CN 2Q18 financials: “Swift network recovery”

CN is raising its financial outlook “following swift network recovery and solid top-line growth” in this year’s second quarter, and expects that “continued strong demand and capital investments will build momentum for second half of the year”

Compared to 2Q17, net income increased by 27% to C$1.31 billion; diluted earnings per share (EPS) increased by 30% to C$1.77; adjusted net income increased by 11% to C$1.12 billion; adjusted diluted EPS increased by 13% to C$1.51; operating income increased by 7% to C$1.52 billion; revenues increased by 9% to C$3.63 billion; revenue ton-miles (RTMs) increased by 5% and carloadings increased by 6%; and operating expenses increased by 10% to C$2.11 billion.

CN’s operating ratio of 58.2% was an increase of 0.7 points over 2Q17, but an improvement of 9.6 points over the first-quarter of 2018.

Free cash flow for the first half of 2018 was C$1.3 billion, compared with C$1.66 billion for the year-earlier period.

“Our entire team pulled together quickly to turn around our operational performance following a challenging winter, delivering a best-in-class operating ratio of 58.2% in the quarter,” said JJ Ruest, newly appointed President and CEO. “Record capital investments in new equipment and expanded infrastructure are on schedule, as we advance important projects that will give us the capacity and resiliency to serve the market at the industry-leading standard we and our customers expect. With these investments and hundreds of new qualified transportation crews in the field, CN has the momentum for a strong second half, meeting the growing economic needs of our customers and exporters, and producing value for our shareholders.”

Following a “strong second-quarter performance” and with a “robust demand environment,” CN now aims to deliver 2018 adjusted diluted EPS in the range of C$5.30 to C$5.45, vs. last year’s adjusted diluted EPS of C$4.99 (compared to its financial outlook of April 23, 2018, which called for 2018 adjusted diluted EPS in the range of C$5.10 to C$5.25).

CN also increased its 2018 capital program by C$100 million to C$3.5 billion, with additional capital investment primarily going toward the purchase of new railcars.

CN’s increase in revenues was mainly attributable to increased volumes of Canadian grain, coal, overseas intermodal traffic, frac sand, refined petroleum products and U.S. grain; freight rate increases; and higher applicable fuel surcharge rates. These were partly offset by the negative translation impact of a stronger Canadian dollar.

RTMs, measuring the relative weight and distance of rail freight transported by CN, increased by7% from the year-earlier quarter. Rail freight revenue per RTM increased by 2% over the year-earlier period, mainly driven by freight rate increases and higher applicable fuel surcharge rates, and partly offset by the negative translation impact of a stronger Canadian dollar. Carloadings for the quarter increased by 6% to 1.51 million.

Operating expenses for the second quarter increased by 10% to C$2.1 billion, mainly driven by higher fuel prices, higher labor costs as a result of an increase in headcount and higher training costs for new employees, and higher purchased services and material costs as a result of increased volumes of traffic. These costs were partly offset by the positive translation impact of a stronger Canadian dollar.

“A few hours after giving the full-time President and CEO title to J.J. Ruest, CN posted a very strong quarter, beating our and Street estimates on both the top and bottom lines,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “CN also raised its full-year outlook as the groundwork appears laid for a strong 2H18 and 2019. We are raising our EPS outlook for 2018 and 2019 and modestly raising our U.S. dollar price target to $98 from $97, as we lower our 2019 multiple half a turn to 20x to be a little more conservative. We continue to recommend CN as one of our top transport picks.”

“Like Canadian Pacific, CN gave color on the potential impact of the announced and proposed tariffs. Of the three announced tariffs that would potentially impact CN—on lumber, aluminum, and steel—none is expected to be materially impacted by the tariffs. In fact, CN’s lumber business was up this quarter, and it’s actually increasing the size of its lumber fleet. Similarly, CN transports base, not semifinished, aluminum, so it believes that the extra costs from the tariff will get transferred to the final customer. CN’s largest steel customers are in the U.S. and are actually more likely to benefit from the tariffs; the benefit that they’ll receive will more than outweigh any lost business from Canadian customers.”