MONTREAL — Canadian National’s revenue and profits grew in the third quarter but the railway on Tuesday lowered its outlook for the year as volumes sag under the weight of a slowing industrial economy.
CN now expects the year’s earnings growth in the high single-digit range with volume to be down slightly when measured by revenue ton-miles. It previously expected revenue ton-miles to grow around 5% and earnings-per-share growth in the low double-digit range.
The company said it’s seeing signs of two economies: a strong consumer sector that’s boosting intermodal and automotive traffic, but a struggling industrial economy that’s clobbering demand for carload freight.
Volume for the third quarter was down 1% on a revenue ton-mile basis and by 0.4% on a carload basis. But for the fourth quarter to date, CN’s volumes are down 10% amid a delayed grain harvest, slumping lumber traffic, and lower energy traffic, including shipments of crude oil.
Operating income grew 8% in the third quarter, to $1.61 billion, as revenue rose 4%, to $3.83 billion for the quarter. Earnings per share, adjusted for the impact of one-time items, increased 11%, to $1.66, which topped analyst estimates by 3 cents, according to I/B/E/S.
CN’s operating ratio was 57.9%, an improvement of 1.6 points compared to a year ago.
“I’m very proud of the CN team. They delivered very good results with solid cost management in a softer and uncertain economic environment for the North American rail industry,” CEO Jean-Jacques Ruest told investors and analysts on the company’s earnings call Tuesday afternoon.
CN’s revenue ton-miles dropped by double digits for metals and minerals and forest products traffic, while grain was off 6% in the quarter. Coal was up 2%, all due to growth in Canada, while intermodal was up 2% and automotive grew 6%.
The railway remains optimistic about intermodal traffic, particularly international containers moving through the Port of Prince Rupert, British Columbia. Container volume at Rupert was up 30% in the quarter, while container volume at U.S. West Coast ports was down between 3% and 8%, says Keith Reardon, senior vice president of consumer product supply chain.
CN took steps to reduce the size of its locomotive and freight car fleets as demand softened.
“We’re in process of returning nearly 3,000 railcars that were on lease, scrapping another 2,000 railcars, and have parked over 6,000 cars to saving car hire expense,” Chief Operating Officer Rob Reilly says. “All of these actions help to right size our fleet to the rail volumes we are experiencing and decrease our expenditures associated with them. As a result of these efforts, our active online inventory has dropped 6% year-over-year, leading to a more fluid railroad.”
The railway has 150 locomotives in storage and will return remaining leased units this quarter.
CN also has furloughed train and engine crews, as well as mechanical employees, as traffic demand declined.
The railway’s key operating metrics improved for the quarter, including car-miles per day, dwell, and average train speed. Fuel efficiency hit record levels as CN better matched horsepower to tonnage and took other steps to conserve fuel.
CN will add an additional 40 air-repeater cars in time for winter, bringing its fleet to 100 cars that help spread air in cold temperatures and allow the railway to maintain train length.
Ms. Harding: I fear that you are right. Rail traffic decreasing is not solely due to PSR inflicted changes in traffic. We have seen coal miners put out of work. We see other industries cutting back work hours and laying off workers. When the unemployment benefits end or the out-of-work workers proactively try to preserved their financial resources we may see more of an economic slow down. This could become a cascading effect which will not end well. In a moment of self-preservation, some people may be decide that making deals is a better choice than creating and fighting trade wars.
On a related topic, I have enjoyed you commentary on the many news items as well as the disclaimers.
Where are and what are the freight cars being scrapped and stored?
“The railway has 150 locomotives in storage”
Better get pictures of those cowl-bodied C40-8M’s while we still can.
David Downie. Are you an economist or a communist?
Now here’s a conundrum, but not really if you think it through. Hard goods (e.g., industrial) is down while consumer goods is either up or has not dropped. That tells us that manufacturing and industry is down, but people are still spending. However, unless manufacturing and industry are automated, there are workers there who will, if not already will soon be out of jobs. Then, they will have no money to spend on consumer goods.
My analysis is that the recession has started but it has not yet hit the consumer level. It may or may not hit the consumer level before the Christmas rush. You are cautioned that I am somewhat of a pessimist when it comes to the economy and could easily be proved wrong.
The above comments are genetic in nature and do not form the basis for an attorney/client relationship. They do not constitute legal advice. I am not your attorney. Eat at Three-Fingered Mickey’s.
David D. – We’ll see.
Curtis, you are so right. Byron is a great place to watch heavy trains tackle a hill in Wis. Although it was more fun in the good old days when a bunch of 1st & 2nd mix generation of engines lashed together & digging in. Don’t forget standing on the County Road F bridge as those units pass beneath you & the exhaust just about blowing you off your feet.
Trump has started a trade war that the USA cannot and will not win.
FWIW …Byron Hill (on the highway known as speedtrap hill) was for years a helper issue (Soo, Whiskey Central & CN, until double tracked). Still worth a look, especially southbound from Fond du Lac (foot of the lake). There exist several good crossings where one may park and enjoy the uphill grind.
Interesting note about the air repeater cars. Canadian railways have been working on the idea for several decades, but it sounds like they now have the mechanical reliability where they want it.