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Canadian National Railway Company (CNI) Q1 2018 Earnings Conference Call Transcript

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Canadian National Railway Co (NYSE: CNI)

Q1 2018 Earnings Conference Call

April 23, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

CN's First Quarter 2018 Financial Results Conference Call will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN's first quarter 2018 financial results press release and analyst presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's website at www.cn.ca. Please stand by. Your conference will begin shortly.

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 President, Investor Relations

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 JJ 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.

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In order to be fair to all participants, I would ask you to please limit yourself to one question. The IR team will be available after the call for any follow-up questions. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, JJ Ruest.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Thank you, Paul, and good afternoon, everyone. Welcome to our first quarter result. 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 up I'm very honored to be here with my colleagues and very experienced railroaders, all of us having decades of building CN from the ground up. This is not our first quest. This is not our first mission. Our service has been challenged since last fall, but I want to salute the huge personal effort of our team of operating railroaders we dealt with strong demand and harsh winters.

Our Q1 result reflects 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 long 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 are also obtaining our guidance. Ghislain will provide those specifics in a few minutes. Our team of railroaders is definitely not showing the power on the year-end results.

I will now provide an update on our topline, on the commercial side, followed by Mike's review of our operation and Ghislain will follow up with our financial performance and our momentum going forward in the next few quarters.

The first quarter revenue was in line with the available capacity. Demand 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 prices are backward looking price measure of price, on the full book of business executed in Q1. While core pricing on recent renewal is a forward-looking measure price trend, we will conclude in the last 90 days.

The strong Canadian dollar was a negative headwind of $80 million in reported revenue and the fuel surcharge program was a $70 million positive tailwind. We experienced significant increase in NP export containers volume in this quarter to the West Coast, which is the main driver of our mix, expanding the major gap between our carloads and our RTM. CN's ports are fluid with normal ground count and entry, 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 continued to grow ahead of schedule. Montreal was up double digit as well, and Vancouver was up mid-single digit. Frac sand 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 land in the prairies and impacted exports. In the last seven weeks, we made quite significant progress and we are now running current weekly car orders as placed on us by the grain companies. CN spotted 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 reduced our crude-by-rail business to last two quarters. Crude carload was reduced 25% versus last year 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 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 the value of our fresh investment [audio cuts out] capital 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 result on RTM.

I'll turn it to Mike. Mike, if you want to take it away?

Michael A. Cory -- Executive Vice President and Chief Operating Officer

Thanks very much, JJ. First, I want to thank all of the railroaders of CN for their efforts in the challenging first quarter. From an operating perspective, the results were a combination of two 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. The slow resiliency, coupled with extremely harsh winter conditions in those same areas resulted in a decline to service levels and an increase in cost for 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 inline 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 result. 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 is 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 off ramp and disbursement to the city streets also takes longer. During non rush hour periods, movement across and onto and off the highway is much faster.

To improve these areas of constraint we are adding capacity. We are building infrastructure to increase fluidity and resiliency on both our busy highways and major terminals. In addition, we are hiring and training employees, and purchasing locomotives inline 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 of 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 15-25 minutes. These return grids are between 10-15 miles apart. We do have some double track sections on this portion of our network, though.

As we add trains to the main line, we slowed the overall speed down. Any time the flow is disrupted the 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 five to six sidings in order to meet another train(s). 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 assets. 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 main line 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. 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.

[Audio cuts out] the commitment made to the customer is fulfilled and the productivity of the asset drives the reliability of the customer needs and products. Our deployment of these stretches of double track are in our Edmonton to Winnipeg corridor where volume growth and the need for resiliency is 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 exceptions. The western region has improved from the depths of winter. High volumes are currently being moved. However, main line capacity constraints remain present, resulting in lower productivity of our assets.

Looking ahead to Q2, operating metrics will continue to be under pressure as compared to 2-'17. 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 on line, and most track infrastructure will be completed, leading to positive operating metrics year-over-year. I've 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 Vice President and Chief Financial Officer

Thanks, Mike. Starting on Page 11 of the presentation, I will summarize the key financial highlights of our first quarter performance. As JJ 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 $1.00 versus $1.16 in 2017, down by 14%. Including the impact on 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 billion, impacted by higher fuel prices, low network resiliency, and harsh winter conditions. 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 costs 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 costs.

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 a $9 million favorable variance 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 partly offset by the favorable impact of some depreciation studies. Equipment rents were up 16% versus last year, driven by the slower network, core higher 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 advanced ordering of materials 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 America economic conditions will be supportive 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 $5.10-5.25 versus 2017 adjusted diluted EPS of $4.99. This compares to our previous financial outlook, which was for EPS to be in the range of $5.25-5.40. We continue to assume that the Canadian to US dollar exchange rate will be around $0.80.

This environment should translate into volume growth in terms of RTMs in the range of 2-4% for the full year versus 2017, compared to our previous expected volume growth of 3-5%. 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 $2.4 billion versus our 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 or surplus non-core assets. In April, we closed to 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, JJ.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Thank you, Ghislain and Mike. Operator, before I turn it back to questions, I'd like to make two 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 are wanting to get this done.

Regarding the operation, we will continue to get sequentially better. We are getting better in the second quarter for the month of March, but also the third quarter will be better than the second quarter. By the time we get to the fourth quarter, our network is going to be quite capable. By 2019, we're going to be very fit to compete and we'll have very excellent service to offer in the marketplace. We're investing in our future. CN is coming back and better.

...

So, Patrick, we'd like to turn it back to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from Brian Ossenbeck from J.P. Morgan. Please go ahead.

Brian Ossenbeck -- J.P. Morgan -- Analyst

Thanks for taking my question. I'll start with the CapEx. It's up a bit from the last outlook. Can 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 and spending that you were making for this year? Maybe you can give us a sense of what changed since the initial update and also why it seems like it's taking a little bit longer than expected for the construction period this year?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah, we're increasing our capital envelope by $200 million. The $200 million is an increase in capacity investment, so some of this will be more infrastructure that Mike is looking for in the West. 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. All in all, it'll be $900 million of capacity investments.

Your second questions -- again, 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 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. This is outside work. This is out there in the elements and so on. 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 reduced our guidance on EPS for the year.

Brian Ossenbeck -- J.P. Morgan -- Analyst

Okay. Thanks for the details. That's helpful.

Operator

Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.

Cherilyn Radbourne -- TD Securities LLC -- Analyst

Thanks very much. Good afternoon. Can you elaborate on the tenor of your discussions with customers? I'm driving at 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 "JJ" Ruest -- Interim President and Chief Executive Officer

Yes, there has been a lot of discussion with customers since last fall, regarding where we made the most progress in terms of the service recovery. One of the area was on the grain. The last two 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's still a backlog of grain to be moved in the second quarter, but the last 15-20 days, we are in cadence with the supply chain, with the grain companies and their program.

In terms of the port business, which was another area of concern, all of our four terminals we serve on the Canadian West Coast, the ground count is quite low. The dwell time of the containers, after ship discharge, is running below three days and has been below running three days of average wealth the last two or three 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 time in the terminal are now really within the service KPI of 45 minutes from gate in to gate out.

Where we still have a backlog to deal with in fairness, it's mostly in western Canada and mostly on the world or car load. Lumber is one area, for example, where there is still quite a bit of lumber product in western Canada, trying to find its way into the US market. We are going to be getting more center beams this year to address that more long term. We're leasing 150 in the lease market an we have sanction from the board to add 250 center beams that will be constructed sometime this fall.

So, I think the sentiment of the customer is getting better, definitely. They are seeing the impact and the goodwill and the whole capital program that Mike was talking about this year. The section of double track and the siding that we will install this summer from basically this month to the end of October will have huge impact in what kind of service we can offer to the trade and those who export come late this year and early next year. Still more work to do, but by the time we get to the end of the year, things will look pretty strong and solid.

Cherilyn Radbourne -- TD Securities LLC -- Analyst

Great. Thank you. That's my one.

Operator

Thank you. The next question is from Brandon Oglenski from Barclays. Please go ahead.

Brandon Oglenski -- Barclays Investment Bank -- Analyst

Good afternoon. Thanks for taking my questions. JJ, 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 quite a bit lower. 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 "JJ" Ruest -- Interim President and Chief Executive Officer

Mike will help me with that, but when you look at 2-'14 versus today, you have to take the total business on the network. The first thing you should look at is the different mix. 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 2-'14.

Michael A. Cory -- Executive Vice President and Chief Operating Officer

Brandon, we're seeing probably upwards of 10%-plus volume growth versus '14 in the pinch points of the western corridor. To JJ's point, there's a mix difference, but we did not really spend after '15 a lot of capital in that corridor. So, that's why, after a winter like this, it's a matter of catch up. 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 higher amount of intermodal, which demands more track capacity, priority has really affected us.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

So, much more intermodal from Rupert, Vancouver, and much more Canadian coal, who wants to go 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. Therefore, those ton miles from the east to the west, any siding, and section of double track. And we're also investing just to meet the demand of this year. The whole capital program we have is also to look for 2019.

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. We have very high visibility of 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 this section of double track and siding. So, it's partly to meet the demand of today, but also the demand of 2-'19. We're very optimistic about 2-'19. I hope this helped.

Brandon Oglenski -- Barclays Investment Bank -- Analyst

It did. Thank you.

Operator

Thank you. The next question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Thank you. Good evening. CN spent many years building trust relationships with customers. When you look back at this operational issue that you've been going through, does it change how you think about capacity overall for the rail network to avoid these kinds of issues in the future? Do you build more in order to allow for your unexpected volume(s)? The other related question is, are you able to build all the capacity you think you need given the volume outlook this year? Or, should we think that there's going to be a little bit of overflow into 2019?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

I can start, Fadi, and we're all going to get in on this as a team. We've learned some lessons in 2017 and we're humble about this. 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. Frankly, 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 -- it's the time value of money. We don't like to invest too early, but if 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 had the first quarter of this year, where you've got a lot of unhappy customers, and pressure being made to Ottawa and the like.

We have learned out of this that, from a financial standpoint, in some key corridors, we need to build a little bit of buffer. 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 into that type of situation going forward. Mike or JJ, want to add anything?

Michael A. Cory -- Executive Vice President and Chief Operating Officer

Yeah, I'll jump in before JJ. First of all, we have a responsibility to our customers that are growing their markets through us to be there before it happens. That's number one. From an operating perspective, the alignment between our team, the marketing and sales team, and the finance team -- and JJ 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. If you look at the type of growth, the mix of growth, that we've had and the amount, I don't know if you could pick another railway that's like this. We're going to develop this ourselves. That's what we're working on, so we have the capacity, the service delivery, in place in line with what the customer needs, and we do it very productively. So, that's the big part from my end. JJ?

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

So, being a company who's organic growth oriented, we will invest in our business. We need to build back the resiliency that we used to have back in '15 and '16 but lost in '17. We know that, to be able to grow organically and provide a 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 times, or most times. One can be off on Easter Sunday, because Easter Sunday church is one day out of 365. But, we can't be off for three months in a row.

So, we need to have enough capacity that's actually in line with what we said we would do, which is we will outpace the economy and have organic growth. In order to do that, you have to have a service that's above the industry average.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay. That's great. The part about -- are you able to build the capacity you need this year or is it going to overflow into 2019 as well?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

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. I think we're monitoring the build actually on a weekly basis, and we're comfortable that we'll be able to build to what we have in the plan. That will really help us, as JJ mentioned, in the fourth quarter, but also give us tons of momentum to enter into '19.

Michael A. Cory -- Executive Vice President and Chief Operating Officer

Make no mistake, Fadi. As we grow, like we suspect, we will continue to build capacity next year.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Great. Thank you.

Operator

Thank you. The next question is from Jason Seidl from Cowen. Please go ahead.

Jason Seidl -- Cowen & Co. LLC -- Analyst

Thank you for the time. I wanted to focus a little bit on the pricing dynamics and comparing and contrasting the current environment that you're in for serving -- [audio cuts out]

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Yeah, the pricing environment is always typically factor of two things. One is the factor of supply and demand. Is the supply of our services -- the pipe and then the demand -- and that is the case. Transportation services capacity right now is more limited in total than it was a year or two back. And two, the quality of the service. So, rebuilding the capital plan that we're reporting, 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 a good pricing.

But, in the meantime, most of the discussion taking place on some of the pricing is the basics of supply and demand, like in any other market. The supply of transportation services is tight and you see that reflected in our pricing and 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 like -- where you have the biggest spike in volume up and down. I think it's only fair that those segments where the volume has been quite volatile the last few years, that this business is priced in a way that reflected that environment.

Going back to our customers, including when we discuss price, our relationship with customers by and large is very strong. They understand what we went through. We are humble and honest about the fact that we've all learned. We are all responsible and accountable around this table about what we did last year and didn't do. I think, in hindsight, we should've probably triggered a lot of this action plan sometimes in April or June of last year. It would've given us the time to execute. Having said that, we're very energized and have a sense of urgency to get it done as 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 is approved contingent on some condition that we can rebuild our Canadian grain fleet and be placing orders in 2019 and '20, to get into 1,000 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 to the house, the way it was originally written. But, all of these things really are pretty tangible action.

When you hire as many people as CN is hiring and you deploy the capital for hiring, it speaks loudly with our customers. They see that it's more than just words that we provide a better service. They actually the see the capital, the time, and the effort that we're putting behind it. And also, the progress already in the last eight weeks. So, the pricing discussion is -- price trend is up and will probably be up for most of this year, if not all of this year.

Jason Seidl -- Cowen & Co. LLC -- Analyst

Thank you.

Operator

Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.

Steven Hansen -- Raymond James Ltd. -- Analyst

Good afternoon. On the labor side, given the turmoil that we've seen with one of your primary competitors of late, I was hoping you'd give us an update on your recent agreement with the TCRC. I believe you signed the tentative agreement back in March, but I don't believe it's been ratified just yet. Any update on that process would be appreciated, and whether or not you think it'll ultimately ratify. Thanks.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Mike will take that one.

Michael A. Cory -- Executive Vice President and Chief Operating Officer

Certainly, Steve. 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 the end of May. Really, we have a very constructive labor environment that we're working within. So, no issues here.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Yeah, that should be in good hands.

Steven Hansen -- Raymond James Ltd. -- Analyst

That's helpful. Thanks.

Operator

Thank you. The next question is from Chris Wetherbee from Citigroup. Please go ahead.

Christian Wetherbee -- Citigroup Global Markets -- Analyst

Thanks. Good afternoon. On the guidance, can I get a sense of the cadence of the improvement? You had a pretty challenging comp in the second quarter, and then maybe it sort of tails off as the year progresses. I just want to get a sense of maybe how quickly you can right the ship from an earnings perspective. It would seem a decent amount of growth is imbedded here. Maybe you can help us with some of the puts and takes to better understand it?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah. We don't provide quarterly guidance, as you know. But, I'll reiterate a little bit what Mike has mentioned. As you know, our operating metrics 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 the operating metrics are still going to be challenged. However, I think, when you look at the new locomotives coming in and we're hiring new people coming in as trained conductors, 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.

That will translate into -- our costs are going to be again back online. 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 out of whack. So, as the operating metrics come back online toward the second half of the year, then these costs will come back in line and you'll see operating ratio and EPS reflect that. We're very optimistic.

But, we've said it before, we need that track. We need that third lane of the highway. Yes, we are seeing sequential improvement, but it's limited because we need that infrastructure. That infrastructure will come online mostly at the end of Q3 and mostly might more in Q4. We need that. So, we'll show sequential improvement, but I think the second half, including Q4, will be quite strong in our view.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Yeah. So, as the section of double track come in service, unit costs improved, and obviously we're going to be in a better position to do a revenue, which will go up as well. So, we'll have the two levers at that time.

Christian Wetherbee -- Citigroup Global Markets -- Analyst

Okay. Thank you very much.

Operator

Thank you. The next question is from Walter Spracklin from RBC. Please go ahead.

Walter Spracklin -- RBC Capital Markets-- Analyst

Thanks very much. Just coming back to pricing, JJ. 4.8% on renewals is very significant. Are you seeing that in certain lines and is that lifting the average, or is the tighter trucking capacity having an impact on intermodal? If you can speak -- I know you've touched a little bit on it already -- but the customer conversations after a fairly challenging quarter. Frankly, I was very surprised to see you get that level of pricing. How was that achieved? How sustainable do you see it in the next 6-12 months?

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

The pricing discussion is an across the board discussion. Any situation today where somebody would insist -- no reason why. They would be wrong -- but insist that they have a better offer than somebody else from us. We will not reduce any price on any condition. So, we don't have any drainage in our price calculation or price going forward. If it is, we'd rather lose a little business than do otherwise. In terms of why the pricing power comes in, it comes from different pockets. Some pockets are stronger than others. The stronger pocket of those are really, really trying to ramp up their volume price in crude-by-rail and the like. The value of the commodities short-term and mid-term 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 at that point also sacrifice very profitable sales while their market is doing well.

In a 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 a world where what's happening in the trucking environment and some of the capacity's pricing is quite relevant. There's also a case in 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 good pricing for the capacity that we have, and number three, we're not adding capacity before the next few months and the next few quarters, before we have 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.

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 90 days.

Walter Spracklin -- RBC Capital Markets-- Analyst

Okay. Appreciate the insights. Thanks very much, JJ.

Operator

Thank you. The next question is from Scott Group from Wolfe Research. Please go ahead.

Scott H. Group -- Wolfe Research LLC-- Analyst

Thanks. Good afternoon. The $150 million of asset sales, what's the gain there? Can you say if that's included in the guidance or not? Bigger picture -- maybe for you, JJ. One quarter only, but your first quarter operating this show I think is going to be second worst in the industry. 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? 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 Vice President and Chief Financial Officer

This is Ghislain. I can take the first part of the question and I can let JJ or Mike take your second part. On the asset sale, this was a Q2 transaction. Again, we got $150 million in cash. From a gain standpoint, these are one-timers. We always try to find these opportunities of monetization of surplus assets. But again, this is one-time other income and that's not part of our guidance. That's not part of our adjusted EPS and our $5.10-5.25 guidance. It's not part of it.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Regarding the question of ORs, the Canadian railroad has had an adjustment this year in the pension. In the case of CN, it's a permanent step change of 2.5 points of OR. So, you have to take that into account. The way the accounting is now, we will have a higher OR than historically. In our case, we're talking 250 basis points. Regarding the model we have, if we are to continue to be able to grow more than the economy and the railroad, we need to deploy capital and hire people. As we hire people, mainly train crews, we will always have 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 six months of being on the payroll, they don't go GBM. They don't business revenue. But, they are part of a unit cost.

In the case of 2018, as we replenish -- 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're catching up. Also, we want to be sure that winter 2019 is a solid winter. We have more unproductive people in the payroll this year than usually. These will be very strong, solid conductors, but this is another one-time adjustment.

Regarding the future of CN in terms of organic growth, we believe that the model of OR may not be really 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 in the industry will still give us the type of EPS growth that fits our network. There's a trade-off. We're at a crossroad to whether or not is it 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 Vice President and Chief Financial Officer

And if I can add, to JJ's point, we've said that publicly many, many times. We've not enamored at CN with the OR. The OR is kind of a result of what we do. We'd rather be a $20 billion, 62-63% OR, than a $13 billion at 57%. Just do the math. This business, we're bringing in. It's profitable. We need the investments and the track infrastructure to bring it 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 JJ highlighted last year at the Investor Day -- between $1.5-2.2 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. We're not enamored by having the lowest OR in the industry.

Michael A. Cory -- Executive Vice President and Chief Operating Officer

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

Scott H. Group -- Wolfe Research LLC-- Analyst

That's very helpful. If I can just ask one more, if that's possible. If I look at the guidance for the year, it looks like, by the fourth quarter, you're expecting high single digit RTM growth. You have a budget for '19. Do you think that's a sustainable growth rate in '19?

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

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.

Scott H. Group -- Wolfe Research LLC-Analyst

Thank you, guys.

Operator

Thank you. The next question is from Turan Quettawala from Scotiabank. Please go ahead.

Turan Quettawala -- Scotiabank Global Banking and Markets -- Analyst

Good afternoon. I want to get back to the CapEx question a little bit. I wonder, Ghislain, if you can provide any color on how you think 2019 CapEx will be? There's a significant uptick here in '18, but any color you can provide on '19 would be helpful. Also, related to that, you're still continuing with the buyback here. Any color you can give on leverage expectations here at the end of 2018 would be helpful as well. Thank you.

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah. If you look at CapEx early to provide guidance for CapEx in '19. But, we've said to expect that CapEx for the next few years will be north of 20%. Whether I would tell you between [audio cuts out] 20%. 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 toward the business and bring that organic growth and some good solid EPS growth going forward.

In terms of leverage, we are not changing from our strategy and financial policy. We do value a strong balance sheet and we saw the value of this when we hit the recession in 2009. We will continue to have a strong balance sheet in '19. You can expect that. In terms of share buyback, we see this as a residual. The 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 dividends. 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 is the way we see things. As we get closer to '19, then we'll provide more specific guidance around these parameters.

Turan Quettawala -- Scotiabank Global Banking and Markets -- Analyst

Thank you very much.

Operator

Thank you. The next question is from David Vernon with Bernstein. Please go ahead.

David Vernon -- Sanford C. Bernstein & Co. -- Analyst

Good afternoon. I 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 imbedded in the guide is due to maybe just lower productivity as you're building out the program versus inflation, the cost of securing the resources you need to 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 --

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Let me talk a little bit about it and then I can get Mike. When we do our usual basic CapEx plan, you need a work block for the entire time you're going to maintain your main line. That is one thing that's baked into our assumptions. 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 when you put the turnout and connect either the siding or double track to the main line. That's what you need the work block for.

But, it's not as extensive of a work block as when you do your basic CapEx. But, we understand. There is 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 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 the daily basis to make sure the work block are there, to 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 Vice President and Chief Operating Officer

No, I think you hit it.

Ghislain Houle -- Executive Vice President and Chief Financial Officer

On the price, maybe I can help you get some color. The same store price in Q1 was 2.7%. It was 2.4% the prior quarter. So, there's a bit of momentum going on that front. The relevance of that 2.7% is 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. Obviously, it's on the smaller impact than the when we talked about the historical.

Whichever way you cut it out, we see slow, progressive momentum on pricing, whichever way you look at it. And when we see the result, the one that matters the most is same store price. Same store price is the one which is tied in on the quarterly result of the prior quarter. That pricing environment is favorable to those who have some capacity, and capacity at CN is tight and because capacity today is more valuable than it was two years ago. So, I think that's just the basic of any market place where supply demands shift a little more to those who have the capacity, that eventually the pricing power gets a little better.

David Vernon -- Sanford C. Bernstein & Co. -- Analyst

I appreciate that. Maybe as a quick follow-up, is there any update on the timing for the board to make a decision on the CEO search?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

No. The whole exercise has started, obviously. They don't have any specific timing for an announcement of any sort. So, no timing.

David Vernon -- Sanford C. Bernstein & Co. -- Analyst

Thanks very much, guys.

Operator

Thank you. The next question is from Ravi Shanker from Morgan Stanley. Please go ahead.

Ravi Shanker -- Morgan Stanley-- Analyst

Thanks. On 2019, you said you weren't going to give detailed guidance, which I understand. But also, you had a detailed operating plan. So, all this time, money, and effort that's going in 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? What's the end going to look like from 2019 onward?

Michael A. Cory -- Executive Vice President and Chief Operating Officer

Let me start it off. From an operating perspective, we're building a three-year plan just based on understanding what capacity we have. Then, it's a matter of puts and takes whether we do something or not. But, to get ourselves in position and get our line of sight so we know what we need to do as the volumes come. I'll let JJ and Ghislain speak about the future, but we're armed and ready three years out and we want to take it out even further. That's just understanding your network and the strength of our organic growth leads us to have to do that to be successful.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

The network we're building, which is in line with what we view as the potential in the marketplace -- and that's why we're focused to build a strong network from the Canadian West Coast, from Vancouver and Rupert all the way to Chicago. And then, from Chicago and the prairies all the way back to Vancouver and Rupert. This is where we see a strong demand for the product that we have. We have a geographic position where there's a lot of physical activities that will be conducive to have 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 -- Morgan Stanley-- Analyst

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 normalizing the network in the east versus the west?

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

The capacity we have in the east is more something 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, the sales that Ghislain was talking about earlier was mostly eastern sales. But, they weren't rail capacity. They weren't assets that were producing rail EPS. They were assets that were actually valuable, but were not producing EPS growth. By selling them and redeploying the capital west is one of the ways we kind of move our book of assets to the west, namely at $150 million that were sold in April. One could argue all of that has been basically redeployed in western Canada in the next six months to these sidings and double track sections.

Michael A. Cory -- Executive Vice President and Chief Operating Officer

We have a very well run, healthy franchise in eastern Canada that is built for growth also. We're not doing that.

Ravi Shanker -- Morgan Stanley-- Analyst

Great. Thank you.

Operator

Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Good evening. Could you provide an update on the crude-by-rail, kind of the discussion you're having these days? How many carloads you handled in Q1, and also the additional capacity you're willing to deploy by the end of the year and also in 2019? Thank you.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Very quickly, crude-by-rail. In the last six months, we actually curtailed that business. We no longer really do any spot business. We have signed contract business that we'll start up a little bit of it in second quarter, but most of it in the third and fourth quarter and in 2019. How much capacity we're wiling to take? I would call this at this point top financial. We don't want to share exactly how much [audio cuts out], but obviously that has a link back to our capital program, which is one reason why we feel comfortable with our capital program. We'll have return on investment because there are ways to actually tie some of these investments with very specific volume in some segments. At this point, that's all we would say as it relates to crude-by-rale.

Benoit Poirier -- Desjardins Securities -- Analyst

Okay. That's my one. Thanks very much for the time.

Operator

Thank you. The next question is from Ken Hoexter from Bank of America Merrill Lynch. Please go ahead.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Great. Good afternoon. JJ, certainly a lot on your shoulders and good luck as you work through this and through the buildout. I appreciate the thoughts on the operating ratio there. Mike, in the STB letters, one of the largest rails talked about the difficulty of hiring engineers, conductors, and even to the point of instituting some signing retention bonuses, all of which you need plus capital employees. 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, JJ, you talked about getting ahead of the curve?

Michael A. Cory -- Executive Vice President and Chief Operating Officer

Like any massive hiring program, there is always going to be little difficult situations. For us, it's in smaller, remote areas. We have a luxury, though, with our collective agreements, to use other people from their locations up in those places that are hard to find. But, 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. Right now, I'm not concerned with getting the people. Our HR department's 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 in advance warning to make those decisions on finding ways to make sure we have the people.

People want to work. We'll always have difficulty in the smaller places, but this is a strategy that we're continuing to develop as we go because we believe in our growth.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

Thank you. The next question is from Tom Wadewitz from UBS. Please go ahead.

Thomas Wadewitz -- UBS Securities LLC -- Analyst

Good afternoon, JJ and team. Ghislain, you had some comments in terms of reflections on some of the constraints and lessons learned. Could you 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 one could argue that you grew a bit too fast. You could say maybe there could've been more of a focus on raising price versus the volume. 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 better on capacity," and no change in that volume versus price equation?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

I can open up and then JJ can jump in. We haven't changed our views about price. We're trying to go out there and get the best price we can. Remember, in '17, we were caught by surprise. We were coming out of '16 where volumes were down 5%. So, '17 came in and -- if you remember, energy markets hit the trough, namely frac sand and crude, in the second half of '16. In December, who would've thought that the frac sand at the year to date at the end of the third quarter in '17 would be up 135%? We were caught by surprise, related to frac sand, which is a highly volatile commodity.

Some of that growth came a little bit and we've been a victim of our success. If you look at Rupert, it's a very good example. Rupert expanded its terminals by 60%. 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. And Rupert will stay with us for the next 30-40 years. In the railroad industry, if now you lack infrastructure, it's nothing you can fix quickly because you have 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, ahead of the investments.

And, in some of our key corridors, we need to build ourselves a little bit of buffer. The cost of slightly overinvesting in some of the key corridor is lower, mainly time value of money, because I will need this infrastructure -- versus underinvesting. So, we've learned. But, the good news is we have good pipeline, solid growth opportunities, in front of us. JJ and the team are getting as much price as we can. We have not changed our views on price. I can remember vividly that years ago, 2010, people were asking us, "How are you going to grow?"

Now, one of the lessons learned from '17 is we've convinced ourselves that we can organically grow. That's good news. That should be good news for investors, that we have that growth story. But, we need to invest to accommodate that growth at low incremental costs. That's what we're going to do.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

That's a fair comment, that price has to be part of the discussion, especially as we deploy very fresh and large quantities 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 right now services were challenges, this will get fixed. It has been fixed in some segments and will be fixed in other segments in the recent months to come. But, capacity today -- especially capacity coming from fresh new dollars of capital investment -- has a higher value than it had 12-24 months ago. Price is important.

Thomas Wadewitz -- UBS Securities LLC -- Analyst

Do you think that reflects any change in mindset going forward, or not really?

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

It affects how we approach crude now versus two years ago. It affects the frac sand industry, who is much more volume focused. They would rather move more volume that debate back and forth the last fraction of the unit price. It has more value for them to move more falloff when the market wants to move it as opposed to debate back and forth the freight rate of each rail car. On domestic intermodal, we will definitely work very hard to reestablish a very strong product offering. At the same time, we want more money for the existing capacity that we have today. Before we deploy a whole lot more capacity on the domestic side, we want to get a better value for what we have already.

Thomas Wadewitz -- UBS Securities LLC -- Analyst

Right. Okay. Thank you. Thanks for the time.

Operator

Thank you. The next question is from Kevin Chiang from CIBC. Please go ahead.

Kevin Chiang -- CIBC Capital Markets -- Analyst

Thanks for all the color there. Good afternoon. A lot of comments around your focus on ROI when you look at your longer term growth. You did lay out a pretty positive volume growth outlook at your Investor Day. Do you think the profile incrementally is different than -- the volume ROIC profile is different looking forward than what you had in the past? When you look at the last three years, you'll have spent a significant amount of capital and seen a lot of volume growth. But, effectively flattish operating income over let's say a 2016-2018 period, do you see a stop function change in the ROIC profile, the volumes, over the next three to five years versus the last three to five years.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

No, we don't. If you look at overall ROIC, we're hovering between 15-16%. We've said that when we look at -- now you go to specific projects, and we've guided to this at our Investor Day last year, our internal threshold 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 could be small, could be lower. But, if it provides value, we will look into it. I would say that right now this is profitable business coming at us. We have a lot of volume. And, when you looked last year, our volumes were up 10%. The problem is that, because we were short of crews and we didn't have the infrastructure, our costs came out of whack.

So, we need that infrastructure back so that our costs come back in line so that you can see metrics that the market has been used to see and we can accommodate that growth at low incremental costs. Otherwise, that's what happens. If you don't invest the capital, then Mike will have recrews. He'll have deadheads. 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. We're going to stay ahead of the game for nine going forward.

Kevin Chiang -- CIBC Capital Markets -- Analyst

Thank you for the color.

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Operator, I think at this point we would like to close. But, before we do the closing, I would like to make a last few comments. As you saw, we have a very solid capital investment program at $3.4 billion this year. This is all about capacity and service and rebuilding our brand and coming out of it stronger as opposed to be just the same. Mike has described to you what that capital investment entailed. It's track infrastructure. It's locomotives. It's train crews. It's mostly in western Canada. This is where our future is, and 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 with these asset sales in the east, that we're not contributing to the volume or revenue that we're going to deploy in the section of track in the west. We have a very strong bench trend of operating guides and extremely strong of a transportation department. We didn't equip them properly in the last six months with enough people for their job to be able to do. But their talent is the same as it was. This is the CN schedule railroading model. When people are given the tools, they do produce a result.

Obviously, we have a very strong line of sight on the demand. We already basically have a detailed list of things we would like to do, or could do, in 2019. We talked about price on this call, and there is more price right now. The value of what we have and the capacity that we have is more valuable than in the past. 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 our return capital plus a fair profit over and above that.

So, on that, I'd like to close the call. We'll see you sometime in July. Patrick, this is the end of the call today.

...

Operator

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

Duration: 77 minutes

Call participants:

Paul Butcher -- Vice President, Investor Relations

Jean-Jacques "JJ" Ruest -- Interim President and Chief Executive Officer

Michael A. Cory -- Executive Vice President and Chief Operating Officer

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Fadi Chamoun -- BMO Capital Markets -- Analyst

Christian Wetherbee -- Citigroup Global Markets -- Analyst

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Turan Quettawala -- Scotiabank Global Banking and Markets -- Analyst

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Walter Spracklin -- RBC Capital Markets-- Analyst

Cherilyn Radbourne -- TD Securities LLC -- Analyst

Ravi Shanker -- Morgan Stanley-- Analyst

Brian Ossenbeck -- J.P. Morgan -- Analyst

Jason Seidl -- Cowen & Co. LLC -- Analyst

Thomas Wadewitz -- UBS Securities LLC -- Analyst

Scott H. Group -- Wolfe Research LLC-- Analyst

Brandon Oglenski -- Barclays Investment Bank -- Analyst

David Vernon -- Sanford C. Bernstein & Co. -- Analyst

Kevin Chiang -- CIBC Capital Markets -- Analyst

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10 stocks we like better than Canadian National Railway

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David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Canadian National Railway wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 2, 2018

The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

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