payroll this year than usually. These will be very strong solid conductors, but this is kind of another onetime adjustment. Regarding the future of CN in term of organic growth, we believe that the model of OR may not be really -- I think we discussed this a number of times, the way to measure success for our business. Return on investment is a very strong way to do that. And having an OR that may not be the lowest of the industry I think will still give us the type of EPS growth that kind of fits our network. So there's a tradeoff. We're at sort of at the crossroads to -- whether or not it is wise for us to try to be the lowest operating ratio of the industry. Based on our last year's experience, I would say that it has definitely an impact on how much growth you can offer.

[Ghislain Houle, Executive VP & CFO]

And if I can add, Scott, to J.J.'s point, we've said that publicly many, many times, we're not enamored at CN with the OR. The OR is kind of a result of what we do. I think we'd rather be -- and we've said that before, we'd rather be a $20 billion, 62%, 63% OR than a $13 billion at 57%. I mean, just do the math. So this business we're bringing in is profitable, we need the investments and the track infrastructure to bring in at low incremental cost, but we're not enamored. We want to grow, and we're very pleased about the organic growth and the prospects we have in front of us. We have a good, solid pipeline of growth opportunities that J.J. highlighted last year at the Investor Day between $1.5 billion to $2.2 billion. We need the investments to accommodate that growth. Our first call on cash is toward the business. We're pleased about that. We're pleased about the organic growth. And we're not enamored by the -- by having the lowest OR in the industry.

[Michael A. Cory, Executive VP & COO]

We just want to be the most productive, best serving business that's out there. That's what it's about.

[Scott H. Group, MD & Senior Transportation Analyst]

That's very helpful. If I can just ask one more, if that's possible. So I you look at the guidance for the year, it looks like, by the fourth quarter you're going to be -- you're expecting sort of high single-digit RTM growth. Do you talk -- do you have a -- built already a budget for '19? Do you think that's a sustainable sort of growth rate in '19?

[Jean-Jacques Ruest]

Well, since it's your second question, I will answer it shortly. The fourth quarter result will be solid, and it's too early for us to provide specific guidance for 2019.

[Operator]

The next question is from Turan Quettawala from Scotiabank.

[Turan Quettawala]

I guess, if I may, I just want to get back to the CapEx question a little bit. I wondered, Ghislain, if you can provide any color on how you think 2019 CapEx will be? Obviously, there's a significant uptick here in '18, but any color you can provide on '19 would be helpful. And also, I guess, related to that, obviously you're still continuing with the buyback here. Just any color you can give on leverage expectations here at the end of 2018 would be helpful as well.

[Ghislain Houle, Executive VP & CFO]

Yes, no problem. Thanks, Turan, for the question. Yes, exactly, I think if you look at CapEx again early, it is to provide guidance for CapEx in '19, but what we've said was to expect that the CapEx for the next few years will be north of 20%. I mean, I think whether -- I would tell you between 20% and 25%. And again as I said before, first use of cash is for the business, and we have these growth opportunities that are in front of us, but we need the infrastructure. So we will deploy that capital towards the business and bring that organic growth and bring some good, solid EPS growth going forward. In terms of leverage, I think again, we are not changing from our strategy and from our financial policy. We do value a strong balance sheet. And we saw the value of this when actually we hit the recession in 2009, so we will continue to have a strong balance sheet in '19. You can expect that. And again, in terms of share buyback, we see this as a residual. So the first thing is -- first use of cash is toward the business. Second is to keep a strong balance sheet and agree on what our leverage should be, and then we think first of dividend. And then as the residual, if now we need a share buyback to get to that targeted leverage, then that's what we look for. So you can expect that this will be -- this is that way we see things. And of course, as we get closer to '19, then we'll provide more specific guidance around these parameters.

[Operator]

The next question is from David Vernon from Bernstein.

[David Scott Vernon, Senior Analyst]

So I just wanted to try to reconcile the acceleration in core price and the improving metrics you guys are seeing with the guide for the year. Is there a way to break down how much of the cost growth is embedded in the guide that's due to maybe just lower productivity as you're building out the program versus inflation, the cost to secure and the resources that you need to actually complete the plan? I'm trying to get a sense for how much productivity is underwhelming in the year because of the construction work versus things like higher labor cost.

[Ghislain Houle, Executive VP & CFO]

Let me bring it -- talk a little bit it, and then -- David, and then I can get Mike. The -- of course, when we do our usual basic CapEx plan and when you do that, obviously, you need a work block for the entire time that you're going to maintain your main line. So that is one thing that's baked in into our assumptions. When -- on our capacity investments, the beauty is you don't need a full work block because, actually, the people are working beside the main line so the train can go through. And the engineering forces make sure that they get safely out of the way, the train goes through. And you need a work block actually when you put the turn out and you connect either the siding or the double track to the main line, that's what you need the work block for. But it's not as extensive work block as when you do your basic CapEx. So I think this is -- but we understand. I mean, there's a lot of volume in front of us. This is a very extensive capital plan. This is why I said in some of my remarks and I think Mike alluded to it as well, that we are very jointly at the hip with engineering and transportation. Transportation and engineering are looking at this on a daily basis to make sure that the work blocks are there, make sure that we don't delay trains, and make sure that we're going to build this infrastructure at the lowest cost possible. Mike, anything you want to add?

[Michael A. Cory, Executive VP & COO]

No, I think you hit it.

[Jean-Jacques Ruest]

Yes. On the price, maybe I can -- just to help you get some color, so the same-store price in Q1 was 2.7%. It was 2.4% the prior quarter. So there's a bit of a momentum going on that front. And the relevance to that 2.7%, it's on the full book of business. It's on the full book of business, whereby, when we talk about core pricing, we're not talking about core pricing of 4.8% on the full book of business, only on the business that was renewed in the last 40 days. So it's obviously -- it's on the smaller impact than it is when you talk about historical. But whatever -- whichever way you cut it out, I mean, we see slow, progressive momentum on pricing, whichever way you look at it. And when we issue the result, the one that matters the most is same-store price. Same-store price is the one which is cited on the quarterly result for the prior quarter. That pricing environment is favorable to those who have some capacity, and obviously, capacity at CN is tight. And because capacity today has more value -- is more valuable than it was 2 years ago. So I think that's just the basic of any marketplace where supply demands shift a little more to those who have the capacity that eventually the pricing power gets a little better.

[David Scott Vernon, Senior Analyst]

Right. I appreciate that. And maybe just as a quick follow-up, if I can slide one in here. Is there any update on the timing for the board to make a decision on the CEO search?

[Jean-Jacques Ruest]

No. The board, I mean, the search, the whole exercise has started, obviously, and they don't have any specific timing for an announcement of any sort. So no timing.

[Operator]

The next question is from Ravi Shanker from Morgan Stanley.

[Ravi Shanker, Executive Director]

If I can just follow up on 2019. You said you weren't going to give detailed guidance on '19, which I understand, but also that you have a detailed operating plan. So I'm just trying to get a sense of all this time, money and effort that's going into the network right now, what are you building at CN? Is it a railroad that can grow at high single-digit RTMs and then when you put pricing on top of that, can deliver low double-digit EPS growth going forward? Or what's CN going to look like from 2019 onwards?

[Michael A. Cory, Executive VP & COO]

Ravi, it's Mike. Let me just start it off and I'll...

[Ghislain Houle, Executive VP & CFO]

Go ahead, buddy.

[Michael A. Cory, Executive VP & COO]

[indiscernible] Look, from an operating perspective, we're building a 3-year plan just based on understanding what capacity we have. And then it's a matter of puts and takes, whether we do see something or not, but to get ourselves in position, get our line of sight so we know what we need to do as the volumes come. And I'll let J.J. and Ghislain speak about the future, but we're armed and ready. Three years out, we want to take it out even further. That's just understanding your network and our view on growth, the strength of our growth, our organic growth leads us to have to do that to be successful.

[Jean-Jacques Ruest]

Yes. And if I may add, the network we're building, which is in line with what we view is the potential of the marketplace, and that's why we're focused to build the network -- strong network from the Canadian and West Coast, from Vancouver and Rupert all the way to Chicago, and then from Chicago in the prairies all the way back to Vancouver and to Rupert. So -- because this is where we see -- with strong visibility, that there's a strong demand for the product that we have, that we have a geographic position where there's a lot of physical activities that would be conducive to add much more capacity. So West Coast to Chicago, Chicago prairies back to the West Coast, that's where the future is for CN in 2019 and for many years after that, too.

[Ravi Shanker, Executive Director]

If I can quickly follow-up on that. I mean -- and also in response to a previous question, you said that the difference between now and '14 is that the growth is in the West. Does that mean you have opportunity to take capacity out of the East, which leads to prolonged potential for real estate gains or kind of normalize the network in the East versus the West?

[Jean-Jacques Ruest]

The capacity we have in the East I would say is more something that we would like to leverage from time to time when there is a business opportunity. But at this point, we're not necessarily planning to take our track away. But as the sales that Ghislain was talking about earlier was mostly Eastern sales, but these weren't necessarily -- they weren't rail capacity. No, they weren't assets that were producing rail EPS. They were assets that were actually available asset, but they weren't producing EPS growth. So by selling them and redeploying the capital West is one of the ways that we kind of move our book of assets to the West, namely the $150 million that were sold in April, one can argue all of that has been -- basically is going to be redeployed in Western Canada in the next 6 months to these sidings and double track section.

[Michael A. Cory, Executive VP & COO]

And Ravi, it's Mike. We have a very well-run, healthy franchise in Eastern Canada that is built for growth also. So we're not doing that.

[Operator]

The next question is from Benoit Poirier from Desjardins Capital Markets.

[Benoit Poirier]

Could you provide an update on the crude by rail kind of the discussion you are having these days, how many carloads you handle in Q1? And also kind of additional capacity you're willing to deploy by the end of the year and also in 2019?

[Jean-Jacques Ruest]

Okay. So very quickly on crude by rail, in the last 6 months, we have actually curtailed that business. We no longer really do any spot business. We have signed contract business that will start up a little bit of it second quarter but most of it in the third and fourth quarter and in 2019. How much capacity we're willing to take? These I would call this at this point, confidential. We don't really want to share exactly how much more capacity we're willing to deploy. But obviously, that has a link back to our capital program. Which is one of the reasons why we feel comfortable that our capital program will have return on investment because there is ways to actually tie some of these investments with very specific take-or-pay volume in some segments. I think at this point, that's all we would see as it relate to crude by rail, Benoit.

[Operator]

The next question is from Ken Hoexter from Bank of America Merrill Lynch.

[Kenneth Scott Hoexter, Managing Director and Co]

J.J., certainly, a lot on your shoulders and good luck as you work through this and through the buildout. And I appreciate the thoughts on the operating ratio there. My question, Mike, would be any STB letters? One of the largest rails talked about the difficulty of hiring engineers, conductors even at the point of instituting some signing retention bonuses, all of which you need plus capital employees. Are you seeing, given the scale with which you want to add on and the pace, are you seeing any difficulty in keeping to that pace as you plan those CapEx programs and the hiring that, J.J., you talked about getting ahead of the curve?

[Michael A. Cory, Executive VP & COO]

Okay. Thanks, Ken. Like any massive hiring program, there's always going to be a little difficult situations. For us, it's in smaller remote areas. We have the luxury though, with our collective agreements, to use other people from other locations up in those places that are hard to find. But it speaks louder to, again, we want to grow in the future. So we're very focused on our retention and looking at it differently than we have in the past. So right now, I'm not concerned with getting the people. Our HR department has done a wonderful job to bring the people on that we need. Again, I go back to making sure that they're also included in this line of sight, and we have far enough advanced warning to make those decisions on finding ways to make sure we have the people. People want to work. We'll always have difficultly in the smaller places, but this is a strategy that we're continuing to develop as we go because we believe in our growth.

[Operator]

The next question is from Tom Wadewitz from UBS.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

I think, Ghislain, you had some comments, maybe the broader theme just in terms of kind of, I guess, reflections on some of the constraints and maybe lessons learned. So wondering if you could comment on how you look at the volume versus price equation going forward? You had a lot of success in growing volume over time, but then maybe you grew -- one could argue that you grew a bit too fast. And then, you could say, well, maybe there could have been more, I guess, a focus on raising price versus the volume. Is the experience -- and as you think about lessons learned, is there a difference in the way you look at volume versus price going forward? Or would you say, "Hey, we just need to plan a little bit better on capacity," and no change in that volume versus price equation?

[Ghislain Houle, Executive VP & CFO]

Yes. I think -- thanks, Tom, I can open up and then, J.J., you can obviously jump in. But I think we haven't changed our views about price. I mean, we're trying to go out there and get the best price as we can. Remember, '17, yes, we were a little bit caught by surprise. I mean remember, we were coming out of '16 where volumes were down 5%. So '17 came in and if you remember, energy markets hit the trough, mainly frac sand and crude in the second half of '16. And in December, who would have thought that the frac sand at the year-to-date at the end of the third quarter in '17 would be up 135%? So we were caught a little bit by surprise related to frac sand, which is a highly volatile commodity. Some of it -- some of that growth came a little bit, and we've been a bit of a victim of our success. If you look at Rupert, it's a very good example. I mean, Rupert expanded its terminal, as you know, by 60%. And even last year at the Investor Day, we were hoping to get 80% of that expanded capacity by 2020, and we're almost literally there as we speak. So -- and Rupert will stay with us for the next 30 years, 40 years. So listen, we were caught a little bit by surprise. And in the railroad industry, the problem is, if you're -- if now you lack infrastructure, it's nothing you can fix quickly because you've got to build it, and it takes time to build it. This is why I said that one of the key lessons learned is that we need to be ahead of the game. We need to be ahead of the investment. And we need -- in some of our corridors that are key corridors, build ourselves a little bit of buffer because I will resay it is the cost of slightly overinvesting in some of the key corridors is lower mainly time value of money because I will need this infrastructure versus underinvesting. So we've learned. And -- but the good news is we have good pipelines, solid growth opportunities in front of us. J.J. and the team are getting as much price as we can. We have not changed our views on price. And I can remember vividly that, years ago, 2010, people were asking us, how are you going to grow? And now one of the lessons learned, I guess, from '17 as well is we've convinced ourselves that we can organically grow. And that's a good news. That should be a good news for investors that we have that growth story. And -- but we need to invest to accommodate the growth at low incremental costs, and that's what we're going to do.

[Jean-Jacques Ruest]

Yes. It's a fair comment that price has to be a part of the discussion, especially as we deploy very fresh and large qualities of new capital. So the commercial team at CN got that message loud and clear too, that fresh new capital does require a solid return and, therefore, price has to be centered in those discussions regardless of the fact that right now our services are challenged. This will get fixed -- has been fixed in some segments, will be fixed in other segments in the weeks and months to come. But capacity today, especially capacity coming from fresh new dollars of capital investment, has a higher value than it had 12, 18, 24 months. So I think that's -- so price is important, obviously.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

So do you think that reflects any change in mindset going forward or not really?

[Jean-Jacques Ruest]

It reflects, for example, how we approach crude now versus 3 years ago. It affects all the dialogue we have in the frac sand industry, who is much more volume-focused themselves than necessarily -- they would rather move more volume than debate back and forth the last fraction of the unit price because it has more value for them to move more product than the market wants to move it as opposed to debate back and forth the freight rate of each railcar. And I think as my comment mentioned, on domestic intermodal, we will definitely work very hard to reestablish a very strong product offering. But at the same time, we want more money for the existing capacity that we have today. And before we deploy a whole lot more capacity on the domestic side. We want to get a better value for what we have already.

[Operator]

The next question is from Kevin Chiang from CIBC.

[Kevin Chiang]

Just a quick one from me. A lot of comments around potential focus on ROI, when you look at your longer-term growth and you did lay out a pretty positive volume growth outlook at your Investor Day. I'm just wondering, do you think a profile, though, incrementally is different than -- the volume ROIC profile is different looking going forward than what you had in the past? When you look at the last 3 years, you'll have spent significant amount of capital, seen a lot of volume growth but effectively flattish operating income over, let's say, a 2016 to 2018 period. Do you see a step-function change in the ROIC profile of the volumes over the next 3 to 5 years versus, say, the last 3 to 5 years?

[Ghislain Houle, Executive VP & CFO]

No, we don't. I mean, if you look at overall ROIC, we're hovering between 15% and 16%. And we've said that when we look at -- when we look at -- now you go to specific projects, and we've guided to this at our Investor Day last year is that our internal threshold on -- on return on investment on projects is 12%. So we want to make sure that what we invest has a return of 12% now. Some of this is -- could be small, could be lower and -- but if it provides value, we will look into it. But I would say that, right now, this is profitable business coming at us. And we have a lot of volume. And when you look last year, our volumes were up 10%. And the problem is that because we were short of crews and because we didn't have the infrastructure, our costs came out of whack. So we need that infrastructure back so that our cost come back in line so that you can see metrics that the market has been used to seeing, and we can accommodate that growth at low incremental cost because, otherwise, that's what happens. If you don't invest the capital, then Mike will have recrews. He will have deadhead. The network will be slower, therefore, you need more cars on the network. You need more locomotives on the network that probably shouldn't be there in the first place. And then your operating costs are going to go up the roof. So that's what we need to fix. That's what we're going to fix this year. And we're going to stay ahead of the game for '19 and going forward.

[Jean-Jacques Ruest]

Operator, I think at this point, we would like to close. But before we do the closing, I would like maybe just make some last few comments. We have -- as you saw, we have a very solid capital investment program at $3.4 billion this year. This is all of our capacity and service in rebuilding our brand and coming out a bit stronger as opposed to being just the same. Mike described to you what that capital investment entails. It's track infrastructure. It's locomotive. It's train crews. It's mostly in Western Canada. This is where our future is for the remaining of '18, '19 and probably 20. We have a very strong balance sheet and we also deploy our capital in a smart way. One example was these asset sales in the East that were not contributing to the volume or revenue that we're going to deploy in the double section -- double track in the West.We have very strong bench trend of operating guides. I'm extremely trauma -- stronger at transportation department. We didn't equip them properly in the last 6 months, we didn't have people -- locomotives for them to be able to do the job that they're able to do, but their talent is the same as it was. This is a CN schedule railroading model. When people are given the tools, they do produce the results.Obviously, we have very strong -- a line of sight on the demand already. This is -- we have a great detailed list of things we'd liked to do or could do in 2019. And we talked about price on this call, and there's more price. Right now, the value of what we have, the capacity that we have is more valuable than in the past. And I think most of our customers understand that for us to deploy the extra capital dollars that they want us to deploy, that will come in at a reasonable good price, such that we can get a return, get our return on capital plus a fair profit over and above that. So on that, I'd like to close the call, and we'll see you sometime in July. And Patrick, this is the end of the call for today.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.