Trade disputes hit CN volumes and prompt railway to cut outlook
CN (NYSE: CNI) delivered the news while releasing its second-quarter financial results, which included higher operating income despite lower revenue and flat volume.
'A few months ago, trade deals seemed imminent. And instead there is an increasing uncertainty around the tariff and trade environment, particularly in Canada,' CEO Tracy Robinson told investors and analysts on the company's earnings call.
The current and threatened U.S. tariffs on Canada include a 35% tariff on various Canadian goods set to take effect on Aug. 1, alongside existing tariffs of 25% on certain imports and 50% on steel and aluminum.
The trade disputes, along with softening economic conditions, have had a negative impact on CN's forest products, metals, international intermodal, and automotive traffic. Overall for the quarter, volume was down 1% based on revenue ton-miles and flat when measured by carloads and containers.
Strong bulk volumes — including grain and potash — and domestic intermodal growth were unable to offset declines in international intermodal and merchandise volume, said Janet Drysdale, interim chief commercial officer. Although grain and fertilizer revenue was up 12%, revenue declined in intermodal, automotive, and every merchandise segment.
As volume softened, CN took steps to reduce costs, including furloughing train crews and storing locomotives. 'This team has proactively and progressively adjusted the operating plan resources throughout the quarter, maintaining good tensions between costs and network fluidity and performance,' Robinson said.
As a result, operating income increased 5%, to $1.2 billion, as revenue declined 1%, to $3.13 billion. Earnings per share rose 7%, to $1.37. The railway's operating ratio improved 2.3 points, to 61.7%. CN trimmed its $2.5 billion capital budget by $36.7 million.
CN now expects to deliver earnings per share growth of between 5% and 9%, down from previous guidance of 10% to 15% growth. And the railway withdrew its 2024-2026 outlook, which was drawn up prior to trade disputes that have weighed on the railway's merchandise and intermodal volumes. Further complicating CN's financial outlook: Unfavorable exchange rates that have a negative impact on earnings per share.
Nonetheless, CN still expects several growth projects in Western Canada to come online as expected over the next couple of years.
Derek Taylor, CN's chief field operations officer, said CN ratched down costs as merchandise volume declined. At the end of the quarter, 560 train and engine crew members were on furlough, 200 locomotives were parked, and 4,000 additional freight cars were stored.
The railway continued to run well, with car-miles per day, through dwell, and local service all improving over last year's second quarter.
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