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CN Announces Second Quarter Results

CN Railway Delivers Solid Second-Quarter Performance Amid Economic Headwinds

In a robust display of operational resilience, Canadian National Railway Company (CN) has unveiled its financial and operational results for the second quarter of 2023, showcasing a blend of growth in key metrics and strategic adaptations to a challenging economic landscape. The Montreal-based rail giant, a cornerstone of North America's transportation infrastructure, reported revenues that underscored its ability to navigate fluctuating commodity demands and supply chain disruptions. This quarter's performance comes at a time when the global economy is grappling with inflationary pressures, labor market tightness, and shifting trade patterns, all of which have ripple effects on the rail sector.

CN's total revenues for the quarter reached $4.06 billion, marking a modest increase from the $3.98 billion recorded in the same period last year. This uptick was driven primarily by higher freight rates and improved volumes in select commodity groups, even as overall carload volumes faced some softness due to macroeconomic slowdowns. Adjusted diluted earnings per share (EPS) stood at $1.76, reflecting a year-over-year improvement that highlights the company's focus on cost control and efficiency enhancements. On a reported basis, diluted EPS came in at $1.62, influenced by certain non-recurring items, but the adjusted figure provides a clearer picture of underlying profitability.

Diving deeper into the numbers, CN's operating income climbed to $1.59 billion, up from $1.52 billion in the prior year's quarter. This gain was supported by a favorable operating ratio of 60.8%, which improved by 10 basis points compared to the previous year. The operating ratio, a key efficiency metric in the rail industry that measures operating expenses as a percentage of revenues, indicates CN's ongoing efforts to streamline operations and optimize its network. Net income for the quarter was $1.17 billion, translating to a solid return on invested capital and reinforcing CN's position as a reliable dividend payer for investors.

From an operational standpoint, CN moved approximately 1.42 million carloads during the quarter, a slight dip from the 1.45 million in Q2 2022. However, revenue ton-miles (RTMs), which measure the volume of freight transported over distance, grew by 2% to 62.3 billion. This discrepancy between carloads and RTMs suggests a shift toward longer-haul shipments, which are typically more profitable for rail operators. The company's train velocity improved modestly, averaging 200 miles per day, while terminal dwell times remained stable at around 15 hours, pointing to effective management of congestion points in its extensive 20,000-mile network spanning Canada and the United States.

Breaking down the performance by commodity segments reveals a mixed but encouraging picture. Grain and fertilizers, a traditional stronghold for CN given its access to the Canadian Prairies, saw revenues increase by 5% to $820 million. This growth was fueled by strong export demand for Canadian crops, particularly wheat and canola, amid global food security concerns exacerbated by geopolitical tensions. Intermodal revenues, encompassing containerized shipments, rose 3% to $1.05 billion, benefiting from resilient consumer spending and e-commerce trends, though port congestion at key gateways like Vancouver and Prince Rupert posed ongoing challenges.

On the other hand, the forest products segment experienced a 2% revenue decline to $450 million, attributed to softer demand in the lumber market as high interest rates cooled housing construction in North America. Similarly, metals and minerals revenues dipped by 1% to $510 million, reflecting reduced industrial activity in sectors like automotive and steel production. Petroleum and chemicals, however, provided a bright spot with a 4% revenue boost to $780 million, driven by steady crude oil movements and chemical shipments tied to manufacturing recovery.

Tracy Robinson, CN's President and CEO, emphasized the company's strategic agility in her commentary on the results. "Our team delivered strong results in a dynamic environment, leveraging our precision scheduled railroading model to enhance service reliability and customer satisfaction," she stated. Robinson highlighted investments in technology and infrastructure, including the deployment of advanced analytics for predictive maintenance and the expansion of sidings to alleviate bottlenecks. These initiatives are part of CN's broader capital expenditure plan, with $1.2 billion invested in the quarter alone, focusing on track upgrades, locomotive modernizations, and sustainability efforts such as biofuel trials to reduce emissions.

Looking ahead, CN provided an optimistic yet cautious outlook for the remainder of 2023. The company anticipates adjusted diluted EPS growth in the low single digits for the full year, assuming stable economic conditions and no major disruptions from labor disputes or weather events. Robinson noted potential tailwinds from recovering supply chains and increased cross-border trade under the USMCA framework, but warned of headwinds like persistent inflation and possible recessionary pressures in key markets. CN's guidance also includes expectations for RTM growth of 3-5%, supported by robust agricultural exports and intermodal volumes.

The quarter's results also underscore CN's commitment to shareholder returns. The board declared a quarterly dividend of $0.79 per share, maintaining its track record of progressive dividend increases. Additionally, CN continued its share repurchase program, buying back approximately 4 million shares during the period, which helps to enhance EPS and signal confidence in long-term value creation.

Contextually, CN's performance must be viewed against the backdrop of the broader rail industry. Competitors like Canadian Pacific Kansas City (CPKC), formed by the recent merger of CP and Kansas City Southern, are intensifying competition, particularly in north-south corridors. CN's focus on its east-west dominance in Canada positions it well, but regulatory scrutiny from bodies like the Surface Transportation Board in the U.S. and the Canadian Transportation Agency adds layers of complexity. Moreover, environmental, social, and governance (ESG) factors are increasingly prominent; CN reported progress toward its 2030 emissions reduction targets, including a 5% decrease in fuel consumption per RTM compared to last year.

Analysts have responded positively to the results, with several upgrading their ratings on CN stock. The company's ability to maintain pricing power amid cost pressures—fuel expenses rose 8% due to higher diesel prices—demonstrates effective hedging strategies and contract negotiations. Labor relations, a perennial concern in the industry, appear stable following last year's contract resolutions, though CN continues to invest in workforce training to address shortages.

In terms of risks, the press release included standard forward-looking statements, cautioning that actual results could differ due to factors like economic downturns, supply chain volatility, and natural disasters. For instance, wildfires in Western Canada during the quarter caused temporary service interruptions, though CN's diversified network mitigated the impact.

Overall, CN's second-quarter results paint a picture of a company that is not just weathering the storm but positioning itself for growth. By balancing operational excellence with strategic investments, CN reaffirms its role as a vital artery in North America's economy. As the year progresses, stakeholders will watch closely how CN adapts to evolving trade dynamics, technological advancements, and sustainability imperatives. This performance, while not without its challenges, signals resilience and sets a positive tone for the rail sector at large.

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Read the Full Toronto Star Article at:
[ https://www.thestar.com/globenewswire/cn-announces-second-quarter-results/article_74ccd190-f389-5ad1-ba5a-920435bab4a5.html ]