Despite looming economic uncertainties in the second half of 2022, Canadian railway CN expects volume gains in grain and brisk intermodal activity to support the railway in the back half of the year, according to executives on CN’s second-quarter 2022 earnings call.
“We continue to assume low-single-digit [revenue ton mile] growth for the year. The current demand remains strong, and we continue to dialogue with customers to monitor any signs of weakness,” Chief Marketing Officer Dough MacDonald told investors on the late Tuesday call.
That strength will likely include domestic intermodal and grain. CN expects a Canadian grain crop of over 70 million metric tons in the upcoming crop year, compared with less than 50 million MT in the past year.
Some consumer softness has been impacting CN’s (NYSE: CNI) international intermodal segment, with “some small dips here and there” as a result of wider supply chain issues. But CN is planning resources based on what customers are telling the railway they need, MacDonald said.
To prepare for economic uncertainties in the second half of the year, CN has been considering multiple scenarios. If the railway must adjust labor needs, it plans to take actions such as repositioning people into training or other departments as a way to hold on to that labor, instead of furloughing employees and potentially grappling with a labor shortage once volumes recover, executives said.
“While we are seeing some inflationary pressures starting to impact our costs, we are closely monitoring the situation and making sure that we control our expenses and continue to price above rail inflation,” said CFO Ghislain Houle.
Should shippers seek to divert cargo to western Canadian ports because of potential disruptions at the U.S. West Coast ports, CN could take on some of that volume through the end of September, executives said. After that time, CN needs to reserve network capacity to move grain.
However, “we haven’t seen anything come up north yet,” MacDonald said. The terminals in Canada are already full and CN is working with the terminals to reduce volumes there, he added.
Meanwhile, fluidity at terminals in Montreal and Toronto is improving after driver shortages and full warehouses caused CN to meter flows of imports into the terminals in June and into July.
To ease warehouse congestion, CN executives said the railway has been working with freight forwarders and drayage companies to improve terminal flows. CN has also been involved in finding storage locations in Toronto and Montreal.
Looking beyond the second half of 2022, CN is eyeing “significant opportunities” to add incremental business in eastern Canada because of the growth potential for more container-related business at the Port of Halifax, which is served by CN. The port’s capacity is at about 1.15 million twenty-foot equivalent units, and it is currently operating at about 50% of capacity. Volume growth at Halifax could come as more production from Southeast Asia makes its way to Atlantic Canada, and CN’s service from the port has fast travel times to Montreal, Toronto, Detroit and Chicago, MacDonald said.
Q2 2022 financial results
CN’s net income was nearly CA$1.33 billion ($1.03 billion), or $1.92 per diluted share, for the second quarter of 2022, compared with nearly $1.04 billion, or $1.46 per diluted share, for the second quarter of 2021.
Second-quarter revenues grew 21% year over year to a record $4.34 billion amid higher fuel surcharge rates, freight rate increases, higher Canadian export volumes of coal as well as higher volumes of U.S. grain, and a weaker Canadian dollar, according to CN. Operating income was also a record, increasing 28% to nearly $1.77 billion.
Operating expenses rose 16% in the second quarter to $2.57 billion amid higher fuel prices and weakening of the Canadian dollar.
“Last quarter, we laid out a number of principles that would guide the way that we run our business and the way that we grow. And I’m happy to say that we’ve advanced on all of these principles,” President and CEO Tracy Robinson said in prepared remarks during the earnings call.
CN has been focusing on improving train departures at hump yards and flat switching yards in April and May, according to Chief Operating Officer Rob Reilly.
“The team achieved performance on a number of operating metrics that we haven’t seen since prior to the pandemic, particularly in western Canada,” with car velocity the fastest since the second quarter of 2017, network train speed at its best since the third quarter of 2017 and through dwell times the lowest since the third quarter of 2016, Reilly said on the call.
These improved service metrics contributed to a lower operating ratio for the quarter, CN said in a news release. OR, defined as operating expenses as a percentage of revenues, is a measure that investors sometimes use to gauge the financial health of a company, with a lower OR implying improved health. CN’s OR was 59.3% for the second quarter of 2022, compared with 61.6% for the second quarter of 2021.
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