MONTREAL — Canadian National today (Tuesday, July 23) lowered its financial outlook for the year as volume growth slowed during the second quarter, due to slumping lumber traffic and the impact of shippers diverting international intermodal containers to U.S. ports in anticipation of a potential rail strike in Canada.
CN’s second-quarter operating income declined 3%, to $1.6 billion, while revenue increased 7%, to $4.3 billion. Earnings per share dropped 1%, to $1.75. The operating ratio rose 3.4 points, to 64%, due to higher labor costs and fuel prices as well as the impact of trackwork-related congestion in the Vancouver corridor.
“This has been a challenging quarter for us,” CEO Tracy Robinson told investors and analysts on the railway’s earnings call this afternoon.
Volume grew 7% based on revenue ton-miles, or 3.7% when based on carloads and containers. But in late May, customers began diverting shipments amid strike fears, and lumber volume began to slump in June.
The international intermodal volume changes primarily involve U.S.-bound containers that CN handles from the British Columbia ports of Vancouver and Prince Rupert, Chief Commercial Officer Remi G. Lalonde says. The boxes have been diverted to U.S. West Coast ports to avoid the disruption of a strike.
CN now expects earnings-per-share growth to be in the mid to high single-digit percentage range, down from around 10% growth in its previous guidance. The new outlook assumes no rail or port labor disruptions occur this year.
Teamsters Canada Rail Conference, which represents CN’s engineers and conductors, has authorized a strike. The Canadian Industrial Relations Board has put a strike on hold while it reviews what commodities are considered essential and must continue to move during a work stoppage. A decision is expected by Aug. 9.
Due to a combination of scheduled and unplanned trackwork in the Vancouver corridor, CN experienced congestion in and around the Directional Running Zone it shares with Canadian Pacific Kansas City in the rugged Thompson and Fraser river canyons of British Columbia.
The work blocks — which stop traffic for four to eight hours –— came as CN was sending record volumes to and from Vancouver, says Derek Taylor, the railway’s chief field operating officer.
“We added train starts to accommodate growth, as planned, and have been successful in onboarding those volumes overall,” Taylor says. “However, our operating metrics reflect the fact that we were impeded by ongoing track maintenance work in the critical Vancouver corridor throughout the entire quarter. There wasn’t a single week in the second quarter where there wasn’t some form of planned or unplanned maintenance in the Directional Running Zone, or DRZ.”
CN and CPKC coordinate maintenance in the DRZ, where westbound traffic uses CN’s mainline and eastbounds use CPKC. But the necessary unplanned work on the single-track main lines created disruption. CN was more affected by the trackwork, Taylor says, because its trains accounted for two-thirds of the traffic moving through the DRZ in the quarter.
CN’s car velocity for the quarter, measured by car miles per day, dropped 3% to 210 miles per day. That has rebounded to nearly 220 miles per day this month as trackwork has been completed in the DRZ.
The congestion in the Vancouver corridor significantly raised CN’s crew costs, including recrews, deadhead moves, and away from home expenses, says Ghislain Houle, chief financial officer.
CN is closely watching a wildfire near Jasper, Alberta, that shut down the main line today.
CN maintained its three-year financial and volume guidance despite the second-quarter setbacks. CN-specific growth opportunities – including West Coast international intermodal traffic, frac sand and propane traffic, renewable fuel moves, and a Toronto fuel facility – remain intact and are coming online as planned, executives said.
