CN scores sub-60 operating ratio, sets volume record in Q2

CN rebounded from a harsh winter-impacted first quarter in a big way — with a sub-60 operating ratio and double-digit revenue, income and traffic gains in the second quarter.

Yesterday, CN reported that second-quarter revenue jumped 17 percent to $3.1 billion, operating income soared 24 percent to $1.3 billion, diluted earnings climbed a likewise 24 percent to $1.03 per share, volume rose 11 percent to 1.46 million units and the operating ratio improved 1.3 points to an industry-best 59.6 compared with second-quarter 2013 results (all financial figures are in Canadian dollars).

"CN recovered swiftly from the first-quarter winter weather challenges … thanks to solid execution by our dedicated team of railroaders. [We] delivered record volumes in the quarter by bringing [our] key supply chains back into sync and taking advantage of continued strength in several of our core markets," said CN President and Chief Executive Officer Claude Mongeau in a press release. "This solid operational recovery underscores our ability to accommodate growth at low incremental cost and to drive very strong financial results."

By commodity group, grain and fertilizers revenue ballooned 35 percent to $526 million, metals and minerals revenue soared 20 percent to $370 million, intermodal revenue jumped 17 percent to $716 million, petroleum and chemicals revenue also climbed 17 percent to $564 million, automotive revenue rose 15 percent to $172 million, forest products revenue increased 9 percent to $393 million and coal revenue went up 5 percent to $201 million.

The gains mainly are attributable to higher volumes driven by a record Canadian grain crop, strong energy markets and market share gains, particularly in intermodal, as well as the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues and rate increases, CN officials said. It was the strongest-ever quarter for Canadian grain, they said.

Operating expenses for the quarter increased 14 percent to $1.85 billion primarily because of the negative translation impact of the weaker Canadian dollar, higher fuel and labor/fringe benefits costs, and increased purchased services and material expenses, CN officials said.

Due to the strong second-quarter results and continued growth opportunities in the intermodal, bulk and merchandise markets, CN has revised its 2014 financial outlook. The Class I now expects to deliver double-digit earnings growth, with mid- to high-digit carload growth, and generate more free cash flow.

"The continuing success of our agenda of Operational and Service Excellence positions CN well to achieve this improved financial outlook for the year," said Mongeau.

The revised earnings guidance suggests an upper-teens growth pace and modest upside to consensus expectations, and the market reaction likely will be positive, said Citi Research analysts in a report. CN's second-quarter results beat Citi Research's forecasts and consensus estimates, with the railroad exceeding expected top-line revenue growth and the anticipated operating ratio, they said.