Mothership is Back -- Q2-19

Greetings;

CNI Q2/19 Takeaways – Good quarter shows that they are back on track and that the future is 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.

  • The CNI revenue story for Q2 was interesting, to say the least – 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.

  • 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%....

  • Rob Reilly, the new COO (from the BNSF) was formally introduced on the webcast, and he is joining at a good time. Safety wasn’t highlighted (always a surprise) but P/I improved 1% and the accident rate fully 43% (although one accident inconveniently in the Sarnia tunnel added to the 5% increase in casualty costs). Four of the six listed KPIs showed improvement (through dwell by 11%), the other two (loco utilization & train productivity) were flat. Overall, headcount increased and overall expense was up 6%, well below the revenue gains (+9%) but triple the “work” increase (units grew 2%). But, ho! Again TransX appears – adding to the HC (which was still up, after the X-factor, due in part to in-sourcing) and overall Opex increase – to the tune of 110bps of OR….

  • The Mothership is back….

For fun, again from “Atlas Obscura”: https://www.atlasobscura.com/places/durango-silverton-narrow-gauge-railroad?utm_source=Atlas+Obscura+Daily+Newsletter&utm_campaign=d5355b27d3-EMAIL_CAMPAIGN_2019_07_25&utm_medium=email&utm_term=0_f36db9c480-d5355b27d3-67111397&ct=t(EMAIL_CAMPAIGN_07_25_2019)&mc_cid=d5355b27d3&mc_eid=262a4c0723

Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com