Ask The Experts: May 15, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: What are your thoughts on Canadian National’s (CN) Q1/19 Report?
Canadian National’s Q1/19 (slight) earnings shortfall made it the second railway – and the second, of two, Canadian Railway, to report below-consensus results – but, as with CP, they harsh winter added to the other distortions (trade, Albertan market interference, etc) to make this quarter’s results hard to decipher and less important than CN becoming the second Canadian to reiterate full-year expectations despite the slow start.

A field day for the (cold):  CN’s CEO JJ Ruest informed us that CN faced ~7 weeks of Tier 3 and even Tier 4 cold – in light of that a 17% increase in adjusted/diluted EPS and an 11% revenue increase that matched the cold-brewed 11% expense increase was actually pretty darned good  (1% of the expense was a PTC charge).  The (adjusted) OR actually improved 60bps to 67.2% - but remember last year was the congestion-winter of CN’s discontent.  Volume was up 1% - you can track the weather impact on their slides, plus the “nosedive” in CBR due to the provincial government’s heavy-handed market interference.  Operating metrics declined in many categories (train velocity down 1%) but showed improvement in dwell (-12% versus last year’s congested performance) and car velocity (up 8%).  The injury and accident rates ticked up, too.  CN didn’t delineate the winter hit to earnings, which on the one hand would have made all of our lives easier, but on the other is a cool way of saying this is just….the rail business.

There’s something happening here:  Resiliency and recovery – along with “railway” one of the Three Rs of CN.  The railroad is now fully fluid, the outlook looks bright – high single digits for the FY19 means quite a strong last 8 months of the year – but CN believes that will happen even if CBT doesn’t ramp back up to December (pre-Albertan interference) levels.

Q:  How is the Surface Transportation Board (STB) working to increase transparency in the industry?
A:  At both NEARS and ASLRRA there was discussion of coming Surface Transportation Board (STB) activism.  In fact, the STB will hold a hearing in DC on the increase in assessorial/demurrage charges (some of which is the actual imposition of existing contractual requirements) on May 22 in DC.  New Vice Chairman Patrick Fuchs spoke, to positive reviews, about these concerns, as well as more use of “Rule 11” pricing (think unbundled/transparent interline 7 switching bills), which add to transparency but bring not insignificant new information complexities….My fears are that, although the recent PSR transformation efforts have compared well with CSX rapid revolution, the well has been poisoned by the latter’s experience - even if it did what it set out to accomplish – better service metrics….and that the STB’s seemingly forgotten caseload includes the reciprocal switching/access decision in a world that seems judicial but is actually highly political…

Q:  What is Canadian National’s (CN) philosophy on OR?
A:  CN’s CEO JJ Ruest explained that lower OR can be achieved, for sure (and CN has the most annual gold records in this category in modern times) – but it “depends on how much risk you want to take on”, defined here as risk of demand as well as “harsh conditions” (to which I would add political).   Describing OR as a “one trick pony” (and the new PSR-led focus on it a “limbo contest”), Ruest continued: “what you’re seeing from CN is a more balanced scorecard – EPS growth and especially ROIC - than strictly pure PSR”.  OR isn’t unimportant or useless, it’s just not the be all and end-all.

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Alison Babcock