Canadian National profit rises amid strong traffic growth

Railroad orders 22 new high-horsepower locomotives to handle additional traffic
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MONTREAL — Canadian National’s first-quarter profit rose 12 percent as the railroad moved record volumes amid broad gains in nearly every traffic category.

"With a strong start in Q1 and an increased volume outlook for the rest of the year, I am pleased to announce an upward revision to our 2017 financial outlook,” CEO Luc Jobin said in a statement on Monday afternoon.

CN now expects earnings to grow by as much as 11 percent this year, up from January projections of mid single-digit gains. CN also increased its capital budget for the year by $100 million, which will allow it to purchase 22 high-horsepower locomotives and fund other growth initiatives.

"I am very proud of the solid response from our team of railroaders in accommodating the strong demand during the quarter,” Jobin says. “We delivered record first-quarter volumes, including a 14 per cent increase in western Canadian grain tonnage moved over our network, despite a return to more demanding winter conditions versus last year.”

Traffic grew across the board, and the growth in carloads was double the Class I average, Chief Marketing Officer Jean-Jacques Ruest said during the railway’s earnings call. The only traffic segments that were disappointments were paper, sulphur, and lumber, Ruest says.

Expectations for continued traffic growth this year, and beyond, prompted CN to order the additional locomotives.

CN took advantage of its last opportunity to acquire Tier III locomotives, which are more reliable and fuel-efficient than Tier IV units, Chief Financial Officer Ghislain Houle says. The locomotives will begin to arrive on CN rails in September, in time to be put into service during the peak intermodal and grain shipping seasons. Older units now in storage will be cascaded to yard service.

A CN spokesman did not immediately respond to a request for specifics on the locomotive order. But Chief Operating Officer Mike Cory told Wall Street analysts the new units will be AC-traction with distributed power capabilities.

“We’ve had such great success with the investment of our locomotives over the last few years and further with the AC tractive effort,” Cory says. “We’ve been able to increase the size of our trains and just create that natural capacity.”

CN has been gaining market share at the expense of rival Canadian Pacific in grain, potash, automotive, and intermodal traffic. Recent contract wins include domestic intermodal business from Lowe’s Canada and the international intermodal from Taiwanese shipping company Yang Ming. And CN pried away some domestic intermodal business from retailer Canadian Tire, a longtime CP shipper.

CN executives were asked about competition from CP, which aims to regain traffic that it says “naturally” belongs on its system’s shorter routes in key corridors.

“We’re very confident about the quality of our product and how...the supply chain services that we have does resonate with customers,” Ruest says. “This question of natural market share I think now is an old story, it’s been around for a while, and eventually, the proof has to be in the pudding. And maybe the last pudding was Yang Ming, who decided to come our way. The series of gains should speak for itself.”

But CN will not underestimate CP, Jobin says.

Container port expansions at Vancouver and Prince Rupert, B.C., will be complete this summer and should enable CN to further increase its international intermodal business, executives say. They’re preparing for the growth by expanding intermodal terminals in Memphis, Tenn.; Joliet, Ill.; Detroit; and Toronto.

Cory says CN’s key operating metrics for the quarter were “solid” considering the 12 percent increase in gross ton-miles and more demanding winter conditions compared to 2016. Train and yard productivity, as well as locomotive utilization, improved. But dwell, car velocity, and train velocity all slipped slightly.

When compared to the first quarter of 2015 — when CN experienced similar volumes and weather — the key metrics all showed significant improvement.

For the quarter, CN reported net income of $884 million. Revenue increased 8 percent, to $3.2 billion, as carloads rose 9 percent and revenue ton-miles grew 14 percent. CN’s operating ratio ticked up half a point, to 59.4 percent, as operating expenses increased 9 percent due largely due to higher fuel prices and higher volume.

CN reported earnings per share of $1.16, up 16 percent. The railway now expects earnings per share for the full year to be between $4.95 and $5.10, up from $4.59 in 2016.

NEWSWIRETrains News Wire

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