By Theo van de Kletersteeg

Claude Mongeau, President and CEO of Canadian National, presented at the Morgan Stanley Industrials & Auto Conference held in New York City on September 14.

Mongeau expressed the view that while there were a number of solid reasons to be worried about the economy, and while CN had recently begun to see signs of a “soft patch”, the Canadian economy was continuing to do well, and that the U.S. exhibited lots of momentum. He expressed the hope that following its recent slowdown, China was on the road to resume its previous growth levels.

In terms of opportunities for CN, Mongeau pointed to the U.S. housing market which should grow another 50 per cent or so before it returns to pre-recession levels of housing starts. Moving lumber and construction panels represents about 20 per cent of CN’s business, so a recovery in the housing market should eventually produce excellent additions to the bottom line. Another growth business has been the carriage of crude oil, which went from practically zero two years ago to about $200 million in 2012. Transportation of pipe, frac sand and other materials in support of oil and gas production from shale formations has yielded good growth opportunities. The carriage of metallurgical coal in Canada, and thermal coal in the U.S., both for export, have also been growing businesses with significant remaining potential, as international clients favour diversification of their sources of supply. Lastly, CN’s intermodal business continues to grow at a rate faster than the economy.

CN continues to be interested in acquiring regional and short-line railways to create additional niche opportunities. In this context, he mentioned a renewed interest in acquiring Ontario Northland.

Mongeau suggested to the analyst audience that a railway such as CN that had managed to squeeze its operating ratio into the low sixties should not be judged on management’s ability to achieve further reductions in the operating ratio. Instead, he suggested, the carrier should be judged by its ability to add real dollars to its existing earnings and to increase dividends to put real additional dollars into the hands of its shareholders.