CN’s outlook dims due to economy, port strike, and fire and flood impact

MONTREAL — Canadian National has lowered its outlook for the year in light of the slowing economy and the impact of Canadian wildfires, flooding, and the two-week port strike in British Columbia.

CN, in reporting lower earnings on Tuesday, pushed its volume recovery expectations into next year instead of later this year. Second-quarter volume was down 7% when measured by carloads or 8% when measured by revenue ton-miles, the preferred metric of the Canadian railways.

The biggest culprit for the volume decline was intermodal, which was down 17%, followed by forest products, which was down 10%. Petroleum and chemicals traffic declined 7%.

CN’s operating income declined 10%, to $1.6 billion, as revenue dropped 7%, to $4 billion. Earnings per share declined 8%, to $1.76. The railway reported a quarterly operating ratio of 60.6%, an increase of 1.3 points compared to a year ago.

Weather-related delays in Western Canada — by far CN’s busiest region — were eight times higher than a year ago due to wildfires. The 13-day dockworker strike in British Columbia, plus a 24-hour wildcat strike, also hit traffic volumes. And a main line washout in Nova Scotia has hurt volumes in Eastern Canada, which also has been affected by wildfires in Quebec and Ontario.

Although the widespread fires are not currently affecting the CN system, they have curtailed production at a number of the railway’s customers. Volume so far in July is down 11%.

As a result, CN now expects full-year earnings to be flat to slightly negative, compared with the prior outlook of around 5% growth. Volume is still expected to outperform the forecast of a 0.2% drop in industrial production.

CN believes it will take eight weeks to move all of the volume that backed up during the port strike.

Although CN has slowed its train crew hiring and reduced the number of train starts, executives said the railway would be ready to handle the eventual traffic rebound.

“We’re adjusting our hiring plans to match what is now a slower than expected return in some of our commodity segments,” CEO Tracy Robinson told investors and analysts on the railway’s earnings call. “And we’re taking the opportunity to advance some locomotive engineer training to ensure we are ready for the medium and longer term.”

CN’s key operating metrics improved for the quarter despite the impact of weather and traffic stoppages related to the port strike that hit Vancouver and Prince Rupert, British Columbia.

On-time train origin performance was 91% for the quarter, up 12% compared to last year. Car velocity, average train speed, and terminal dwell all improved. And local service performance improved 9%, to 90.6%.

CN’s safety stats were mixed: The injury rate improved 17% but the train accident rate increased by 5%.