Canadian National Railway was one of the rail leaders of the last decade – can they be again? (Tony Hatch)

20161212 Tonyhatch (Cropped)

Hard-luck PSR Mothership CNI beat Street expectations ... in the calm before the C19 storm (although of course, the pandemic began its awful influence before the quarter ended). They produced good financial results despite a (pre-C19) tough environment, had improved OR (although they were in the mid-60s and trailed the group), yet they produced very solid operational metrics. While Q1/20 may well be remembered only as the “calm before the storm.” there are enough interesting takeaways, upon reflection, to consider.

CNI’s good Q1 beat back bad luck – does it matter? Canadian National, the PSR Mothership and the winner of best freight railroad on the planet, all-in and century-to-date – is facing increased competition, of course, from her children spreading the religion across North American.  The best ORs (in Q1/20) came from CSX, UNP (!) and CP, all helmed or operated by CN alumni – but it is important in judging CN over the quarter and the past year is the run of bad luck they have suffered – most notably and recently the illegal blockades that dominated the winter headlines. So in that regard, their operating metric improvement in car/train velocity (+10%) and dwell (-7%) is remarkable. CN noted that by March, post-blockade, their OR was in the “high 50s”.  April, etc will not be so kind (though with volumes down ~15%, there’s was a relative bright spot – but they’re looking to May to be the low point….hopefully); now their recent run of bad luck has been shared by all of us.  But their ability to handle the blockade (etc) impacts was an important piece of “new news” – since a lot was pre-covered, if you will, in their notable late-Q webcasts.  It has been a long while since CNI has had an easy or clean quarter, mostly no fault of their own; it will still be a while, thoroughly no fault of their own. Still:

  • CNI attributed their agility – as seen in their rapid cost takedown where the expense decline (6%) matched that of volume – as a result of “PSR being in their DNA.”
      • Headcount was down 12% (now running over 14%) YOY.
      • Train productivity was 5% better YOY.
      • They remain industry leaders in fuel (and therefore emissions) efficiency which improved 6% YOY – they think there is plenty of opportunity remaining, as well.
      • Safety improved – injury rate by 3%  but the accident rate (compared to 2019’s so-called “polar vortex”) by fully 36%.
  • CNI noted their strong FCF (guiding to a “minimum of $2.5B in 2020”), balance sheet, debt ratings, etc.
  • CNI reduced its Capex plan – stop the presses – but by a “mere” $100mm to $2.9B (noting that given the volumes down some 25% now, they can stretch their Capex dollar a lot further).
  • CNI stressed the long term nature of their business and their L/T opportunity – notably in their IT investment (and they noted that their track geometry car was getting an FRA test – very good news); they did suspend not only their Guidance but also, noting that even the Bank of Canada suspended guidance, their 3-year Guidance that dated to their last (2019) analyst/investor conference but they stressed.
      • Their excellent appendix included their pipeline of growth (and stressed that channel partners such as ports are going forward with their expansion plans - and their experience in previous economic shocks.
      • They are preparing for changed post-pandemic freight flows, though they think some of the talk of near-shoring etc is “emotional” and “overblown” (hear, hear!).