Why CNI Saw Huge Decline in 4Q17 Operating Margin



CNR’s 4Q17 operating margins

Canadian National Railway (CNI) and rival Canadian Pacific Railway (CP) have higher operating margins than their US peers. In 4Q17, CNI’s operating margin contracted by 380 basis points to 39.6% from 43.4% in 4Q16. The operating income declined 6.7% to 1.30 billion Canadian dollars in the fourth quarter from 1.39 billion Canadian dollars in the corresponding quarter of 2016.

A quick analysis of CNI’s income statement suggests that while its revenue grew by 2.1%, the operating expenses jumped 8.9% in 4Q17.

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CNI’s 4Q17 operating expenses breakup

Canadian National Railway’s labor and compensation expenses were $589.0 million, up 4.2% from $565.0 million in 4Q16. Increased wage expenses were favorably offset by reduced incentive compensation. Fuel expenses jumped 21.5% to $379.0 million in 4Q17 from $312.0 million in the same quarter of 2016. An increase of $60.0 million in fuel price along with $8.0 million in incremental operating expenses associated with higher volumes led the rise in fuel costs. The addition of net assets saw the depreciation expenses rise 4% to $316.0 million in 4Q17.

Management outlook for 2018

In 2018, Canadian National Railway expects its pension expenses to go up by $50.0 million compared to last year. A new general agreement on accounting principles on pensions will be effective beginning in January 2018. According to the agreement, current service costs will be accounted for in labor and fringe benefit expenses. In contrast, all other components of pension expenses will be reclassified in a separate category.

For 2018, CNI has assumed the Canadian to US dollar exchange rate to be approximately $0.80 and WTI (West Texas Intermediate) fuel prices to be in the range of $60 to $70 per barrel.

Peers’ operating margins in 4Q17

With an expected rise in 2018 volumes, railroads have been looking for opportunities to increase their operating margins. Norfolk Southern (NSC) realigned its coal-related assets in 2017. Its competitor CSX (CSX) has shifted to Precision Scheduled railroading. Major Western US carrier Union Pacific (UNP) has been aggressively pushing its G55 + 0 program to boost operating margins. We can likely expect better operating margins for the US Class I railroads (IYJ) in 2018.

In the upcoming section, we’ll look at analysts’ views on Canadian National Railway after its 4Q17 earnings.


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