Although CN (NYSE: CNI) is looking forward to an improved economy in the second half of 2021, uncertainties surrounding the COVID-19 pandemic and the vaccine rollout are making the Canadian railway “cautious” about the first quarter of this year.
“We are optimistic about 2021, especially the economy and the GDP [gross domestic product] in the second half … [but] we are more cautious about Q1, especially as it pertains to lockdowns and preventive quarantines on our operating employees in the communities where we operate,” said CN President and CEO JJ Ruest during his company’s fourth-quarter 2020 earnings call Tuesday.
Some segments are seeing a “V-shaped recovery,” such as consumer goods, while others, such as crude and refined products, are “depressed,” Ruest said. However, CN has been handling “solid” grain volumes in the U.S. and Canada and that trend is only expected to continue in 2021 amid export demand for corn and soybeans.
That strength in the consumer economy helped CN witness record port volumes at Prince Rupert and Vancouver, with fourth-quarter volumes almost 17% higher than the fourth quarter of 2019. Fourth-quarter port volumes at Halifax and Montreal were 5% higher year-over-year. For both coasts, these fourth-quarter port volumes are quarterly records for CN, according to Keith Reardon, CN senior vice president of the consumer product supply chain.
CN’s domestic intermodal business also got a boost from drivers such as groceries, e-commerce and consumer purchases, according to Reardon. He told investors on the call that volumes for the first three weeks of the first quarter 2021 have been “strong,” with that strength projected to continue through at least the end of the first quarter.
CN expects to spend CA$3 billion in capital investments in 2021, of which $1.6 billion will go toward track and railway infrastructure maintenance, the company said Tuesday in a release. All figures are in Canadian dollars, and 1 Canadian dollar equals about 79 cents in U.S. dollars.
CN also expects earnings-per-share growth for the year in the “high single-digit range” and “mid-single-digit volume growth” in terms of revenue ton miles.
CN seeks to increase network capacity around Edmonton and toward Prince Rupert, and it is wrapping up construction for a new terminal in Minneapolis. It is also making capacity improvements in Chicago, among other locations, according to Reardon.
“Smartly managing capacity and price will be the theme for 2021,” said James Cairns, CN senior vice president for the rail-centric supply chain.
When asked about whether CN can reach a lower operating ratio (OR), CN Chief Operating Officer Rob Reilly said the company is shooting for a full-year operating ratio below 60%. To do that, CN will be looking to lengthen trains, increase car velocity and train speeds and achieve greater fuel efficiency, he said.
“We do believe that’s achievable,” Reilly said of an OR below 60%. Investors sometimes use OR to gauge the financial health of a company, with a lower OR implying improved financial health. OR is a company’s expenses as a percentage of revenue. Adjusted OR for the fourth quarter was 61.4%, compared with 65.2% in the fourth quarter of 2019.
CN also expects to be hiring additional workers to handle rising volumes in the second half of 2021, although it plans to grow employee headcount at a different rate during that same time frame, Reilly said.
As 2021 plays out, the railway is seeing service opportunities in areas such as Halifax and the U.S. Gulf Coast and for business segments such as consumer and the refrigerated market. However, CN is “more bullish” in the second half of the year, especially for carload volumes.
“There’s volume growth at CN … but we also want to manage what comes at us,” Ruest said.
He continued, “We’ll see how the winter goes along” as the COVID-19 pandemic and vaccine rollout play out.
CN said Tuesday that its net income for the fourth quarter of 2020 rose 14% year-over-year amid a 2% increase in revenue and a 5% decrease in operating expenses.
Fourth-quarter 2020 adjusted net profit was $1.02 billion, or $1.43 adjusted earnings per share, compared with $896 million, or $1.25 adjusted earnings per share, for the fourth quarter of 2019.
For more on CN’s fourth-quarter earnings results, go here.
| CN ($ in Canadian dollars) | 2020 Value | 2019 Value | Y/Y Gross Change | Y/Y % Change |
| Freight revenue (in millions) | $3,507.0 | $3,408.0 | $99.0 | 2.9% |
| Carloads (includes intermodal) (000s) | 1,526 | 1,425 | 101.00 | 7.1% |
| Revenue per carload | $2,298 | $2,392 | -$94.00 | -3.9% |
| Intermodal shipments (000s) | 731 | 638 | 93.00 | 14.6% |
| Intermodal revenue per carload | $1,417 | $1,453 | ($36.0) | -2.5% |
| Revenue tonmile (in millions) | $63,207 | $57,709 | $5,498.0 | 9.5% |
| Employee counts (quarterly average) | 24,272 | 26524 | -2,252.00 | -8.5% |
| Network train speed (mph) | 18.4 | 19.2 | -0.80 | -4.2% |
| Through dwell time (hours) | 8 | 8.1 | -0.10 | -1.2% |
| OR% (on an adjusted basis) | 61.4% | 65.2% | -3.80% | -5.8% |
| EPS (on an adjusted basis) | $1.43 | $1.25 | $0.2 | 14.4% |
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