EFTA01371097.pdf

31 October 2017 Railroads Canadian Rails Figure 30: Employee productivity. as measured by GTMs Figure 31: Fuel efficiency, as measured by GTMs per per employee (in M) gallon of diesel consumed 801 25 1,200 20.1 20.0 1,100 1,061 19.0 1,035 20 Ui 1,000 14.6 "18 919 15 13.3 880 900 II I us 800 1 - 10 I- 700 5 600 0 500 CM CP UNP NSC CSX CM CP UNP NSC CSX Sans Dead. Sint CoVenv Sens Genes art &Man Map Compensation/labor related costs are the largest component of operating expenses for a railroad - accounting for over 35% of expenses on average. In our view, this highlights the importance of employee productivity as it provides the largest opportunity for margin improvement. When we compare different cost contributions across our coverage universe, this is where CP and CNI see the largest difference relative to the other rails. We believe a large driver behind this is the Precision Railroading model implemented by Hunter Harrison at both CP and CNI (we go into more details in company-specific sections). However, we note that Canadian rails benefit from pension differences which optically reduces comp/labor expenses by roughly 3-4% points. We note that this will change on January 1, 2018 as these gains will flow through other income. Figure 32: Employee productivity is the largest source of margin differential for the industry (2016) 50% • CNI • CP • UNP irNSC CSX 45% 40% t 35% c 30% 25% 0 dE 20% ri 4us 15% ffi HU eca III III g 10% 5% ffin PH 42 0% I if .1111 Comp/Labor Purchased Fuel D&A Equipment & Profit services, Other Rents materials, other SOW* DatiON &IS, Cowin morn Page 18 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0064288 CONFIDENTIAL SDNY_GM_00210472 EFTA01371097