Canadian National's third-quarter earnings slump on traffic, revenue declines

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Intermodal traffic was a strong point for Canadian National during a third quarter that saw declines in all other business segments except grain.
TRAINS: David Lassen

MONTREAL — Canadian National’s earnings slumped in the third quarter as the railway saw steep declines in all traffic segments other than grain and intermodal.

CN’s operating income fell 15%, to $1.3 billion, as revenue declined 11%, to $3.4 billion. Earnings per share sank 17%, to $1.38, which fell short of analyst expectations of $1.46 per share.

The railway’s operating ratio rose 2 points to 59.9% as an 8% reduction in operating expenses did not match the pace of the revenue decline.

The recovery in CN’s volumes accelerated during the quarter and this month is trending above levels of 2019.

“The recovery has a different mix of business,” CEO JJ Ruest told analysts and investors on the company’s earnings call Tuesday afternoon. “Some markets recovered fast and V-shaped. Some markets have yet to recover. All of this evolved into a different mix of revenue ton-miles as compared to the pre-pandemic, with a significant decline in crude and a significant increase in Canadian grain.”

Overall, CN’s volumes declined 6% when measured by carloads and 7% when measured by revenue ton-miles, the favorite metric of the Canadian railways. Grain and fertilizer carloads rose 12% and intermodal was flat. Every other business segment declined by double digits.

CN’s network is fluid and is prepared for winter and what may be a record Canadian grain harvest, Chief Operating Officer Rob Reilly says. CN is on its way to an eighth straight monthly record for Canadian grain tonnage, he says. 

CN’s operating metrics improved during the quarter as the railway brought back furloughed crews and locomotives and freight cars that had been stored. Car-miles per day, which is the product of both average train speed and terminal dwell, is up 25% since July. “We really have not missed a beat and that is a credit to the men and women of CN,” Reilly says.

The railway moved its tonnage on fewer but longer trains, which helped boost CN’s fuel efficiency to another quarterly record, Reilly says.

CN’s intermodal, automotive, and forest products traffic all experienced sharp rebounds as the third quarter progressed. Keith Reardon, senior vice president of consumer product supply chain, says that’s the result of restocking depleted inventories as well as consumers shifting their spending from services to goods during the pandemic. 

Lumber was a bright spot, as CN pulled all of its flat cars out of storage and added 500 leased cars to the fleet, says James Cairns, senior vice president of rail centric supply chain. Ports-related carload business, including propane, remained strong, he says.

Ruest says CN’s international intermodal volume is experiencing an extended fall peak as port traffic remains strong.

CN experienced a “tsunami” of international intermodal volume on both the Atlantic and Pacific coasts as retailers imported goods to restock e-commerce warehouses and store shelves.

The dockworker strike at the Port of Montreal over the summer added to the disruption. Several ships were diverted to the CN-served Port of Halifax. CN has been banking on increased volumes through Halifax as companies increasingly source goods produced in Southeast Asia, which favors a routing to North America via the Suez Canal.

But the strike-related surge was not a good test of the CN network, Ruest says. Montreal typically receives international cargo directly from the port, rather than via rail. On just 72 hours notice, CN had to send empty trains to Halifax to grab Montreal-bound containers. There were no exports to send to Halifax because those containers were stuck at the strikebound Port of Montreal.

CN also handled Montreal containers from ships that were diverted to the Port of Saint John as well as the ports of New York, New Jersey, and Philadelphia via steel-wheel interchange from CSX Transportation, Reardon says. 

Over the long term, CN is banking on significantly increasing international intermodal volume through Halifax by gaining share from the Port of New York and New Jersey. “The Halifax to Chicago-Midwest corridor is going to be one that two or three or four years from now, you're going to see it probably at least doubled from what it is today,” Reardon says. 

CN declined to offer earnings guidance for the full year. Like most other companies, it withdrew guidance during the second quarter during the onset of the pandemic.

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