Canadian National Chief Outlines Acquisition Strategy

Canadian National's CNI strategy to build up its eastern network could include even more partnerships with trucking and intermodal partners, the company's chief executive officer said at an investor conference.

"We need to be much more relevant to the consumer economy, and we need to find a way to exploit our eastern and southern networks, and so these acquisitions should help us to maintain a good level of growth," said CNI president J.J. Ruest at the Bernstein Strategic Directions conference on May 29. Canadian National finalized acquiring trucking company TransX in March, while in April, the company said it was acquiring the intermodal assets of H&R Transport, which provides refrigerated trucking services.

The company will be focusing on how it can better utilize its eastern network, which spans from Halifax to Chicago, and its southern network, which runs from Chicago to Mobile and New Orleans.

In contrast to Canadian National's western network, which has a large number of long-haul movements, the eastern network consists of shorter hauls, and so any efforts to expand capacity would focus less on infrastructure and more on having additional trains on the network, Ruest said.

Canadian National might need capital for locomotives, or it might need capital for acquisitions or partnerships with businesses that would require CNI to use railcars through TTX, a railcar pooling company owned by the Class I railroads, he said.

Any acquisition or partnership must bring business to CNI's network and convert product from the road to the railroads, Ruest said.

"To get really good at doing retail door-to-door, at converting this long-haul truck over to rail, you need to have people who have done this for a living," Ruest said. The people behind H&R and TransX aren't railroaders but they have spent their whole life doing this type of work, he said.

Ruest also said having rail terminals in Nova Scotia and on the St. Lawrence River could enable CNI to target the Midwest better. Canadian National has a long-standing relationship with the port at Halifax, which just announced infrastructure investments there by the Canadian government, while the Port of Quebec said on May 28 that it signed a long-term agreement with CNI and Hutchison Ports to build and operate a new container terminal known as project Laurentia. The project is worth C$775 million (the Canadian dollar is the equivalent of US$0.74) and was previously known as Beauport 2020.

Canadian National has spent C$7.9 billion in the last two years in capital expenditures, with much of the capital doled out in 2018 going towards building up its western network, which runs from Chicago and Toronto to Canada's west coast.

The capital expenditures for 2018 consisted of "catch-up capital" to get the company's western network to meet demand for exports such as grain, while the capital budget for 2019 is for capacity needs for 2020 and 2021, Ruest said.

Both Canadian National and Canadian Pacific CP have been criticized in recent years for not having enough capacity to support western Canadian grain exports. CNI, CP and BNSF were investigated by the Canadian government recently for capacity constraints during fall 2018. The government cleared CP but said CNI did not take adequate measures to relieve congestion at the port of Vancouver. CNI has said it is appealing the government's decision.

"If we can't move the economy, if we can't move product to market because we don't have the capacity, it brings in significant regulatory risk and that's not good business long-term," Ruest said.

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