Ask The Experts: August 21, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: What are your takeaways from the Canadian National Railway (CNI) Q2/19 report?
Good quarter shows that they are back on track and that the future is Precision Scheduled Railroading (PSR) 2.0 - CP may have won the Gold Medal for Q2/19, but Canadian National ran a hard last lap to close the gap significantly – an all-Canadian top 2, and solid (if likely repeatedly ignored) evidence that the future of North American freight railroading is PSR 2.0 (sometimes called PHR, by me, anyway). CNI’s EPS was up 15% YOY (and 4% above consensus); volume grew 2% - half the CP rate but the only other Class One to show growth at all; revenues were up 9% (price was, and will continue to be, “solid”). CNI reiterated its short term guidance – including “mid-single digit” growth in 2019 RTMs, so with H1/19 slightly below 3%, assumes….an acceleration in H2/19 (!). More importantly (but also, of course) they reaffirmed their longer term targets from Investor Day, only 7 weeks ago, notably stabilizing in a “high 50s OR), yet investing to grow even while normalizing capex (that means 18-20% of revenues, folks) and producing a 15—17% ROI. On that note I do wish that they had joined CP in revealing their LTM ROI (CP’s was just under 17%!) to make a louder argument. The OR came in 70bps lower to 57.5% which “adjusting for real estate sales will prove to be the lowest in the industry – CNI’s traditional role.

Q: What did we see for industry revenues in Q2?
The usual strength in Forest Products was reversed (quarterly revenues down 1% on an 8% carload drop)due to “recent BC plant closures and production curtailments”; powerhouse Intermodal grew only 1% in units (15% in revenues) – and that as including TransX’ revenues (~$100mm of the $129mm YOY increase). On the other hand, coal was up 5% (units) on Canadian met exports and “higher volumes of domestic thermal coal to US utilities” and Grain was up 3% (revenues +7%) on higher Canadian wheat “and US corn and soybeans” exports. Go figure….of course the star was Petroleum & Chemicals (volumes up 12%, revenues 23%) led by CBR, which by June was back up to about 2/3 capacity on the CN, awaiting expected Alberta government contracts and the removal of production curtailments.

Q: How does the forecast look for potential new business pipelines?
Good (“constructive” forecasts include that CBR – and propane, autos, international and eventually domestic IM) ….there has been no degradation of the new business potential pipeline (an additional $1.25B-$2.32B – in new-win revenues by 2022!) as outlined on Investor Day. July appears to support the acceleration thesis – traffic (RTMs this time) is running up ~6%....

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Alison Babcock