CN President and CEO Tracy Robinson on Jan. 24 reported the Class I’s approach to “scheduled railroading” improved service to customers, drove operational efficiency, and “built the resiliency that enabled a rapid recovery during the extreme winter conditions late in the [fourth] quarter.”
“As we look to 2023, we believe our back-to-basics strategy and disciplined operating model will continue to deliver despite the softening economy,” she said during a fourth-quarter and full-year 2022 financial and operating report.
Among CN’s fourth-quarter 2022 results:
• Revenues were C$4.542 billion, up 21% or C$789 million from fourth-quarter 2021. The railroad said the boost was “mainly attributable to higher fuel surcharge revenue as a result of higher fuel prices, the positive translation impact of a weaker Canadian dollar, freight rate increases, and higher volumes of Canadian grain.”
• Revenue Ton Miles (RTM)—measuring the weight and distance of freight transported by CN—increased by 6% over the same period in 2021. Freight revenue per RTM increased by 15% over fourth-quarter 2021, CN said, “mainly driven by higher fuel surcharge revenue as a result of higher fuel prices, the positive translation impact of a weaker Canadian dollar and freight rate increases.”
• Operating expenses rose 20% to C$2.630 billion, when compared with the same period in 2021. This was “mainly a result of higher fuel prices and the negative translation impact of a weaker Canadian dollar,” CN reported.
• Operating income came in at C$1.912 billion, up 22% from fourth-quarter 2021, or an increase of 21% over the year-ago period on an adjusted basis.
• Diluted EPS was C$2.10, up 24% from fourth-quarter 2021, or an increase of 23% on an adjusted basis.
• Operating ratio—defined as operating expenses as a percentage of revenues—was 57.9%, an improvement of 0.4 points over fourth-quarter 2021, or flat on an adjusted basis.
• On the operations side, fuel efficiency improved by 1% to 0.886 U.S. gallons of locomotive fuel consumed per 1,000 gross ton miles (GTMs); car velocity (car miles per day) improved by 10%; through network train speed (mph) improved by 1%; through dwell (entire railroad, hours) improved by 9%; and train length (in feet) decreased by 7%, compared with fourth-quarter 2021.
Among CN’s full-year 2022 results:
• Revenues were C$17.107 billion, up 18% or C$2.630 billion from 2021. CN said this “was mainly attributable to higher fuel surcharge revenue as a result of higher fuel prices, freight rate increases, the positive translation impact of a weaker Canadian dollar, higher Canadian export volumes of coal via west coast ports, and higher volumes of U.S. grain; partly offset by lower international container traffic volumes via the port of Vancouver as a result of supply chain congestion and significantly lower export volumes of Canadian grain in the first half of 2022.”
• RTMs increased by 1% over 2021, and freight revenue per RTM increased by 18%, “mainly driven by higher fuel surcharge revenue as a result of higher fuel prices, freight rate increases, a decrease in the average length of haul, and the positive translation impact of a weaker Canadian dollar,” CN reported.
• Operating expenses were C$10.267 billion, up 16% from 2021 “mainly due to higher fuel prices and the negative translation impact of a weaker Canadian dollar,” according to the railroad.
• Operating income was C$6.840 billion, up 22% from 2021, and adjusted operating income was C$6.862 billion, up 22% from 2021.
• Diluted EPS was C$7.44, an 8% increase over 2021. Adjusted diluted EPS was C$7.46, a 25% rise over 2021.
• Operating ratio was 60.0%, an improvement of 1.2 points over 2021, and adjusted operating ratio was 59.9%, an improvement of 1.3 points over 2021.
• Return on invested capital (ROIC) was 15.8%, a decrease of 0.6 points from 2021. Adjusted ROIC was 15.9%, an increase of 1.8 points over 2021.
• On the operations side, fuel efficiency improved by 2% to 0.867 U.S. gallons of locomotive fuel consumed per 1,000 GTMs; car velocity (car miles per day) improved by 1%; through network train speed (mph) decreased by 2%; through dwell (entire railroad, hours) improved by 4%; and train length (in feet) decreased by 5%, compared with 2021.
CN said it expects to deliver EPS growth in the low single-digit range “due to a softer economic outlook.” North American industrial production is assumed to be negative in 2023, according to the railroad.
For more details, visit the CN Investors webpage.
The Cowen Insight: A Seemingly Cautious Guide
“CN came in above forecasts in the fourth-quarter and strong year-to-date trends position the company well to start the new year,” reported Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Outperformance in Bulk segments should more than offset the consumer segment, though the second-half remains unclear. We see management’s low single-digit earnings guidance as conservative while acknowledging broader macro uncertainties. Our PT moves to $123 as we roll our model forward. Reiterate Market Perform.”
Key Cowen Takeaways:
• “CN reported fourth-quarter EPS of C$2.10 beating our estimate of C$2.07 and the consensus forecast of C$2.08. Robust pricing of 20% year-over-year drove top-line growth, mitigating the impact of inflationary pressures and adverse weather in December resulting in a 59.7% operating ratio (OR), flat on a year-over-year basis. Higher fuel surcharges added to pricing discipline in producing strong yield performance for the quarter.
• “Fourth-quarter volumes grew 2.5% year-over-year on historically strong Canadian crop movement and continued demand for coal due to energy shortages. Strong bulk freight and easy comps are expected to support first-half volume growth. Weakness is expected on the intermodal side due to softening demand and although automotive freight supported fourth-quarter volumes, management anticipates a draw-down due to rising interest rates and spare parts shortages. Like Union Pacific, management issued a cautious volume guide of outperforming national industrial production and emphasized low second-half visibility.
• “CN posted a 20% year-over-year increase in revenue/carload driven by strong pricing discipline in line with results from our rail shippers survey and fuel surcharges. With approximately 33% of CN’s book being repriced every year, we expect favorable pricing power to persist in 2023. Inflationary pressures, particularly on the labor front will also support the case for pricing discipline. As a result of Canadian regulations regarding paid sick leave passed in late 2022, CN expects an additional $100 million in labor expenses for 2023. We anticipate modest margin pressure in the first half relative to typical seasonality despite strength in volumes and pricing.
• “Citing uncertainty around second-half performance and a mild recession as their base case, management issued a full-year 2023 EPS growth guide in the low single digits, a fairly conservative projection in our view given the largely positive outlook on the first half. Given a murky second half, we acknowledge the possibly that management may have to raise guidance as we get closer to the back half, especially given the projected level of buyback activity (up to approximately 32 million shares).
• “We lower our 2023 EPS estimate to $5.81 from $6.10 and introduce our 2024 EPS estimate of $6.45. We lower our multiple a turn to 19x and using our new 2024 EPS estimate our PT moves to $123. Reiterate Market Perform.”