It has been 18 years since the Canadian National Railway was privatized, transforming, as President and CEO Claude Mongeau has described the company, “from what was a stodgy Crown corporation to a leader in the railway industry—objectively, one of the most profound transformations in Canadian business history.”
Mongeau is a member of what one industry observer calls “CN’s Holy Trinity”:
• Paul Tellier presided over the railroad’s privatization, taking it from a money-losing operation subsidized by Canadian taxpayers, and laying the foundation for its transformation into one of the most profitable railroads in North America.
• Hunter Harrison brought operational discipline—“Precision Railroading”—helping transform CN from a railroad primarily focused on Canada, to a full-fledged North American carrier, a three-coast franchise stretching from Halifax on the Atlantic to Vancouver on the Pacific, and down through the American heartland, from Chicago to the Gulf Coast—touching eight Canadian provinces and 16 U.S. states.
• Claude Mongeau has accelerated CN’s ability to create value for its shareholders, largely by focusing on service initiatives and expanding into new markets. In late 1995, CN’s market capitalization was C$2.2 billion; in late October 2013 it was approaching C$47 billion.
Commenting on CN’s third-quarter 2013 financials, in which the company reported record revenue of C$2.7 billion and an operating ratio of 59.8%, Mongeau said that the company’s “agenda of operational and service excellence delivered outstanding financial results. All our key operating metrics improved, service levels remained solid, and we reached new levels of safety in our train operations. With continued focus on supply chain collaboration and solid execution, the CN team is determined to grow our business safely and efficiently, at a pace faster than the overall economy and to meet our full-year 2013 financial outlook.”
“We are raising our 2013 and 2014 EPS estimates to $6.23 and $7.10, from $5.99 and $6.75, respectively,” said Managing Director, Cowen and Company, and Railway Age Contributing Editor Jason Seidl. “This revision reflects better-than-expected third-quarter results and a favorable outlook. Indeed, we believe the company’s guidance might be somewhat conservative. Our price target increases from $101 to $110, as we use our new 2014 EPS estimate and a 15.5x PE (price/earnings ratio) multiple, which is modestly higher than our previous 15x multiple. We believe this is warranted based on CN’s continued ability to execute, and improving trends in most of the company’s markets. We maintain our Market Perform rating.” As of Oct. 23, CN shares were trading at around $110 on the New York Stock Exchange.
Strategic capex
CN’s C$1.9 billion 2013 capital investment program (which represents 18% of revenue, a figure that has held steady for the past few years), is focused on port terminal unloading performance, maintaining a fluid rail operation, and sizing its hopper car fleet capacity to help keep its supply chain synchronized.
The railroad’s C$100 million investment in increased rail capacity in the critical Edmonton-Winnipeg corridor is helping CN handle strong volumes of grain and other commodities through the fall and winter seasons. This investment is part of an overall program that includes:
• Continuing a siding extension program in northern British Columbia and northern Ontario.
• Double-tracking portions of its main line in Saskatchewan and adding new signals on the Alberta main line to expedite train movements.
• Continuing improvements at Kirk Yard in Gary, Ind., and to the former Elgin, Joliet & Eastern Railway.
• Increasing yard capacity and adding sidings in the Baton Rouge, La., region.
CN is also investing approximately C$700 million to grow with its customers across a range of markets as it expand its business, including:
• Investments in transloading operations and distribution centers to transfer freight efficiently between rail and truck.
• Construction of an intermodal terminal in Joliet, Ill.
• Completion of the Calgary Logistics Park project.
• Upgrading information technology systems to improve service and operating efficiency.
In addition, CN is investing approximately C$200 million in acquisition of locomotives, intermodal equipment, and vehicles as well as locomotive and car refurbishments. The railroad is taking delivery of 40 new and 37 second-hand high-horsepower locomotives through the end of 2014.
Illustrative of CN’s customer-growth initiatives is its investment in intermodal facilities at the Port of Halifax, which is intended to grow the Halifax gateway well beyond its current annual capacity of 417,000 TEUs (Twenty-foot Equivalent Units). Though Halifax’s current capacity is small compared to those of competing North Atlantic ports at New York/New Jersey (5.5 million TEUs) and Norfolk/Hampton Roads (2.1 million TEUs), Mongeau believes that, though “we will have to work hard to compete,” CN also has a strong suit, “a solid ecosystem of collaboration, an end-to-end view of the supply chains we serve, and access to markets with the potential to grow. Our supply chain collaboration agenda and commitment to operational and service excellence can support growth at the Port of Halifax and make the railway’s and port’s common customers more competitive in their end markets.”
CN’s collaboration agreements with the Halifax Port Authority and its two container terminal operators, Halterm Container Terminal Ltd. and Cerescorp Company Ltd., “are creating faster and more reliable supply chains, demonstrating the benefits of teamwork, and generating positive responses from international shipping lines and their customers,” Mongeau said. “The agreements dating back to 2010 were the first signed by CN, which has similar ones with all of Canada’s major ports and their terminal operators. The agreements contain clear standards and performance measurement mechanisms for our railway and its partners.”
Mongeau said the Port of Halifax/CN partnership “faces significant competitive pressures from other ports and vessel routing options, including New York, which enjoys a large hinterland market and highly competitive sea and land distances between Asia and inland points.”
Among the markets with growth potential is temperature-sensitive cargo. “The Port of Halifax is well equipped to handle Cool Cargo, with over 1,000 reefer plugs now, compared to 500 just a few years ago,” he noted. “This has been a major effort at the port to put Halifax in the big leagues for reefer traffic. CN has also invested significantly in new generator sets on containers, with GPS and remote-monitoring capability. With a strong partnership anchored on innovation and a commitment to continuous improvement and increased productivity, CN and Halifax can have a bright future together.”
Another intermodal initiative is CN’s joint venture with Indiana Rail Road Co. (INRD) on the new Senate Avenue Intermodal Terminal in Indianapolis. The multimillion-dollar facility is designed to serve Indiana shippers moving goods to and from Asia. INRD and CN announced their partnership in January to inaugurate all-rail service for trans-Pacific containerized freight from the Canadian ports of Vancouver and Prince Rupert, B.C., to Indianapolis, bypassing the congested Chicago terminal area. The Port of Prince Rupert and Port of Vancouver offer service from major Asian ports across the Pacific Rim. Transit time from Shanghai to Prince Rupert and Vancouver is shorter than other West Coast options, based on first-port-of-call service. A total transit time of as little as 20 days from Asia to Indianapolis is expected.
Expanding Precision Railroading
Mongeau has frequently cited “the innovative spirit that has emerged at CN” over the past 18 years. “This is a spirit that continues to drive CN today,” he said. “Innovation in a railway? How can one innovate with a technology that’s more than 150 years old? How can one innovate in such a traditional line of business?”
Hunter Harrison brought Precision Railroading to CN when he took over the reins in 1998, shortly after CN’s acquisition of the Illinois Central. Through train scheduling and preset trip plans for each freight car or intermodal container, Precision Railroading improved CN’s asset utilization while improving customer service, bringing more balance and fluidity to a system moving well over 200 trains and managing 100,000 freight cars every day.
Under Mongeau, CN has extended the principles of Precision Railroading to its yards, shops, and maintenance-of-way practices. The railroad’s information systems are used to produce daily “operational dashboards” that are accessible to many employees.
For example, at the Port of Montreal, CN staff and terminal operators at the port receive a scorecard that shows how well each is meeting its commitments to the other. The scorecard shows if trains arrived on time, the number of containers that arrived and how many of them were moved, the number of train slots filled, and the number of containers that have been on the ground for more than 72 hours. Such performance metrics, Mongeau noted, show exactly where something needs to be addressed. “That’s the beauty of having transparent information,” he said. “If we know two or three days ahead of time that we might have an issue, we can start to do something about it now.”
There are other supply chains with similar informational tools, ranging from “coal mines in Alberta to ships in Prince Rupert, and grain farmers in the Prairies to the waterfront in Vancouver,” Mongeau said.
“In these cases as well,” he said, “it’s about collaboration between partners, transparency about the facts, and the normal pursuit of commercial interests. A compelling way of moving forward. An engaging approach that avoids finger-pointing when things go wrong. An effective path to solution-finding to make things go right so we can win our share of world markets.”