CN's Second Quarter Pricing, Front And Back, Was About 4% Or More, And They're OK With That

Canadian National Railway CNI pricing was up between 4 and 4.4 percent in the second quarter compared to the second quarter of 2017, and the executives on the company's second quarter earnings conference call say they're OK with the fact that it wasn't higher.

"We have to be mindful that it's a marathon, not a sprint," Jean-Jacques Ruest said on the Tuesday call accompanying the release of the company's earnings. Ruest had been the interim President and CEO but had the interim title taken off the same day as the earnings were announced. Prior to his interim appointment, he had spent eight years as the executive vice president and chief marketing officer.

Ruest said the goal was to have sustainable price increases. The 4 percent increase was for "same store sales," which is a backward-looking metric. "That is really a sweet spot range for the rail industry," he said. It is "very, very solid, and given where rail inflation is, we think that's pretty good."

The 4.4 percent number was for renewals completed in the quarter, which Ruell described as more of a forward-looking number.

The numbers were questioned by one analyst on the call, who wondered why they did not come in higher in a tight market for freight capacity. In response, CFO Ghislain Houle said the company is "pushing on every lever" on price but had other goals as well. "We want to accommodate growth, we want to do good service, and we are actually growing organically," he said. "At the end of the day the reason why we have solid pricing is because capacity is a precious commodity, and we're getting as much price as we can."

CN is one of the many class 1 railroads that had a near-disastrous second half of 2017, carrying into 2018, when surging demand overwhelmed rail networks. Ruell noted that the problems have not all been solved and the impact of them were still being felt in the company's second quarter earnings. "We are still in recovery phase, but we did better in the second quarter than we thought we'd do before the quarter began," Ruell said.

The operating numbers reported by CN were strong. Train productivity, as measured in gross ton miles per train mile, was up 3 percent from the first quarter of 2018. Total GTMs were up 9 percent; terminal dwell was down a whopping 20 percent to 17 hours (the Surface Transportation Board has been reporting dwell time for all class 1 railroads as hovering in the 26-27 hour range); car velocity (car miles per day) was up to 196 from 160, but was still well below the 231 number of the second quarter of 2017; and train velocity was 22.7 compared to 21.8 in the first quarter, but again, still less than the 26.1 from the year earlier quarter.

While industry talk is of a shift from the roads to more intermodal, CN's earnings did not show a significant shift. Intermodal revenue was up 6 percent from a year earlier, more than the average price increase for same store sales but not the type of number that indicates a large movement of products from the roads to the rails. Intermodal is 24 percent of CN revenues, and in its slide presentation, CN said intermodal benefitted from new weekly SM Line service to Vancouver.

CN's operating ratio was a solid 58.2 percent, still worse than the 57.5 percent of the second quarter of 2017. But it still marked an almost 1,000 basis point improvement over the 67.8 recorded in the first quarter of the year.

Ruell said CN is not targeting a specific OR number. "Our objective is to have a leading operating ratio, if not be the leader," he said. "If the industry can do better, then we think we can probably achieve that as well. So in relation to our peers, we want to be the pack leader, like in this quarter." CN's Canadian competitor, Canadian Pacific, reported an OR for the quarter of 64.2.

The top and bottom line numbers for the company were all strong. Net income was up 27 percent, operating income rose 7 percent, and revenues were up 9 percent. Operating expenses rose 10 percent, a number that was boosted by the fact that the company hired 350 new conductors as part of its growth project that is focused on numerous areas of the system, with a particular emphasis on the track between Alberta and Chicago.

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