CN speeds ahead of turnaround plan
Railway reports strong Q2 results with 27% profit spike, names permanent CEO
After a tumultuous period marred by capacity constraints, Canadian National Railway Co. said Tuesday it is well ahead of its turnaround plan as it reported a 27-per-cent jump in quarterly net income.
The railway said its secondquarter profit jumped by $279 million to $1.3 billion in the three-month period ended June 30. It now expects its end-of-year adjusted earnings to be between $5.30 and $5.45 per share, an increase from three months earlier when the railway lowered those financial targets.
The better-than-expected results came the same day the railroad announced it had appointed Jean-Jacques (JJ) Ruest to be its new chief executive officer and president, following a four-month period during which he served as interim CEO.
“Despite a very challenging first quarter, our team of railroaders is definitely not giving up on delivering solid year-end results,” Ruest said on a call with analysts after markets closed. “We are ahead of our turnaround plan and we expect progressive improvement during the second half (of 2018).”
Ruest, 63, moved into the interim role in March after CN announced the surprise resignation of chief executive Luc Jobin, who had been on the job for less than two years. At the time, the railway was facing an onslaught of criticism from customers and government officials over operational challenges caused by increased demand and what the company called “insufficient network resiliency, coupled with severe weather conditions.”
One of Ruest’s first moves in March was to issue a formal apology to customers “for not meeting expectations of our grain customers, nor our own high standards.”
Since then, the company has embarked on a record capital spending program to deal with increased demand and strained capacity, focusing on expanding rail infrastructure in Western Canada.
On Tuesday, the company said it has increased its capital spending program by another $100 million, bringing the total to $3.5 billion.
In a statement, CN’s board chairman Robert Pace credited Ruest’s leadership for bringing the firm together to quickly tackle services challenges that first arose last fall. “In JJ, we have the best. He brings vision, energy, and speed to the role,” Pace said in a statement. “Following a global search, the board concluded that JJ is the right leader to accelerate CN’s innovation strategy, to lead the company forward, and to restore and retain industry-leading metrics and bestin-class customer service.”
RBC Capital Markets analyst Walter Spracklin said in a note to clients that the appointment of Ruest — who has been with CN for 22 years, including eight years as chief marketing officer — was “favourable” as it brings continuity to the executive team. “We continue to have a favourable investment thesis on the CN shares and we expect the company will continue to improve its service, clear the back log and realign costs in 2018,” Spracklin wrote.
CN’s operating ratio — a measure of railway efficiency that calculates operating costs as a percentage of revenues — increased from 57.5 per cent to 58.2 per cent, which the company said was the leading figure in the industry.
CN’s adjusted net income increased by 11 per cent to $1.1 billion, or $1.51 adjusted diluted earnings per share, as compared to $1 billion, or $1.34 adjusted diluted earnings per share, during the same time last year.
Revenues also increased by nine per cent to $3.6 billion, with shipment revenues increasing across nearly all categories, including coal, metals and minerals, petroleum, chemicals, grain and fertilizers.
CN Rail and smaller rival Canadian Pacific Railway have been investing in rail infrastructure to ease capacity constraints after a surge in demand from producers of grains and other commodities. Even oil producers are increasingly using railroads to ship crude as output has exceeded pipeline capacity. Financial Post