Greetings;
Well, I didn’t see this coming….Round Four was a doozy but confounded the cornermen. Canadian National announced pretty fair earnings and progress towards their announced “(2022) Strategic Plan” – expected. But then JJ Ruest announced he would be retiring on/about January….Before the Special Shareholders Meeting scheduled for 3/22/22 – So, what does it mean, in general, and specifically in the Big Fight vs TCI? My initial, and maybe lingering thought is: how do you go into battle without your general? I remain confused….is this a white flag? Is Jim Vena the anointed one? CN announced a search for a “World Class Leader” to replace JJ (interestingly language similar to the TCI deck from yesterday). Can the CN’s new WCL be ready to battle with TCI’s picked WCL? When asked if this was, in effect, an accommodation to TCI, JJ replied that engagement with the activists was up to the Board, but that TCI’s language yesterday had actually moved more to CN’s way of thinking (balanced growth over the Cult of the OR), which was true. In the language. Meanwhile, JJ said he will not be going away now, would stick around as need be, and will be our Keynote speaker as “IoY” at RailTrends (which is on – and please note the date – November 18-19 www.railtrends.com ) which might well serve, along with the January Q4/21 earnings call, as a twin valedictory….
Other than that, Mrs. Lincoln, how did you like the play? CN ran a pretty good railroad in Q3/21, especially after July (September OR was ~1000 bps better than July, apparently). EPS (and revenues) beat expectations (the former by ~5%) and both increased by 10%, which wasn’t bad considering the hurricane-like headwinds of grain (volumes down 19%, FX-adjusted revenues down 14%, recovery timing uncertain) and autos (-31%/-19%, respectively, with recovery also uncertain but likely sooner). Intermodal presented a strange pattern – volumes 6% lower, but revenues 9% higher – and we know that BC ports, especially Rupert, are so fluid when compared to the US, especially LALB. Overall volumes (units) were 1% lower, so Opex at an adjusted (for merger expense, before the $700mm bonus kicks in, and for the workforce reduction program, etc) 7% higher stands out, but more than all of that is fuel, the OR went down a tad (90bps) to 59%. Does it shock anyone, by the way, that the very first question after this momentous news, and yesterday’s TCI Plan, etc was on fourth-quarter OR? Maybe that’s why JJ said “adieu!”
- CN reaffirmed its 2021 outlook
- CN reaffirmed its 2022 Targets (+20% EPS growth, ~15% ROIC, share buybacks, 57% OR) – in the face of the grain headwind.
- Longer-term growth opportunities were emerging in export coal, iron ore, renewables, and in the hydrogen economy of Alberta, along with lead racehorse intermodal
- In a rare, if not unique direct rebuttal to TCI claims (“CN has a pricing problem”), they showed a run-rate of 5%+ in same/store price growth, and though they are concerned about inflation, expect to price about 2 points or so above it….
- Large portions of its 2022 Efficiency Plan have been achieved – for example, 75% of the headcount reductions (including ~600 from management ranks, which wasn’t easy or pretty)
- The Non-Core Asset Review is also underway – Helen Quirke, head of Strategy (Sean Finn’s absence may have been a coincidence) and said that the GLT ship fleet was in the process of being marketed and that TransX, while running at expectations levels, might end up as part of a partnership
You can't always get what you want….I had anticipated that this was the Big Heavyweight Fight, not just between TCI and CNI, but between Operations & Marketing, between the Cult of the OR and the Need to Grow. And I was (we were) going to have a ringside seat, cherry red soda in hand. Maybe it still will be. Both sides have indeed moved their positions closer to each other’s (TCI to growth/CN to cost). But with one leader exiting stage left (next year) – it’s harder to see how the fight can actually go on(I could well be wrong, we await CNI’s Board), which would end up leaving philosophies untested, perhaps. Rails need to focus on Growth, ESG & technology and for many years CN, the Mothership, has actually been doing just that. They ran into “CN Luck”, a clever opponent, a recalcitrant STB, and an activist. That’s a fair share of abuse….Maybe it will all work out and if we can’t always get what we want, we just might find….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18