The Q1 2024 earnings call for Canadian National Railway Company (CNI) was a symphony of bullish optimism. Despite a volatile macroeconomic environment and a tough comparison to Q1 2023, which benefited from a favorable fuel lag, CN confidently reaffirmed its guidance of 10% EPS growth for the year. While analysts focused on volume recovery, pricing dynamics, and CN's specific growth initiatives, a subtle yet profound shift in the company's narrative went largely unnoticed: the emergence of a nascent productivity revolution.

Buried deep within the transcript, in response to a question about declining purchase services expenses, lies a clue. Ghislain Houle, CN's CFO, attributes the 4% year-over-year decline to "a little bit of less snow clearing, a little bit of less outsourced services, and a little bit of less maintenance." (Source: CNI Q1 2024 Earnings Call Transcript). While these factors may seem individually insignificant, their confluence signals a strategic focus on operational efficiency beyond the traditional levers of headcount and train length.

This deliberate pursuit of productivity enhancements across various cost categories is a departure from CN's historical reliance on volume-driven leverage. It suggests a proactive approach to cost management, aiming to create a leaner and more agile organization capable of delivering sustained profitability even in a less robust volume environment.

Consider the implications. If CN can maintain this level of efficiency improvement across purchase services, which represent a significant portion of its operating expenses, the impact on its margin profile could be substantial. Let's hypothesize a scenario where CN achieves a sustained 2% annual reduction in purchase services expenses over the next three years.

Assuming a starting point of $3.6 billion in purchase services expenses (based on the 2023 annual report), a 2% annual reduction would result in cumulative savings of $216 million over three years. This translates to an approximate 130 basis point improvement in operating ratio, holding all other factors constant. When coupled with the anticipated volume and pricing growth, this productivity-driven margin enhancement could unlock significant upside potential to CN's EPS guidance and its long-term 10% to 15% EPS growth target.

This nascent productivity revolution is not merely a response to a challenging macroeconomic environment, but rather a strategic pivot towards a new era of operational excellence. CN is leveraging technology, process optimization, and a commitment-based culture to drive efficiency gains across every facet of its operations.

"The walking simulators deployed at CN's training centers, resulting in a 30% reduction in walking injuries, exemplify this commitment. (Source: CNI Q1 2024 Earnings Call Transcript). This seemingly minor innovation translates into fewer workplace accidents, lower insurance costs, and improved employee productivity. The ripple effect of such initiatives, often overlooked in the clamor for volume and pricing growth, is slowly but surely transforming CN into a leaner, meaner, and more profitable railroad."

CN's history is rich with stories of innovation and operational excellence. From its pioneering role in the development of the intermodal container to its unwavering focus on network fluidity, the company has consistently pushed the boundaries of railroading. The whispers of a productivity revolution emanating from the Q1 2024 earnings call suggest that CN is once again poised to redefine the industry standard.

As analysts dissect volume trends and pricing dynamics, the true story may be unfolding quietly in the background. CN's hidden weapon, its relentless pursuit of operational efficiency, could be the catalyst that propels the company to new heights of profitability and shareholder value. While the exact magnitude of this productivity revolution remains to be seen, its early whispers are a compelling signal for investors seeking to capitalize on a company that is not just adapting to change, but actively shaping its future.

International Intermodal Volume Recovery

The following chart compares International Intermodal RTMs between Q4 2023 and Q1 2024, showcasing the steady recovery from the West Coast port strike.

"Fun Fact: CN's network spans over 20,000 route-miles, enough to circle the Earth nearly once! This vast network is a testament to CN's scale and its crucial role in facilitating trade across North America."