Net income of C$866 million, compared with net income of C$847 million in second-quarter 2014, combined with an operating income increase of 8% and a record-low quarterly operating ratio of 56.4%, resulted in a solid second-quarter 2015 for CN, the railroad reported on July 20, 2015.
CN’s net income was C$1.10 per diluted share compared with C$1.03 per diluted share for second-quarter 2014. Second-quarter 2015 results included a deferred income tax expense of C$42 million (C$0.05 per diluted share) resulting from the enactment of a higher provincial corporate income tax, CN said.
Excluding the deferred income tax expense, second-quarter 2015 adjusted diluted EPS increased 12% to C$1.15 from year-earlier diluted EPS of C$1.03. In addition, second-quarter 2015 operating income also increased by 8% to C$1.4 billion. And CN’s operating ratio for second-quarter 2015 improved by 3.2 points to 56.4% from 59.6% the year before, a Class I record low.
Second-quarter 2015 revenues were flat at C$2.1 billion, carloadings decreased 3% to 1.4 million, and revenue ton-miles declined by 7%. Revenues increased for automotive (17%), forest products (8%), petroleum and chemicals (4%), and intermodal (2%). Revenues declined for metals and minerals (5%), grain and fertilizers (7%), and coal (26%).
CN says the revenue performance was mainly attributable to the positive translation impact of the weaker Canadian dollar on U.S. dollar-denominated revenues; freight rate increases; and strong overseas intermodal demand and higher volumes of finished motor vehicle traffic. These factors were almost entirely offset by a lower applicable fuel surcharge rate; lower volumes of Canadian grain vs. the prior year’s record crop; decreased shipments of coal due to weaker global demand; reduced shipments of energy-related commodities, including crude oil, frac sand and drilling pipe; and lower volumes of semi-finished steel products and iron ore.
Revenue ton-miles declined by 7% over the year-earlier quarter. Revenue per revenue ton-mile increased by 7% over the year-earlier period, driven by the positive translation impact of the weaker Canadian dollar and freight rate increases, partly offset by a lower applicable fuel surcharge rate and an increase in the average length of haul.
CN’s operating expenses for the quarter decreased by 5% to C$1.8 billion, mainly due to lower fuel costs and lower labor and fringe benefits expense, partly offset by the negative translation impact of a weaker Canadian dollar on U.S. dollar-denominated expenses as well as increased purchased services and material expense.
“I’m proud of our very solid second-quarter results, driven by swift action to recalibrate resources and double-down on efficiency, while continuing to improve customer service,” said CN President and CEO Claude Mongeau. “CN is pleased to reaffirm its outlook for double-digit adjusted EPS growth in 2015 vs. last year's adjusted diluted EPS of C$3.76, despite volume growth that remains constrained by weakness in several markets, as well as challenging year-over-year comparables. We’re focused on our long-term agenda and investing C$2.7 billion in CN’s capital program this year to support it, with an emphasis on the integrity and safety of the network.”
“CN’s results were yet another example—perhaps the best one thus far this earnings season—of the industry’s ability to effectively ramp down resources in response to lower demand,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “The company’s impressive operating ratio (OR) was a reflection of resource management, solid pricing and a beneficial foreign exchange rate. The OR of 56.4%—320 basis points better than last year, 410 basis points better than our assumption, and 280 basis points better than the implied consensus OR, was the best quarterly OR recorded by CN or any of its Class I counterparts.”
“CN’s volumes fell 3.3% due to tough year over year comparisons and weakness in a number of commodities, including coal and crude,” Seidl noted. “The company’s response to the traffic challenges, however, was very effective and included improvements in key operating metrics, namely yard productivity, terminal dwell time, locomotive utilization and car velocity. The company reduced train starts, implemented roughly 600 lay-offs and a hiring freeze. These actions were coupled with continued pricing discipline evident in the 3.9% increase on same-store business, which represents about 75% of revenue. CN expects to garner 3-4% increases going forward, even when taking into consideration the Canadian grain cap, which goes into effect on Aug. 1.
“We are raising our 2015 and 2016 EPS estimates to C$4.20 and C$4.70, from C$4.00 and C$4.55, respectively, in order to reflect the 2Q15 beat and the company’s demonstrated ability to effectively right-size resources in a sluggish volume environment. Our price target, denominated in U.S.dollars, rises from $66 to $68 and is based on our 2016 EPS estimate of U.S. $3.76 and the same 18x multiple, which is just above the midpoint of the company’s valuation range in the past five years. In the longer term, we believe CN is taking the proper steps to allow for more growth on its lines as it embarks on new intermodal projects and focuses on improving rolling stock, track structure and its people. Additionally, CN is one of the better-positioned railroads in the current environment, in our opinion, due to lower exposure to coal and more favorable currency dynamics than U.S. carriers. We reiterate our Outperform rating.”