Canadian Pacific Railway Ltd

TSX:CP

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Canadian Pacific's Fourth Quarter 2019 Conference Call. The slides accompanying today's call are available at www.cpr.ca. [Operator Instructions] I would now like to introduce Maeghan Albiston, EVP, Investor Relations and Pensions, to begin the conference.

[Maeghan Albiston, Assistant Vice President of Investor Relations]

Thanks, Jack. Good morning, everyone, and thanks for joining us today. Before we begin, I want to remind you that this presentation contains forward-looking information, and actual results may differ materially. The risks and uncertainties and other factors that could influence our actual results are described on Slide 2 in our press release, and in the MD&A filed with Canadian and U.S. regulators. Our presentation also contains non-GAAP measures, which are outlined on Slide 3. With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, EVP and Chief Financial Officer; as well as John Brooks, EVP and Chief Marketing Officer. Our formal remarks will be followed by Q&A. And in the interest of time, we'd ask if you could limit your questions to 2. Now my pleasure to introduce our CEO, Keith Creel.

[Keith E. Creel, President, CEO & Director]

All right. Thank you, Maeghan, and good morning. Thank you for joining us this morning to review our fourth quarter results as well as our view on what we see as another strong value-creating year ahead for our shareholders, our customers and our CP family. I can tell you as a leader, it's my honor to represent the results that we're going to cover on behalf of our CP team, which I'm extremely proud of. For the quarter, the team delivered fourth quarter revenues of $2.1 billion, an operating ratio of 57% and adjusted EPS growth of 5% for the year. I'm extremely proud to report financial records across the board for revenues up 7%, an all-time high of $7.8 billion, combined with an all-time record operating ratio at a 59.9%, producing operating income growth of 10% to $3.1 billion and adjusted EPS of $16.44, another double-digit year increase of 13%. These strong results were driven by an industry-leading operating team. As I advised on our last call, Mark Redd, who we promoted to his new role as EVP of Operations, started in September of last year. In his first full quarter in this role the results serve, I believe, as a true testament to what a true leader does. Leaders do not sustain performance, they improve them. Mark and the talented group of men and women he leads daily set a number of operating metrics through the quarter. Terminal dwell down 9%, car miles per car day, a CP record up 11%, locomotive productivity up 5% and trip plan compliance as well an impressive 90% for the quarter. All, again, a testament to the power of executing with our proven operating model. So a special thank you to all those dedicated railroaders, the men and the women that serve CP across all of our departments, with a special, unique thank you and words of recognition to the men and women that work in our Winnipeg terminal. Their contributions to our success, which is obviously covered in these results, earned the distinction of terminal of the year in 2019, which I look forward to honoring at our upcoming CEO awards in a few weeks. Speaking to safety, which is foundational to all we do at CP. I'm also proud to report a strong performance in the quarter, with train accidents down 31%, personal injuries down 10%, safety being paramount to our success at CP. Precision railroading isn't about cutting to the bone or sacrificing safety to achieve results, it's absolutely about earning financial returns that enable reinvesting into the network to ensure a safe physical plant that when combined with a culture of accountability, care and concern for each other, it allows us all to go home safe every day, which is our fundamental objective. That said, I also want to recognize a few pockets of safety excellence among many at CP. In Thunder Bay, Ontario, where our running-trades employees have worked in excess of 1,150 days injury-free as well as our locomotive shops in Vancouver and Winnipeg, where both have worked in excess of 900 days injury-free. So thank you for setting an example of excellence for all of us to follow. I'm also happy to highlight a number of positive announcements this past quarter that will be benefiting this franchise and our shareholders, customers and fellow colleagues for years to come, namely in the CMQ acquisition. In November, we announced the acquisition of the Central Maine and Québec Railroad. This acquisition enables CP to extend its REITs to Saint John on the Eastside, East Coast, New Brunswick and increase our presence in the Eastern U.S. with access to a port in Searsport, Maine. We closed the transaction successfully at the end of December. I was excited about the strategic value the network addition would enable when we purchased it, but after spending time on the railroad the last few weeks, I feel even more compelled and convicted about the addition to our CP family franchise and the value it represents. The value proposition is simply compelling. Operationally, we'll work hard at bringing our expertise, our safety record and our disciplined culture to the railroad as quickly as we possibly can. Commercially, the customers are extremely excited to have service alternatives which they simply have not been afforded in over 2 decades. We'll be able to offer the shortest routes from the Maritimes to Montreal, Toronto, Chicago and Western Canada that will be truck-like reliable and truck-like competitive on a service standpoint, and obviously much more compelling on a cost standpoint. We're going to stick to our expertise, making a rail acquisition where our team has proven that we know how to create service solutions that enable compelling value for our customers, for our shareholders, both at the same time. And then on to what truly gets me most excited about the topic of crude oil is our DRU announcement. As John is going to speak to you shortly, in December Gibson and U.S. Development, great partners, business partners to CP, announced they'll be constructing and operating a diluent recovery unit near our rail terminal -- our rail-served terminal at Hardisty, Alberta. This is a game changer for crude in what is a unique and innovative development that will enable our franchise to enjoy sustainable crude by rail revenues that are safer and more efficient to move for the long term, which is unique to CP's franchise in Canada. And finally, on guidance, as I stated in our press release, we're targeting mid-single-digit RTM growth, continued opportunity to improve margins and high single to low double-digit earnings growth. I can tell you I've never been more convicted or confident in this team's ability to deliver [ but ] on our long-term potential in our journey to produce contained -- continued sustainable profitable growth. 2019 marked the second consecutive year we've led the industry in volume growth. And as we enter into 2020, I certainly expect to continue that trend as we deliver another record-setting year. So with that, I'm going to hand it over to John to bring some color on the markets before Nadeem closes as he elaborates on the numbers, and we open up the discussion for questions.

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

All right. Thank you, Keith, and good morning, everyone. So total revenues were up 3% this quarter to a record $2.1 billion. RTMs were down 3%. FX was flat, while fuel was a 1% headwind. And pricing landed in our targeted range, while mix was slightly positive. The quarter was not without its challenges as you saw, but you also saw the resiliency of the CP family that Keith just spoke about. We steadily gained momentum across the quarter and across our book of business. We are carrying that momentum into January and into 2020. On the year, total revenues were up 7% and on an FX-adjusted basis to a record $7.8 billion. So we'll take a look now at the fourth quarter revenue performance on the next slide, and I'll speak to the results on a currency-adjusted basis. So grain volumes were flat on the quarter, but revenues were up 4%. Despite a challenging Canadian grain harvest, we delivered our single largest quarter in the company's history with 7.9 million metric tons delivered to the market. This historic quarter capped off a 2019 as the largest Canadian grain and grain product tonnage shipped in any single year of our history. This achievement is a true testament to the dedication of our employees, our investment in the grain industry and collaboration with our customers in driving the most efficient operating model. As I look ahead, with the delayed harvest, and more recently the extreme wet weather in Vancouver, I expect Canadian grain shipment to remain strong through the first half of 2020. In the U.S. side, volumes were up 3%, largely as a result of increased soybean shipments to the P&W as positive U.S.-China trade settlement talks have helped rally spot grain movements in this export lane. Now moving on to coal. Revenues were down 10%, where volumes were down 8%. Canadian coal volumes were down as a result of maintenance at the mines, and again, the weather challenges I spoke about in Vancouver. Further, low natural gas prices resulted in U.S. coal volumes being down 17%. All in all, I expect coal volumes to be slightly down in 2020. On the potash front, volumes were down 29% and accounted for nearly all of our total RTM decline, and revenues were -- decreased 26%. Continued delay with international contract negotiations weighed on export volumes in the quarter. However, as expected, we did see volumes begin to pick up the back half of the quarter as India and other smaller export contracts were resolved. Based on our latest information, we are optimistic that the Canpotex contract [ with ] China will be resolved towards the end of Q1. Overall, our belief is the macro demand outlook for potash remains solid for 2020 and volume growth, both Canpotex and K+S, will be weighted to the back half of the year. The energy, chemicals and plastics portfolio saw revenue growth of 33%. Q4 was the third consecutive quarter with record revenues in our biofuels portfolio, as our ethanol plants continue to be well positioned to compete in both the domestic and export markets. This was also our largest crude by rail quarter in the company's history, with over 36,000 carloads. We're expecting a similar run rate as we look out to Q1 and beyond. I'm also extremely excited, as Keith mentioned, about the announcement to construct the diluent recovery unit near Hardisty. This innovative development creates a sustainable and safer crude by rail shipping model to the U.S. Gulf. When operational in 2021, the DRU process will remove the diluent prior to loading the railcar at Hardisty, allowing for approximately 30% more crude to be loaded in each tank car, making crude by rail cost-competitive with pipe. Further, by removing the diluent, it returns the crude to a more concentrated state and is no longer classified as a hazardous commodity. The capacity for this facility equates to 2 trains per day, and a key set creates a long-term revenue stream for crude by rail. Moving on to forest products. Revenues were up 3%, while in MMC revenues declined 14%, largely driven by lower steel prices and continued declines in our frac sand shipments to the Permian Basin. Automotive revenues were up 12%, an outstanding outcome given the pressures on this sector. Our surgical approach to this market has driven growth through partnering with the right automakers and developing unique market solutions that cannot easily be replicated. In 2020, we will enjoy a full year of our Vancouver auto compound, we'll welcome GLOVIS to our franchise and we will continue to look for those opportunities to open new auto compounds that will further enhance our value proposition in this sector. I continue to see a path in 2020 to grow auto revenues at a significant pace. Finally, on the intermodal side, quarterly volumes were up 4%. And on a full year basis, I'm extremely pleased with the strong growth we had in intermodal, with volumes up 5%. On the domestic intermodal front, we had a record quarter and our third consecutive record year. I fully expect continued growth in 2020 as we leverage our demand management tools, our premium service in the market and continue to deliver over-the-road conversion. On the international side, we extended HMM to a long-term contract. And January 1, we welcomed Yang Ming aboard. We will continue to leverage this business and the capacity brought on at Deltaport to grow with our customers through the Port of Vancouver. So let me just close by saying over the last couple of years and even back to our Investor Day, I've talked about this team executing our strategic playbooks. And what you're seeing is exactly that playing out in the marketplace. We are doing what we said we were going to do. We are leveraging our distinct advantages to grow revenues at a sustainable, profitable manner. And these are creating unique growth stories for CP, and I'm extremely proud of the results this team is delivering. So look -- as I look ahead, there remains a very strong pipeline of opportunities to bring incremental volumes to this railroad at a price that reflects our service. And this includes some very positive initial discussions, as Keith spoke about for opportunities utilizing the CMQ network. I'm excited about the opportunities in front of us for 2020 and beyond. So with that, I'll pass it to Nadeem.

[Nadeem S. Velani, Executive VP & CFO]

Thanks, John, and good morning. Before I start my prepared remarks about the quarter and the year, I just want to take a moment and congratulate Maeghan Albiston, who was recently named as the best Investor Relations professional in all of Canada in the industrial sector by Institutional Investor Magazine's inaugural Canadian survey. So congratulations, Maeghan. A very well-deserved honor. I'm extremely proud of the results the team is delivering today. Through the back half of the year, this team has continued to demonstrate an ability to adapt to a dynamic volume environment and exhibit the power of a true PSR railroad. We adjusted and rationalized resources effectively and are well positioned with the momentum we built through the fourth quarter and early into 2020. Overall, the operating ratio increased 50 basis points to 57%, driven by stock-based comp headwind of $30 million as well as lapping a land sale from 2018. Taking a closer look at a few key items on the expense side. Comp and benefits was up 5% or $18 million versus last year. The primary driver of the increase was the higher stock-based comp I mentioned earlier, primarily as a result of the increase in the share price. This was partially offset by decreased volumes and increased operating efficiencies. Fuel expense decreased $20 million or 8%, primarily as a result of lower fuel prices, lower volumes and a record fourth quarter fuel efficiency of 0.952 gallons per 1,000 GTMs. Depreciation expense was $178 million, a decrease of 1% as a result of asset retirements. Purchased services was $294 million, an increase of $44 million or 18%. The main driver of the increase was lapping 2018 land sales of approximately $35 million. Moving below the line, other components of net periodic benefit recovery were negatively impacted $10 million or 10%, primarily due to a lower discount rate applied to year-end workers' compensation valuations. Interest expense decreased $2 million as a result of a lower effective interest rate resulting from our 2018 and 2019 debt refinancings.Income tax expense increased $38 million or 20%, primarily as a result of a provision of an uncertain tax item of a prior period. This is being backed out of adjusted earnings. Rounding out the income statement, adjusted diluted EPS grew 5% in the quarter. Turning to full year results on the next slide. The fourth quarter performance caps another record year for CP. For the year, revenues grew 5% and operating grew -- income grew 9%. Full year operating ratio was 59.9%, 140 basis point improvement year-over-year, as we continue to demonstrate our ability to improve margins in spite of a softer volume environment overall. Adjusted income grew 10%, and the continued disciplined approach to our share repurchase program helped us achieve adjusted diluted EPS growth of 13%. As Keith mentioned, our third consecutive year of double-digit EPS growth. Turning to our 2020 guidance. In the release this morning, we highlighted mid-single-digit volume growth, CapEx of $1.6 billion and high single-digit to low double-digit EPS growth. A few specifics to call out. We will be facing a pension headwind both above and below the line, of $30 million and $40 million, respectively, largely as a result of lower discount rates at the end of the year and a reduction in our expected return on assets for our pension plan. Depreciation is expected to increase to approximately $190 million a quarter as a result of a larger asset base. Last year, in Q1, we incurred what was typically our full year of casualty expense, which is part of the purchased services and other line. Moving on to free cash, 2019 cash from ops increased by 10% to a record of nearly $3 billion, and free cash increased by 5% to $1.4 billion. Shareholders continue to be rewarded. We took a brief pause following the completion of our NCIB in October. In December, we announced a new 3.5% share buyback program to repurchase up to 4.8 million shares over the next 12 months. In 2019, we returned over $1.5 billion to shareholders through share buybacks and dividends. Our balance sheet remains strong with leverage of 2.4x adjusted net debt-to-EBITDA. CapEx came in around the guided $1.6 billion. Our disciplined approach to capital investment and the strong returns we are generating are evidenced by an adjusted ROIC of 16.9%, which compares to 10% back in '12 -- 2012. It's clearly demonstrating a prudent investment in the business. As we go forward, we expect to remain at that $1.6 billion for the next 2 years in terms of capital investment. And that's also inclusive of the capital we expect to be invested back into the CMQ to bring that asset up to CP standards. That acquisition is one that we are increasingly excited about as we invest back into our core competency of railroads. As we continue to grow earnings and remain disciplined on capital, you can expect to see CP's free cash conversion improve both in 2020 and beyond. Overall, 2019 was not without its challenges. But in spite of that, it marked the third consecutive year of double-digit earnings growth and the third consecutive year of delivering on or exceeding our earnings guidance. This is a company built on a culture of accountability and delivering on what we say we'll do. We're going to continue to be an industry leader in 2020. With that, I'll turn the call back over to Keith to wrap things up.

[Keith E. Creel, President, CEO & Director]

Okay. Thanks, John. Thanks, Nadeem, for the color. But before I open it up to questions, I, too, want to echo your comments and congratulate Maeghan for such an honored achievement as well as congratulate you, Nadeem, for being recognized as the best CFO from Canada. And finally, congratulate our 13,000-strong CP family for being recognized as the best overall company in 2019 in the industrial space in Canada. Votes of confidence by our investors like this are deeply valued, and we don't take them for granted. They're received with a high degree of responsibility to honor the trust that you place in us, and we do that by producing future performance that meets or exceeds your expectations. So thank you for that trust. And with that said, we'll move to the questions.

[Operator]

[Operator Instructions] Seldon Clarke with Deutsche Bank.

[Seldon T. Clarke, Associate Analyst]

I know this is still somewhat of a developing situation. But as it relates to Phase 1 of the U.S.-China trade deal and China's agreement to start purchasing more goods from the U.S., do you think this could present a risk to any of the exports that CP handles if China does indeed start relying on the U.S. for more like, ag products or met coal, things like that?

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

Seldon, actually, no. I think, frankly, we've started to see a little bit of upside as some of the more -- for positive outcomes of this trade deal emerge. The Canadian ports continue to be cost competitive relative to the U.S. side. So we've seen a nice surge of volumes sort of offsetting some of the trade disruption, volumes from Vancouver into the U.S. And then frankly, if we can start to see some of these ag products begin to move, I see upside potentially in our U.S. grain franchise as we move towards the end of the year.

[Keith E. Creel, President, CEO & Director]

Yes, we actually take a view that this is a net positive for all West Coast ports, be they Canadian or U.S., which again, this franchise uniquely will benefit from.

[Seldon T. Clarke, Associate Analyst]

Okay. That's helpful. And then kind of a longer-term and just a higher-level question. But if you look at the revenue per RTM of CP versus your Canadian counterpart, the discount that CP is earning is wider than it's ever been. It was in 2019 and kind of has been steadily increasing for the last several years, and obviously, you're both impacted by things like fuel and currency. But can you just maybe talk about what you think is driving this divergence? And whether this presents maybe an opportunity for you guys to make up some ground as it relates to pricing?

[Nadeem S. Velani, Executive VP & CFO]

I think it's a reflection of length of haul and mix of business. So as we've grown our potash business, as we've grown crude recently and so forth, that does have an impact on overall cents per RTM and impacts the overall company-reported cents per RTM. So I think that's the major item.

[Seldon T. Clarke, Associate Analyst]

Okay. So we shouldn't be reading in too much into it as there's some ground to be made up on the pricing side?

[Keith E. Creel, President, CEO & Director]

No.

[Nadeem S. Velani, Executive VP & CFO]

No. And I think, not that the OR is a reflection of everything, but I think there's a -- we're getting close to a 10-point gap between ORs in the company this quarter. So I don't think pricing is really a reflection of anything. I think it's just solid execution.

[Keith E. Creel, President, CEO & Director]

Yes, I think the most important number to pay attention to is double digit earnings.

[Operator]

Walter Spracklin with RBC Capital Markets.

[Walter Noel Spracklin, MD & Analyst]

So there was some news, obviously, on the tech side about having gained some share on the Kamloops either up to Ridley or over to Neptune. Can you quantify the impact that you expect on that? I know it's only 1/3 of the haul for a portion of the business, but curious your quantification of the impact on that?

[Keith E. Creel, President, CEO & Director]

Well, Walter, I'd say the worst-case scenario, and this is assuming a worst-case scenario, assuming that we don't sell any of that precious capacity that goes west to Kamloops into Vancouver, and assuming we don't improve the profitability on the existing book of business that remains with us, both of which are not realistic expectations, is a 1% headwind. I'm not concerned. Obviously we value our relationship with tech, and we value their business. That said, I'm convicted and convinced with my 28 years of railroading experience and quite a bit of that being in Canada running both railroads, that tech will value our service in a way they never have, given their overall experience. To me, as a PSR railroad, I'm not one that sells complexity, I'm not one that creates velocity and faster asset turns by introducing it. The game is to eliminate and to minimize complexity to turn those assets faster. So right now, what we're seized with is making sure that we clearly work closely with tech as well as Canadian National to ensure that interchange location, which today's state will not handle any marked movement or increase in volume, is able to handle it efficiently so it doesn't have an adverse impact, not only on tech's business, but the balance of our book of business. So that's what we're seized with. At the end of the day, we're going to do our dead-level best to make sure tech succeeds, given what we can control to move as much coal as they can. We'll make a fair buck at doing it and enable tech to continue to succeed in the marketplace. That's what we're seized with. Not seized or concerned with the 1% headwind on revenue.

[Walter Noel Spracklin, MD & Analyst]

Okay. That makes sense. I appreciate that color, Keith. Moving over to Nadeem. A question here on operating leverage and volume cadence. So as your mid-single-digit volume plays itself out, can you give a sense of whether this is something you're building into the back end? Or is this something that we can see sooner than -- rather than later? And as that volume comes on, you've always typically indicated 100 basis point roughly OR improvement with 500 basis points of volume. Does that hold here in this scenario as well, as your efficiencies pile on each other? It certainly gets a little harder to achieve, but just wondering if that still holds for this year?

[Nadeem S. Velani, Executive VP & CFO]

All right. Thanks for the softball there, Walter. So if you recall, last year, Q1 was a very difficult and challenging quarter in terms of how the impact of that tragic derailment had on our network and the impact that, that had of a very challenging winter throughout February time period. So we have very easy comps in Q1. I expect a very, very strong Q1 report, both from a revenue point of view, volume point of view and an expense point of view. So I think we're going to have a very strong start to the year. We were impacted in the spring last year with network outages from flooding in the Midwest and so forth. So very achievable kind of first half volume trends. We expect to see continued year-over-year improvements in volumes. Where it gets a bit more challenging is in the second half, just in terms of where we have line of sight to volumes. Recall, some of the positives that we do have is in the Canadian grain space. So August, September, we had a very late start to the grain crop. So you should see some benefits there. And potash as well. We had the impacts of a sudden 30%, 40% kind of drop in potash volumes. So that should be a very favorable environment as well to report RTM. So overall, I think we have good line of sight to a very strong year. We've guided to that mid-single-digit RTM growth. And I don't think it's necessarily just front-end loaded by any stretch. I think it's going to be consistently strong. From a -- in terms of our operating -- our incremental margins and so forth and our operating leverage, we're going to do what we always do, which is take the volumes and bring it to the bottom line. And so I would expect a continued operating ratio improvement and nothing less than that from our team.

[Operator]

Brandon Oglenski with Barclays.

[Brandon Robert Oglenski, VP & Senior Equity Analyst]

Nadeem, I guess following on that answer there, you did speak to a couple of cost headwinds, I think, in 2020. And more specifically -- if you could just re-highlight those for us, and more specifically on purchased services because that did come in maybe a little bit higher than we were thinking?

[Nadeem S. Velani, Executive VP & CFO]

Yes. Pension was probably the item that we know was a headwind in both above the line in terms of our compensation benefits and then below the line, given discount rates and also as we've been a bit more conservative in terms of our expected return on assets of the pension plan. The other item would be depreciation. So we've had kind of record CapEx spending the last year. And so as we add that higher asset base, we'll see depreciation trend up a little higher. And then the other item that we faced is stock-based comp. That's been a, I think, a well-received headwind by investors, but it's something that we expect to face again this year. We don't have any sort of accruals from a bonus point of view that we're going to face with any sort of headwinds there. We've been consistently performing and consistently paying the management team for the effort. So nothing on that front. And what was the back half of your question, Brandon, again?

[Brandon Robert Oglenski, VP & Senior Equity Analyst]

It was just about the right level of purchased services.

[Nadeem S. Velani, Executive VP & CFO]

Yes. I think overall, we're not expecting much in the sense of land sales, maybe could see $10 million to $20 million. That would be -- create a bit of noise between quarter-to-quarter, but nothing that we'd call out in terms of volatility quarter-to-quarter on purchased services.

[Brandon Robert Oglenski, VP & Senior Equity Analyst]

Okay. I didn't mean to deminimize the [ out ], by the way, which is pretty strong. And I guess Keith or Nadeem is -- I asked this question of your competitor the other day, but there's clearly a trend at some U.S. railroads that think CapEx can be at 15% of revenue, but there's also a clear track record of not a lot of growth below the border, either. I mean can you guys talk to that divergence? Because obviously, yourself and your competitor included have gotten better growth, but obviously, better -- higher CapEx too. Is that the right equation?

[Keith E. Creel, President, CEO & Director]

Yes. I would say it's just understanding the 2 stories. Obviously, every railroad's at a different place in their implementation in progress with the operating model, precision scheduled railroading. We enjoyed a capital holiday, given the excess of surplus assets that are a natural outcome of implementing PSR, where PSR didn't exist. If I look at our spend now, we're still enjoying some of those tailwinds in locomotives, but we're also investing for growth. So again, our absolute numbers, where we're at is where we expect to stay. We're going to continue to invest in our hopper cars. We're about halfway through it by the end of this year. We're at twenty -- rough number, 2,200 cars. We'll be around 3,000, 3,200, end of '20, with a view to finish that program end of '22. And once we get there, you'll see cash flow improve in a material way, and you'll see our total dollars come down. And again, if you get into the percentages, obviously that's going to improve as well. But we do both. We should have a lower call on capital, call on cash when we run an effective and efficient railroad. But at the same time, we're making money so we can invest money to grow and protect our physical plant. And that's the formula.

[Nadeem S. Velani, Executive VP & CFO]

Yes. All right. Our scorecard is our return on invested capital, which is getting closer to 17%. So that's always a good kind of basis to see how we're operating in terms of our capital deployment.

[Operator]

Fadi Chamoun with BMO Capital Markets.

[Fadi Chamoun, MD & Analyst]

You mentioned the CMQ a few times on the call. I just wanted to see if you can offer up a little bit more kind of details about the opportunity you see there. Is it on the intermodal side? And also the timing of that opportunity that you see as well. Is this kind of 2020? 2021? Or beyond that the time frame?

[Keith E. Creel, President, CEO & Director]

Well, number one, the art of the possible, Fadi, in all fairness, we're still developing. I can tell you, I see opportunity in intermodal growth, be it domestic, but it international. I see an opportunity in automotive growth, be it domestic, inbound product, be it off the water inbound product. I see opportunities in fuels, I see opportunities in lumber, just across the board, you think about an environment and that's -- yes, the paper industry has walked through some very challenging years. Yes, there has been a reduction in available shipments in Eastern Canada, but at the same time the strategic value of that port in St. John has not been unlocked. We've got a railroad now that is very efficient. It's very safe, and a St. John to Montreal option is the shortest distance. And if you run your best day at the shortest distance versus a truck running its best day or your competitor running its best day at a longer distance, I'd say that's a compelling opportunity to open up value for our customers as well as our -- obviously, our shareholders and our franchise. So as far as timing, our quantum, our magnitude, we're going to be working hard at that in 2020. The most important thing we're working on though, Fadi, is investing in the physical plant to get it up to a CP standard, which we owe that to ourselves, and we owe that to the communities that we now operate in and through. So we'll do that in 2020. We'll finish the year with a stronger physical plant, with a more efficient -- we've already worked with the leaders at CMQ that are under trust until the STB gives us approval. We hope it gives us approval and anticipate approval in May of this year to implement a more CP-like operating plan, taking time out of the schedules with the existing physical plant, it's not that we're running trains faster per se, it's in totality the transit time is reduced, because we're handling the trains differently and the schedules differently and the -- philosophically, it's differently. So more to come. I think 2021, you'll start to see the needle move in '21 and '22 for certain. Those are 2 key years for us. The timing couldn't have been better as we prepare for those business opportunities, and I look forward to celebrating some of those successes and sharing more color on them as we go forward through '20 and into '21.

[Fadi Chamoun, MD & Analyst]

Okay. That's helpful, Keith. Is the upgrade of the physical footprint, the need, the CapEx required are included in your guidance, I would assume, right?

[Keith E. Creel, President, CEO & Director]

Yes, it's absolutely baked into it. We've got a big chunk of it. We're focusing on ties and rails and ballast in 2020. We'll do the same thing in '21. And we'll come out with a Class III track that allows us to convert that short distance in a very safe and reliable fashion by the end of 2021 for certain.

[Fadi Chamoun, MD & Analyst]

And a quick question to Nadeem on the labor cost line. So I'm understanding that we should assume some inflation. Obviously the pension expense increased above the line. How about headcount, like you've got a big swing going on in 2019. You went up, and then you went down and you ended the year where you started, pretty much. So how should we think about 2020 with volume up mid-single digit?

[Keith E. Creel, President, CEO & Director]

Well, I -- the formula for us is we always want to do more with less. That's what -- as we become better railroaders, and we invest in our physical plant, and that's what we should be able to do, and we got to -- we owe that to our shareholders. So actually in '19, we finished down about 1% on flat RTMs or actually just positive RTMs. We're proud, super proud of that just positive, because we're the only railroad in the industry to be able to do it in a very challenging macro environment. And I know what great efforts it took from our sales team and our operating team to produce that. So that's where the pride comes from. But with that said, if we look at 2020, on a mid-single-digit RTM guidance you can assume a low single-digit headcount increase.

[Operator]

Chris Wetherbee with Citi.

[Christian F. Wetherbee, Vice President]

I wanted to touch on crude by rail. So I think you mentioned 36,000 carloads in 4Q. I wanted to get a sense of what you think the capacity could be in maybe 2020 on a quarterly basis, assuming there is some potential demand growth there? And then maybe as a second part to that question, how do we think about sort of the DRU opportunity? And sort of what that means in terms of what you might need to do to add capacity? Or how we might think about it relative to the 36,000 carloads you moved in this last quarter. Just trying to put some numbers and some structure around the crude by rail opportunity in 2020 and then 2021?

[Keith E. Creel, President, CEO & Director]

Chris, I'll speak to the capacity piece, and I'll let John provide the color on the run rates and what the potential upside might be. Capacity, it's a simple answer, it's 0. We have the people, we have the assets. This growth, we prepared for it. We prepared for it in '19 and '20. We worked in lockstep with our partners in this business, and the demand has been delayed. So it's there. We continue to [ rifle ] shot, invest in it, and there'll be no surge or peaking capacity needed to be able to handle and enjoy the current run rates that we're at, and with some potential upside.

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

Yes. I mean, it kind of, Chris, sits in a time frame where you could be able to see some of the pipe capacity come available. So it might actually act as an insulator or not a quite a one-for-one replacement. But as Keith said, from a capacity standpoint, there shouldn't be any issues there. In terms of the run rate, I'm kind of looking at Q1 to land probably in a similar space as we saw Q4. I do think sort of market pending, and as we know, the crude by rail market can be pretty volatile. But if things hold in the FRED range that we see today, I could see some acceleration as the government contract fully gets converted. You could see a little bit of upside Q3 -- Q2, Q3. And probably that sort of run rate continuing as we look to close out fourth quarter and the year.

[Christian F. Wetherbee, Vice President]

Okay. Okay. That's very helpful. I appreciate the color. And then maybe a bigger picture question just around pricing. And there's been some, yes, higher-profile competition amongst the players in Canada, but it seems that pricing has remained a reasonable focus for both players. Just want to get a sense of how you think about the pricing dynamic in 2020? Should there be meaningful variation from what we've seen over the course of the last 12 months?

[Keith E. Creel, President, CEO & Director]

Yes. I don't think so. I am extremely pleased with my team's results on pricing for the value of our service through 2019. And just as a reminder, my team's -- a big part of their compensation is built around our pricing efforts. And I think we're prudent and will compete because we have the low-cost structure head-to-head where we need to compete. We're also not going to go down to a level and grow for growth's sake, as we spoke about. So I expect that similar level of discipline as we move into 2020, and we'll be driving inflation plus for sure, Chris.

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

Chris, I would just add that in this environment where both railroads can see growth opportunities both in the short, medium and long term, I think that's very healthy for rational pricing.

[Operator]

Scott Group with Wolfe Research.

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

So Nadeem, I had a couple of questions for you. First, just to help with the models. Is CNQ going to be in the weekly volume reports? And if not, maybe just how much revenue a quarter we should be assuming? And then first quarter has just got so much noise. Can you just help us sort of think about RTM and OR for first quarter, as you guys see it?

[Nadeem S. Velani, Executive VP & CFO]

Sure. So yes, the carloads are in the numbers. Reminder that the Canadian component of the CMQ, we've acquired, but the U.S. assets are being held in trust until we get STB approval. So the accounting of that will be an equity pickup for that until we actually get approval, we're hopeful in -- by the middle part of this year. So there's a bit of noise in terms of where we see things the first half of the year, and then we'll fully get the benefits of the full entity going forward past midyear. And at that point, then you'll see kind of the full revenue picture. So it's not meaningful in terms of the current incorporation of the revenues. So we're talking $40 million kind of in total. So we're getting a portion of that as we speak, if that makes sense. And as far as Q1, last year we had about a $70 million impact in Q1 year-over-year increase in casualty or -- sorry, the Q1 number was $70 million of casualty. Typically that would be closer to $20 million a quarter. So there's a pretty big year-over-year improvement that we expect for running the railroad as the way we should. So that's certainly going to be beneficial to Q1 operating ratio. I think we had the worst operating ratio in the industry last year, kind of mid-60s level. You should see something closer to a 60 level, is probably a fair assumption. So it should be a pretty meaningful improvement year-over-year. We always -- we're always cautious when we give our guidance a little bit at the beginning of the year, given we're a Northern railroad, and given there's uncertainty around winter weather. We had an extremely cold environment a week ago, very challenging on the network. But our best operating team in the industry, which happened to be CP employees, got through it extremely well. We entered that situation in a very good state overall in terms of the network and in terms of the terminals, and we came out of it very well. So it's not something that we can't overcome. It's not going to be impactful. You'll see the volumes recover very nicely through this week and through the February time frame. So expect to have a very, very strong Q1 report, Scott.

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

Can I -- did I just hear that you said around 60 for the first quarter?

[Nadeem S. Velani, Executive VP & CFO]

Yes.

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

Okay. Great. And then can I just ask one more. Keith, you talked earlier about the DRU as being unique to your franchise. Can you just expand on that?

[Keith E. Creel, President, CEO & Director]

At this point, the DRU, it's been announced to be built in Hardisty, a single line served -- solely served by CP. So there is a potential down the line to build one in Edmonton. Some of the players have talked about doing that. It may or may not happen. I'm not sure, that's their decision to make, but should it occur in Edmonton, we'll benefit from that as well because we also serve that facility. So Hardisty at this point is the only 1 that is not a maybe. They're moving forward. It's well underway. We expect it to be operational in 2021, and we will uniquely serve it.

[Operator]

Konark Gupta with Scotiabank.

[Konark Gupta, Analyst]

Congrats, Nadeem and Maeghan for your achievements. So I just wanted to begin with a question on your guidance for EPS. So Keith, if I can ask you, what is causing you to be conservative in the sense that you're guiding high single-digit EPS growth at the low end? I mean like, obviously you have talked about low double-digit before, but there seems to be a little bit of caution here because of maybe some uncertainties you're looking at. Can you share with us what is that, that's causing you?

[Keith E. Creel, President, CEO & Director]

I -- to some, it's conservative. To me, it's prudent. I -- this team takes great pride in being a team that we guide to what we believe is achievable and exceedable. And in this case, that's exactly what this guidance is. I have full conviction in line of sight, giving things -- things I can't predict and things that I've got a pretty good feel for that this team can certainly achieve that guidance, and I'd be disappointed to sit here a year from now and not be in a position to congratulate our team for exceeding that guidance. So with that said, I think prudent is the right approach. We've worked hard to earn that reputation to meet or exceed, and we don't take it likely, and we expect to continue to do that. But rest assured, if there's an opportunity to exceed and achieve in any of our endeavors day-to-day, the end result is going to be earnings growth, and we're going to do that with this team. It's a culture of performance. It's a culture that pursues excellence. We're blessed to work with the best team of railroaders with a strong franchise, with its own unique set of, in many cases counterintuitive to the industry, growth opportunities that embolden our guidance and our conviction about being able to meet. And again, I think the key word is exceed.

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

Yes, in '17, we raised; in '18, we raised; in '19, we were the only one to meet. So our track record, I think, is [Audio Gap] for itself.

[Konark Gupta, Analyst]

Okay. And then secondly on the market share opportunity. So we obviously heard about a few opportunities in -- at your last Investor Day, and then clearly, there's been some contract announcements over the last couple of years toward that. If you can remind us, are there any more opportunities from those kind of intermodal and automotive opportunities you laid out before? Is there anything else that you are kind of looking at over the next 12 to 18 months? Or is there any new opportunity base that has opened up? You mentioned about CMQ, I know, but is there anything else within the existing CP franchise that you think is up for grabs?

[Keith E. Creel, President, CEO & Director]

Absolutely yes. And I'll let John speak to some of those exciting things that we've talked about and some things we haven't been able to speak to yet, but we soon hope to be able to provide color on.

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

Yes. So I'd look at our domestic intermodal franchise in particular. So just recently, in the fourth quarter, we signed long-term agreements with Bison and Consolidated Fastfrate. 2 leaders in the trucking industry, 2 leaders in the wholesale industry, and we're creating solutions with them without needing to purchase them. We're providing solutions in the marketplace that will drive new first-mile/last-mile innovation that the industry hasn't seen. On top of that, there is an intense focus with my team to drive over-the-road conversion. We think 2020 and into '21 present a whole new opportunity in over-the-road conversion with, again, these 2 partners and others to bring that business to our railroad. So look, you combine that with onboarding Yang Ming, future growth at the Port of Vancouver, all the good things we're doing on the auto side, the energy, chemical and plastic side of our business in terms of our refined fuels growth into the Eastern markets, our refined fuels growth into Vancouver for export. And you begin to layer on the diversity that the CMQ brings, not only from a commodity and product and customer perspective, but one thing that Keith didn't mention about the CMQ that I'm super excited about, is all the new gateway access to the short line partners that we've never reached before as part of the CMQ and to the Eastern carriers creating new routes and new markets. The level of interest from that part of the Northeast U.S. and Eastern Canada has frankly been overwhelming in the last 60 days. And I can tell you, my team and our leadership has been out on that property and talking to these folks. And I don't -- we'll see if it's a 2020 story, but it sure makes us excited about what 2021 should look like.

[Operator]

Tom Wadewitz with UBS.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

Yes. Let's see. Just, I guess a fine point, maybe for John on -- the energy, chemicals and plastics line had very strong revenue per car. I assume that's due to the strength in crude, but I think you were like 4,860 per car. Is that something we ought to model going forward that, that continues? Or how do we think about RPU on that line in 2020?

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

Yes. So we certainly -- we had a pretty good tailwind as it relates to the price in general. We saw some nice increases there. We did benefit, Tom, on the mix front, also in that space. And then last, you're right, a lot of it was driven by the crude. I think you continue to see some of that into Q1 and then it sort of begins to moderate.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

So it stays at that level, but the year-over-year moderates. Is that what you're saying?

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

You could even see some acceleration as we move through Q1. And then it begins to moderate Q2 and beyond.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

Okay. Great. I wanted -- I don't know if I can ask just a, I guess a quick one as well on the network. You've got mid-single digits RTM, very good growth outlook for this year, your commentary is positive about the opportunity to keep growing. How do we think about the network where if you have -- stretches of single line or sidings spaced out or whatever, where eventually you get into some potential line constraints, is that something to consider or kind of bottlenecks in the network? Or are you pretty good in terms of line capacity on a multiyear basis?

[Keith E. Creel, President, CEO & Director]

Yes. From a capacity standpoint, Tom, there's no lines of constraint on the horizon at all. Nothing that's material, nothing that's concerning, nothing that we couldn't address as far as increasing capacity in lockstep with growth. As always, I remain -- I keep my eye on Chicago. Chicago can always bubble up, given the right conditions, albeit Chicago has never been in a better condition, given the benefits of PSR that the other railroads are implementing, as well as some of the infrastructure investments. So I don't let my sense get to a false sense of security in that space. I pay attention to it. But at this point not concerned, overly concerned. The other place I pay attention to is Vancouver. Obviously that port is critical to the commerce in Canada. It's critical to our railway as well as our competitors' railway. So as much as we compete hard, working in partnership to make sure we protect the capacity to the benefit of everyone, is something that I pay attention to. And that's why I'm so seized with focus on Kamloops. I want to support tech as much as I can for them to realize business success because I know with their success comes CP's success. And if that formula can do that, I'm all for it. I've just got to make sure that, that formula doesn't destroy value or capacity on my network, especially given so close to being in the corridor in Vancouver, which we all depend upon both as railroads as well as commerce in the country. So long answer to your question. Line capacity is not an issue that we can't manage and that we don't manage day in and day out. You can take a look at our business. We've ran at our highest levels. We've never been better, faster, more fluid. That's a testament to that process, and you can expect that to continue.

[Nadeem S. Velani, Executive VP & CFO]

Yes. And a reminder, Tom, when we had our Analyst Day in 2018, we guided to mid-single-digit RTM growth, double-digit EPS growth. And if anything, '19, 2019, RTM growth was lower than expected. So we have our capital plan that was to support that multiyear plan as -- was lockstep into that mid-single-digit RTM growth. So if anything, there's probably more capacity available than we expected back then.

[Operator]

Ravi Shanker with Morgan Stanley.

[Sawyer C. Rice, Research Associate]

This is Sawyer Rice on for Ravi. Maybe just a couple of cleanup ones from me. I guess just following on some of the CBR questions we've had. Can you update us on your current timing expectations around the government contract in Alberta at this point?

[Keith E. Creel, President, CEO & Director]

Yes. So I'd say generally we are in, in terms of our agreement with the highly likely party that [ it will ] be assigned to, is completed. That party is working with their suppliers, their destination markets they'll sell into. I would expect we may see some ramp-up of that associated volume as we move into February here. So fairly tight.

[Sawyer C. Rice, Research Associate]

Got it. Understood. And then maybe just taking a step back, could you refresh us on how you're thinking about capital allocation priorities here? And good to see the CMQ announcement back in November. Maybe just how you think about the M&A balance between short line and potentially other transportation modalities versus investing in the rail?

[Nadeem S. Velani, Executive VP & CFO]

Yes. So we have a line of sight to invest our CapEx of about $1.6 billion over the next several years, a combination of investing in hopper cars as a major project, fundamentally investing back into the basic infrastructure of that $800 million to $1 billion a year. And then we have some locomotive modernization to add some additional modal power, if you will. Apart from that, we will look at adding to the network where there's opportunities. We're more focused on rail than other types of supply chain opportunities. So it's just, there's not a lot available out there. So the CMQ came at the right time, at the right price, and that was maybe a unique opportunity. Beyond that, we'll look at continuing to increase our dividend. We have guided to get that to the 25%, 30% payout ratio over time. And then we'll look at returning cash through buybacks, which we've consistently done in that 3% to 4% kind of level. We announced a new buyback program in December of 3.5%. And so that will be the other opportunity for capital allocation.

[Operator]

Brian Ossenbeck with JPMorgan.

[Brian Patrick Ossenbeck, Senior Equity Analyst]

Maybe one more on capacity, but from a labor perspective. It's clear there's a lot of headcount reductions elsewhere in the industry, you're looking to grow and expand headcount there, but it wasn't too long ago where there was a more widespread shortage, and obviously the labor market is not any looser, I don't think. So can you just talk about how you perceive the tightness in the labor market? And if there's anything that you're doing sort of proactively to get ahead of what might be some challenges in some of the specific areas you look to grow?

[Keith E. Creel, President, CEO & Director]

Well, at CP, let me start with right now. We still have surplus labor. We've got employees that we've invested in and trained in that, unfortunately, our business doesn't -- the business demand at this point doesn't warrant the need that are in furlough status. So we have that to call upon as we bring on additional incremental RTM growth. But with that said, even in a tight labor market, it's about value proposition, and you've got a company that we pay well, we strive to treat our employees well. There's a tremendous amount of pride in working for this company and the success that we've created and we continue to succeed, and success breeds success. We've not had any meaningful challenges attracting and hiring and training employees. And in fact, our retention rates, if you look at the last 2 years, I'm especially proud of, have improved dramatically, double-digit improvements to add industrial if not railway best. So employees are coming. They're enjoying their jobs. They're being paid well. They're contributing to and enjoying the success we're creating. So at this point we have not, and I do not foresee, any additional problems to be able to hire and train in lockstep with our growth.

[Brian Patrick Ossenbeck, Senior Equity Analyst]

Thanks for all the details there, Keith. One for John. If you can just talk about the capacity that might be unlocked when the tech transition happens next year? Is it too early to start to have those conversations with potential customers? And what do you think that might do to the overall mix that was previously going over that segment as you start to transition something that's a little more diversified?

[Keith E. Creel, President, CEO & Director]

Yes. I don't know if there's a big mix change. Obviously, there's an ongoing opportunity to grow our grain business. We've moved 5 or 6 trains into the new G3 terminal here recently as they prepare and commission their siloes to open up. We've opened here in 2019, 6 new 8,500 foot elevators that will primarily service that Vancouver market. There's additional coal opportunities that we are working, that we expect to come on right around the right timing of this transition. So it's definitely not too early. We're having those discussions with customers today, but I think it's pretty diverse in terms of the opportunity.

[Operator]

Benoit Poirier with Desjardins Capital Management.

[Benoit Poirier]

Yes. So congratulations for the good results. Could you come back a little bit on the potential opportunities to replace the tech business from Kamloops to Vancouver? And eventually, how the potential to come back with EPS accretion to offset the 1% dilution that could be again another scenario right now?

[Keith E. Creel, President, CEO & Director]

Okay. Let me -- if I could, Benoit, let me say this. To put it in its simplest terms, the loss of the tech business in and of itself, stand-alone, worst-case scenario, as I've said, is about a 1% earnings headwind but it's margin accretive. Our operating ratio improves as a result of that. Now that said, the opportunity, and John can provide a bit more color, but be it grain, the effect, everything that we move in that corridor, the capacity that's going to be unlocked and available to convert with improved service and faster asset times, I see incremental growth across the book of business. Beyond that incremental growth, this discussion which is advancing rapidly with this alternative met coal producer in Riversdale, is real. It's substantive. It's taking positive steps. And to John's point, I fully believe and expect that it can be online shortly after this coal transitions through the switch at Kamloops over to the Canadian National. So again, it's an opportunity that we fully intend to be accretive and to realize leading up to and certainly after and through that transition. So John, I don't know if you want to add anything I missed, but...

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

No, I -- again, Benoit, I think it really is across a large piece of the book of business. Our ECP team continues to add on to our energy train. We're only going to see, I think, the refined fuels export market grow through Vancouver, and we've got the best mousetrap in the industry to service that. So it's capacity like that, it's the coal, it's future growth and in the intermodal sector. And again, don't underestimate the power of the operating model related to our 8,500-foot grain model and what that's going to do into Vancouver.

[Benoit Poirier]

Okay. That's really good color. And with respect to crude by rail, John, as the -- you will move towards DRU and need bitumen, how the exposure to need bitumen will be down the road? And what about the pricing, given it's a nonhazardous? Is there a big discrepancy versus typical crude by rail? Or it's about the same we should forecast going forward?

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

Yes. I don't know if I can give you a number, Benoit, relative to how we've priced sort of standard [ crude versus this ]. But I can tell you this, it's a safer commodity. So we have looked at it differently in terms of how we get it to market and our -- the partner, ConocoPhillips that we're working with to market the product. I don't know. That...

[Keith E. Creel, President, CEO & Director]

I think an important piece that we can't lose sight of is the length of haul is going to improve. We're going to be interchanging a large percentage of the crude that we move [ off our ] Kansas City as opposed to shorter gateways, given the 10-year deal with partnership with KCS and ConocoPhillips. Whereas today's model, much of that business that it's replacing is interchanged over a gateway that's much closer to the origin than Kansas City is.

[John Kenneth Brooks, Executive VP & Chief Marketing Officer]

That is a fair point. It will depend on sort of how that mix rolls in and out of our business at that time.

[Operator]

Justin Long with Stephens.

[Justin Trennon Long, Managing Director]

I wanted to ask about the trend in comp and benefits per employee, and what you're expecting on that front this year relative to labor inflation? And then Keith, you made the comment earlier on headcount that with mid-single-digit RTM growth this year, we should see a low single-digit increase in headcount. Is that a good way to think about the framework longer-term as well?

[Keith E. Creel, President, CEO & Director]

Yes, in general. It's all mix-dependent. If we were to drive all of our growth through 80 foot -- 8,500-foot grain trains or 152 car set coal trains or 172 car potash trains, there are limitations, obviously. We can't incrementally make monumental train length changes in those [ contexts ]. But in general, across the board, that's a good rule of thumb. It proved to be true last year. It will prove to be true with our mix this year. And I can tell you when it comes to our cost per employee on an RTM basis, we have negotiated and ratified some pretty progressive agreements. I talked to them, I guess last year, probably don't talk a lot about it. But effectively we tied our success and our growth to our employees. So we start with the base in many of our contracts on the collective agreement side, our union contracts, that have a base of 2% and incremental can grow up to 3% [ leads ] appreciation if the growth is there. As it was, given flat RTM growth in 2019, then obviously we're going to realize the lower side of that model as opposed to the higher side of that model. Now I'm not saying that proudly. I'd love to be able to give our employees the higher side of that model, and we've set it up so that we can do that because they are key contributors to our ability to be able to grow with the service they provide. So I don't expect a headwind in that space in 2020, given the RTM, and it's all tied to the RTMs. That's why we always speak RTMs at CP. We get paid by the RTM. Not the carload, it's by the RTM. So again, hopefully that helps give some color to your question.

[Nadeem S. Velani, Executive VP & CFO]

The only other -- we talked about the $30 million headwind in pension under comp and benefits that you should add to your model, and that's equal each quarter. So you can add an extra $7.5 million to each quarter's comp and benefits. And then whatever you think the stock-based comp will be in terms of our performance, that's always the variable. It was a big headwind in 2019, and we fully expect it to be a big headwind in 2020.

[Justin Trennon Long, Managing Director]

That's helpful. And maybe one other bigger picture question around the OR. Obviously a lot has kind of changed in the last year with how the economy has progressed, the freight market has progressed. You mentioned some of the contract announcements. And we've seen the headlines on that. When you put it all together, how are you thinking about the right framework for OR improvement going forward? Is it still something around that 100 basis points of annual improvement if we're growing RTMs mid-single digits? Or is there an updated way to be thinking about that?

[Nadeem S. Velani, Executive VP & CFO]

Yes. Justin, good question. We don't necessarily look at the OR for the sake of OR. It's just, it's a product of doing everything else well. And it's a bit of a scorecard. So if John and his team that have been very successful in leading the industry in growth, continue to do that, that's going to be sustainable, profitable growth. It's not going to be growth for growth's sake, and pricing to the service and the value we give our shippers, that's going to be beneficial to the OR. The operating team executing safely and executing in a controlled fashion in terms of -- from a cost control point of view. The operating leverage we should get, some of the investments that we're making in terms of assets and infrastructure and terminals that will allow productivity improvements to be achieved. All of that goes into the blender. And you should naturally see a benefit to the OR. We put up some very strong numbers in the back half of 2019. And there's no reason outside of stock-based comp, which I mentioned again is, we expect to be a headwind outside of that, and we should see continued improvement in the OR. And I'm bullish on what we can achieve relative to the industry.

[Operator]

David Vernon with Bernstein.

[David Scott Vernon, Senior Analyst]

So Keith, I wanted to ask you a little bit about the decision to extend the network a little bit with short line purchase. Obviously, that's a little bit of a switch from prior rationalization of short line. Is this a shift in sort of philosophy in terms of looking for ways to further enhance the value of the network? Or was this just like a onetime opportunity that seemed like a good fit in the network?

[Keith E. Creel, President, CEO & Director]

Well, we've always embraced the philosophy that we're continually looking for value-accretive opportunities to grow our network. And this certainly was a compelling one. I look at this railroad -- some people do know this, some people don't -- this is a railroad that our predecessor sold 25 years ago for the reasons that only they can explain or properly give justice to. They made a decision to exit the market. The world has changed in 25 years. The railroad has changed, it's evolved. We've got a very, very compelling, competitive service offering that we're able to produce that when you lay that over that geographic footprint, it represents strength and opportunities for long-term, sustainable, profitable growth. We're going to help those customers win in the marketplace. It just makes too much sense. It fits right in, folds right into the strategy that we've executed across this. [ While ] railways the last 3 years, when we shifted from our mandate to fix the strength and the stability and the long-term sustainability of the company to one of growth, using the value and the capacity that we created by implementing a precision scheduled railroading. So we'll continue to look for these. I would suggest, I don't see any that are as compelling that have made themselves available, but we've got dry powder. We've got the balance sheet to act, and we certainly have the expertise within this company to convert it. So we'll continue to look. Again, nothing I see in the immediate future, but our eyes are wide open.

[David Scott Vernon, Senior Analyst]

And maybe just as you think about integrating it into the business, will there be some time for it to kind of get up to the return level you'd expect? I'd imagine there might be some CapEx you need to put in, the labor may be coming over at a little bit of a higher rate if you're going to be bringing those employees into the existing contracts. How should we think about the return profile on that extension of the network? Should it be a little bit more back-end loaded? Or will it be -- will it start from day one?

[Nadeem S. Velani, Executive VP & CFO]

Yes. I mean you'll see some small accretion kind of day one, but it's nothing that's going to move the needle in any way. So some of the growth opportunities we talked about, to your point, in terms of getting the network back up to the levels of capital condition that we expect, it will take some time. So it will be more back-end loaded. It is a strategic opportunity that we're not going to rush. We're going to do it right.

[Operator]

Ken Hoexter with Bank of America.

[Kenneth Scott Hoexter, Managing Director and Co]

Maeghan and Nadeem, congrats on the awards. And Keith, I appreciate the comments, that comment earlier about your conservatism in your outlook, but just really quickly, I just want to follow up on that. Would you be more surprised on the volume side, meaning you're more concerned about the revenue outlook? Or is this more cost returning that Nadeem talked about, just because you've been so adamant about kind of double-digit growth in '19, '20 and '21. So just a little bit of conservatism, I'm wondering what -- where are you leaning? The revenues or cost side?

[Keith E. Creel, President, CEO & Director]

You know what, from a prudent view, Ken, if I knew what the winter was going to do in the fourth -- in this first quarter, and I knew that all of this uncertainty in this trade space was going to be resolved. And I knew that the ground moisture was going to be favorable, and we don't have the same wet weather we had when we harvest our crops this last year, you could convict me for conservatism. I just don't know that yet. I see an opportunity to firmly achieve the guidance that we've issued, which we pride ourselves in that, and we owe that to you and our other partners in this business. But likely again, I'll be surprised if we don't exceed, given some good fortune, given the hard work and the potential this team represents. In these opportunities, I see opportunity to meet and exceed on the cost side as well as to meet and exceed on the revenue side, all of which leads to meeting and exceeding on the earnings. That's truly what the bottom line is.

[Kenneth Scott Hoexter, Managing Director and Co]

Truly fair. I just wanted to see where -- if you were throwing it in on one bucket versus another in terms of why you were adding that -- a little bit more conservative. So that's helpful. And then I guess just lastly for me. Your peer talks a lot about this potential growth of Halifax opening up the Eastern. Is that -- when you talk about CMQ and the Port Maine, is that what you're -- or St. John, is that what you're looking at? Or is there -- is that kind of a minor portion of what you can do in Montreal or elsewhere? I just want to kind of gauge, when you talk about this future, is that kind of your opening up the East for additional capacity?

[Keith E. Creel, President, CEO & Director]

Yes. I see it as a competitive option, a direct competitive option for the existing business that [ they ] currently calls on or is served in the Maritimes to Halifax, obviously, but I see it as opening the door and being competitive to trucks and creating new solutions that don't call on the Maritimes now from an inbound standpoint. And to John's point, we can't really provide the color yet because the devil's in the detail and we're going to do this right, but we're having some very encouraging discussions with customers about existing moves as well as new moves to the rail industry in providing solutions that, frankly, even though the geographic advantage was there, the service proposition wasn't there, given that you go from, some of these lanes would have been a 3 railroad move to a 2 and in some cases one. And we believe in partnership with a short line that does the final mile into St. John, what will feel like and look like and the experience will be like a single-line served railroad from East Coast to West Coast in Canada. And certainly compelling into -- with speed into the Midwestern markets. I mean, you think about St. John to Montreal in a day, that's pretty darn compelling, especially when it's reliable. That's truck-like reliability with a railroad that not says it but does it. And from a service standpoint, if that speed matters, that's compelling. As you think about St. John to Chicago in 3 days, consistently, reliably. These are products that haven't been put in the marketplace that are still got to be tested by the customers. And once they do, and they see the value of it, those that sign up early are going to realize the value early and those that are a little bit late to the party to compete, I just truly believe it's too compelling for them to ignore.

[Kenneth Scott Hoexter, Managing Director and Co]

Surely appreciate the time. And Nadeem, looking forward to that 16 first quarter, that's great stuff.

[Nadeem S. Velani, Executive VP & CFO]

Thank you.

[Operator]

Allison Landry with Crédit Suisse.

[Allison M. Landry, Director]

And I'll just ask one. But just following up on the discussion with the CMQ and Eastern Canada. Is there anything that's specific that may relate specifically to the Brookfield transaction of Genesee & Wyoming? Is there anything in that portfolio that you think may be an opportunity to further extend connectivity to either Eastern Canada or the Northeast U.S.? And then just any comments on your willingness to take up leverage for an M&A?

[Keith E. Creel, President, CEO & Director]

Allison, the question there specific to the Genesee & Wyoming transaction, I would say maybe. See, it just depends. Obviously, there's a piece of that network, again, that sort of is reflective of the CMQ story, a railroad that we used to own that went to Québec city. That just depends. It may or may not come into play, but it could represent compelling value. It just depends on the willingness to sell it and what the numbers are and if we can make it work. So with that said, that's an opportunity. And the other way I look at this and think about this. I think about, in simple terms, how important and critical Vancouver is to our network and how it -- it's the bookend or the starting point or the ending point of the strength of our franchise, with the shortest routes to the key markets in Canada, the major metropolis centers in Canada as well as to the Midwest of America. If I go to the East and I look at St. John, to me, the art of the possible there is St. John could be the Vancouver. It could be the Vancouver in the East that can get you to those same key routes in the Midwest. So a franchise that has a Vancouver in the West and its sister, brother in the East, I think that's pretty compelling. And again, it's the art of the possible, but what's impossible is if you don't have that network, you can't create that vision, and we think we can do that.

[Operator]

This ends the time allotted for our Q&A session. I would now like to turn the call back over to Mr. Creel for final remarks.

[Keith E. Creel, President, CEO & Director]

Okay. Well, thank you, again, for your time and for your vote of confidence. As I've said, it's -- we don't take it lightly at this company. We're going to work hard to meet or exceed your expectations and to reward you for the trust you put in us, as we reward our customers with our service so they can win in their end markets, and our employees that make this all possible for their sacrifices and their contributions. We look forward to meeting again and discussing again what we anticipate to be strong results for the first quarter of 2020. Have a safe and productive day.

[Operator]

This concludes today's conference call. We thank you for attending Canadian's Pacific's Fourth Quarter 2019 Conference Call. You may now disconnect.