Canadian National Struggling to Remain North America's Most-Efficient Railroad

Eric Pancer/Flickr

Canadian National Railway Co. is running into challenges in maintaining its status as North America’s most efficient railroad.

A key measure of efficiency dropped in the first quarter even as the Montreal-based company forecast higher volumes for the coming year. The shares fell the most in almost three months in Toronto April 25 after rising to a record at the close.

The results spotlighted the task facing Canadian National, the most efficient North American railroad last year, as it strives to keep costs down while tapping into a much-anticipated rebound in volume. The company boosted its 2017 profit target, citing better demand for commodities such as grain and coal. First-quarter earnings met analyst expectations.

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“People just expected a much better number," said Dan Sherman, an analyst at Edward Jones. "The market was hoping they’d get a little bit more. Fuel costs were up a lot and that masked everything else that went well.”

The operating ratio, in which a lower number is better, worsened to 59.4% from 58.9%, the Montreal-based company said April 24 in a statement. Fuel expenses jumped 46 percent as equipment rents climbed 6.3%, leading to an 8.9% advance in operating expenses.

Canadian National said adjusted earnings this year will rise at least 7.8% to C$4.95 to C$5.10 a share. The carrier, like Canadian Pacific Railway, is benefiting from last year’s bumper crop in western Canada.

Canadian National now expects to devote C$2.6 billion to capital expenditures this year, C$100 million more than previously planned. The extra investment will go toward the purchase of 22 high-horsepower locomotives “and other projects to support growth,” the railroad said.

The company has begun hiring to replace departed employees, and additional train starts may be needed to handle rising volumes, executives said Monday on a conference call with analysts.

“Trust us, we’re not going to keep our eye off the ball in term of productivity,” Chief Financial Officer Ghislain Houle said.

New contracts with customers such as Taiwan’s Yang Ming Marine Transport, Canadian Tire Corp. and Lowe’s Cos.’s Rona unit will generate more than C$100 million a year in additional revenue, Chief Commercial Officer Jean-Jacques Ruest said.

“We can see good momentum,” CEO Luc Jobin said on the call.

Canadian Pacific last week reaffirmed a forecast that calls for a high-single-digit increase in 2017 profit.


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