CN Rail adjusts 2018 financial targets after net profit falls 16 per cent in the first quarter
Canadian National Railway Co. adjusted its end-of-year financial targets on Monday after the company’s net profit fell 16 per cent in a first quarter marred by capacity constraint issues and the surprise resignation of its chief executive.
CN says it now expects its adjusted diluted earnings per share in 2018 to be in the range of $5.10 and $5.25, a decrease from its previous target of between $5.25 and $5.40.
Significant volume growth, combined with what the railroad says was a difficult winter, saw the company’s first-quarter net profit fall to $741 million, or $1.00 per adjusted diluted share, in the three-month period ending March 31 as compared with $884 million, or $1.15 per adjusted diluted share, at the same time last year.
“Our focus since March is centred on catching up on volume, gaining back the confidence of our customers, sequentially improving our operating metrics in line with reducing our costs,” CN’s chief operating officer Mike Cory said on a conference call with analysts after results were released Monday afternoon.
“Although we have months to go before we regain our rightful standing as the operational and service leaders in the industry, our work since the harshest part of the winter has produced some very good results.”
CN’s operating ratio — a measure of railway efficiency that calculates operating costs as a percentage of revenues — jumped from 61.8 per cent last year to 67.8 per cent in 2018, due to the increased demand and weather-related challenges. (A lower operating ratio implies better efficiency.) Revenues in the first quarter were $3.2 billion, a decrease of just $12 million from the same time last year while grain and fertilizer revenues fell 11 per cent, more than any other commodity.
Capacity constraint issues have put pressure on CN since late last year, leading to service disruptions and strained customer relations.
To deal with the capacity issues, which have been more pronounced than those at CN’s rival Canadian Pacific Railway Ltd., the company is increasing its capital program to $3.4 billion, with $400 million dedicated to track infrastructure in Western Canada.
In hindsight, Cory said, the company should have triggered the action plan that includes investing capital in the network infrastructure in April or June of last year.
“It would have given us the time to execute,” he said.
Despite the challenges, which infuriated grain producers across Western Canada because of the lengthy delays, CN’s interim chief executive JJ Ruest said the company “has turned the corner on a difficult quarter and winter.”
“There’s been a lot of discussion with customers since last fall,” Ruest said on the conference call, adding that while there is still a grain backlog, one of the areas where the company has made improvements is on shipping grain.
“The sections of double track that we will install this summer from this month to October will have huge impact in what kind of service we can offer to those who export come late this year, and early next year. There’s still more work to do, but by the time we get to the end of the year, things will look pretty strong.”
CN announced the surprise resignation of chief executive officer Luc Jobin in March, less than two years after he had stepped into the role. The move came as CN grappled with record volume growth that put pressure on its capacity, leading to service disruptions and complaints from customers. The company said the board’s search for its new chief executive is ongoing.