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CN working to get its groove back after income slide

Canadian railway CN is reassessing its operating plan to see where there are opportunities to take on more business while also striving to maintain network fluidity and increase velocity, executives said during the railway’s earnings call late Tuesday to discuss first-quarter 2022 financial results.

This network balancing comes as CN (NYSE: CNI) adjusted its earnings guidance for 2022 amid a first quarter that experienced operating challenges due to harsh winter conditions and macroeconomic uncertainties in the second half of the year.

Growing intermodal volumes is “about being intentional about putting the right volume on the right parts of our network so that we can deliver effectively,” CN President and CEO Tracy Robinson told investors on the call. “And when you can do that — and you can do that with some velocity — then you tend to like the returns that you get on the capital that you invest.”

Investors on the call seemed to try to be getting a feel for Robinson’s vision for CN. Robinson has been in her new role at CN for about 60 days, following the retirement of JJ Ruest.

Prior to Ruest’s departure, CN was headed on a trajectory to grow the network through investments, which industry observers view as the next step following the adoption of precision scheduled railroading, an approach used to streamline operations. But actions by an activist investor last year to change the leadership and focus on improving shareholder value prompted CN to relook at cost-cutting measures. 

The start of Robinson’s tenure has served as a time for company leadership to regroup so that it can determine where the next business opportunities are that benefit the bottom line, while also seeking to improve velocity, according to Robinson and others on Tuesday’s call. 

CN is being intentional about what it puts on its network by “first understanding the capacity and capability of our operating plan and then selling into that so that we’re capable of consistently delivering what we’ve committed to our customers,” Robinson said. Once CN knows where its capacity lies, CN can “lift our head and take a look at that pipeline of great growth opportunities that’s in front of us.”

As the year progresses, CN will continue to keep its pulse on its customers, including those with its intermodal franchise and particularly as CN’s Class I counterparts in the U.S. are under federal scrutiny to improve rail service. 

“We certainly understand the concerns of [the Surface Transportation Board], and we’re working with the STB to provide the potential solutions there and especially with our customers on any service issue that may arise,” said CN Chief Operating Officer Rob Reilly. 

Reilly is scheduled to testify before STB Wednesday on deteriorating rail service among the U.S.-based Class I railroads.

Robinson noted, “There’s been a big shock in the supply chains, and we’re working very hard to get our rhythm back and our operation back and to serve our customers well.”

While CN views demand in the second half of 2022 as being “quite strong,” the company is keeping its eye on potential headwinds, such as geopolitical uncertainties. 

“From an operating standpoint, of course, I mentioned we’re resourcing up for the second half, and that’s the demand we see in front of us right now. It is strong and we’re preparing for that accordingly,” Reilly said. “Obviously, there could be changes in that, and we’ll adjust accordingly as those times come. But right now we’re preparing for that more normalized grain crop in western Canada and the opportunities that are ahead of us.”

CN’s Q1 2022 financial results

Net profit for CN slipped 6% to CA$918 million (US$715 million) in the first quarter of 2022, compared with $976 million in the first quarter of 2021. (All financial figures are in Canadian dollars.)

Earnings per share was $1.31 in the first quarter of 2022, compared with $1.37 a year ago. Diluted earnings per share was $1.32, compared with $1.23 in Q1 2021. 

Revenues grew by 5% to $3.7 billion, with revenues derived from freight also increasing by 5% to $3.6 billion. CN attributed the year-over-year gain to strong demand, despite reduced revenue ton miles resulting from a significantly smaller Canadian grain crop, global supply chain disruptions and harsh winter weather. 

Operating conditions in the first quarter included a “very rough winter season” in which the railway experienced conditions of minus 31 degrees Celsius and colder, Reilly told investors on Tuesday’s earnings call. These conditions force CN to reduce train size as well as use more locomotives and crew, and the end result is that less freight moves through the very cold portions of CN’s network. 

“With the weather moderating at the end of February, we were able to regain fluidity on our network in the month of March,” Reilly said. “We are working closely with our customers that are continuing to face supply chain challenges, particularly in the merchandise sector.”

Expenses grew 12% to nearly $2.5 billion on higher fuel costs and costs associated with a sale of noncore lines.

First-quarter 2022 operating ratio was 66.9%, while adjusted OR was 66.6%. In comparison, first-quarter 2021 OR was 62.5% while adjusted OR was 66.3%. Investors sometimes use OR to measure a company’s financial health, with a lower OR implying improved health. 

CN adjusted its financial guidance for 2022, citing harsh weather and supply chain disruptions impacting first-quarter 2022 results. “The uncertainty from the war in Ukraine and the continuing pandemic disruptions in China and elsewhere all suggest just a little bit of caution on the year,” Robinson said. 

CN expects its 2022 adjusted diluted earnings per share growth to grow by approximately 15% to 20%, compared with its January target of 22%. It also expects a yearly OR of below 60% for 2022, compared with a January target of 57%.

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