Subject: CN's Big News - My Take
Importance: High
Greetings;
So the “existential fight for the soul of the railroad industry” ends not with a bang but a….whisper….
Regarding Canadian National, I had anticipated a good quarter despite the headwinds (line outage for three weeks, the supply chain issues, the weak Canadian grain crop), and no other real news – yet. Umm….not so fast. Big news, the war’s over massive quarter.
At 5 pm or so, I tweeted:
Boy, I was surprised (by the announcement’s timing, having written - just yesterday - I didn’t expect to come with the earnings call) – CN names Tracy Robinson new CEO amidst big Q4 EPS#; thus scoring the winning goal in the game – now over – with TCI. That’s the big news; but so far CN’s results, despite BC washouts, are the best of 3 RRs reporting (see report), and (strange) seemingly the focus of the Q&A….
On the last part, I should have waited a few minutes – CN and outgoing CEO JJ Ruest (adieu mon ami) faced about six questions about the choice of Robinson, a 27-year CP vet currently in executive leadership at TC Energy, and what that mean for their margin versus (?) growth strategy, on the order of:
- “The market’s perception is that the operational discipline focus around CN might have lapsed….(so) why…(is the move to) go outside the industry for someone who doesn’t have hands-on experience with PSR the right solution for CN?”
- “Did you guys get maybe a little bit complacent on costs?”
- “In September (with the rollout of what in essence was CN’s response to the TCI challenge)something got lost in translation (sic) with this discussion about growth versus profitability”
- (Given her tenure at CP in the “tough years”) “Why do you think she is the right railroader?” (although, to my point above, this was number two of a two-part question with number one being the (sigh) OR in the first half of 2022). The questioner, one of the biggest proponents of the original TCI plan, conceded that he should be “open-minded”.
And that’s the rub – so many folks were invested in the “re-focus on margin” story- TCI never explicitly said that, but certainly didn’t correct any of those (quoted above) who did; Or perhaps in the return of the prodigal son, the proposed star-COO TCI promoted for the CEO position. The stock tanked in after-market trading and finished today (for what it’s worth – not very much) down 3% in a flattish overall market. So let’s take a breath and examine:
- Ms. Robinson comes well-qualified and recommended by people I trust. One Prominent Railroader Well Known to the Industry and to RailTrends wrote to me unsolicited: “Tracy is one of the most effective and inspired leaders I ever worked with…. I am delighted.. this is amazing news for the Rail Industry”
- This is a vote to “stay the course” – but this course was (is) the daring one, the pro-growth one, not “to go back to the past” (JJR).
- This is the side of history (we hope), in line with Norfolk Southern (good results today) naming their CMO as the coming new CEO. This (my take) is not about Jim Vena the man, whose track record is beyond reproach, but rather the COO on the resume at a 2022 Class One railroad (with apologies to those that have it there such as Ms. Farmer and Mr. Creel)
- This stops the fight with TCI with no “special shareholders meeting needed in March, two new independent directors to be named (with NA railroad experience so – guessing – Rob Knight might be back in the rail game). CN named the former Premier of the province of Quebec, Jean Charest, to its board, which seems like a huge “get”. The TCI fight, over a fraction of the OR opportunity of the previous (successful) activist strikes, including TCI’s own venture against CSX.
- This removes the uncertainty – you could almost feel the relief of the CN management team during the webcast
The quarter was something else too – earnings up 20% YOY and fully 10% above Streets (Bay & Wall) estimates. The OR was down 350bps to 57.9% (do we even remember what the fuss was about?). Volumes dropped 10% (units) but remember, aside from the industry/supply-chain wide problems, their western mainline, responsible for something like 23% of their revenues, was down, for the second time in the year, for some three weeks, and the Canadian grain crop was down ~35%. The big headcount reduction came fast enough to produce a big (1800) employee reduction YOY, which helped (and hopefully won't hurt the future).
- Operating metrics were mixed – and that’s actually both really remarkable and likely the best performance in the industry – car velocity was down but train velocity was way up and dwell improved. On a full-year basis almost everything improved. Safety showed a similar pattern – FY was an A+, quarterly injuries improved whilst accident rate worsened a bit.
- CN highlighted its Google Cloud relationship as “central to their strategic plan for the DSR” (COO Reilly) but didn’t discuss bringing PTC/ETC to Canada
- Technological advancements, notably the well-known ones in car and track inspection, were cited as efficiency reasons for being able to reduce Capex; filed under “Marty’s gonna love this (although he regulates only ~1/3 of CN)” are the facts that CN will be the only rail to reduce Capex in 2022 while pumping out a $5B buyback plan, an 1800 headcount reduction and a near-term 57% OR 2022 target (or, in other words, CN reiterated their September guidance targets, including “~20% EPS growth
- On the negative side, there were a few things that didn’t sit fully right with me, anyway:
- Strategist Helen Quirke, in discussing the asset reorganization plan, also rolled out in September, noted that both the ocean-going vessels (in possible sale process with active bidders) and TransX, which generated “rail miles nearly 10% YOY on improved margins” were both “accretive to earnings but dilutive to OR”. So what? That sounds so retrograde; the very purpose of TransX (etc) was “to feed the beast’. To be sure, TransX CN is looking for a strategic partner, not a sale.
- Co-CMO, for lack of a quicker term, James Cairns (will that process last? I will say this – it makes for confusion in the webcast!) noted that anticipated export coal growth would more than compensate for the greatly reduced grain business in the first half, noting that CN has “that available capacity….because we’re not moving that grain”. Which led me to ponder – what happens when both commodities are moving, say in H2/22? The grain hit (to revenues) was noted as being on the order of $350mm – even in Loonies, that’s big bucks.
- Capex will be down, as noted, bucking the industry trend. To be fairrrrr (Letterkenny reference) CN does have that inspection technology edge, and did have a three-year period of massive Capex….
- ROIC improved, what really matters – 0.7 points to 14.1%
So, it was all a bit of an anti-climax, a crisis averted. The Mothership lives on the grow another day….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18