CN’s first-quarter 2021 results included “an industry-leading increase in traffic volume of 5% year-over-year.”
CN also railroad updated its 2021 financial outlook and said it “is now targeting double-digit adjusted diluted earnings per share growth.” Concurrently with reporting earnings on April 26, CN announced that it formallysubmitted its voting trust for its proposed merger with Kansas City Southern to the Surface Transportation Board.
Financial Results, 1Q2021 Vs. 1Q2020
- Operating income of C$1.327 billion, an increase of 9%,; adjusted operating income of C$1.19 billion, a decrease of 2%.
- Revenues of C$3.535 billion “in line with the prior year.”
- Operating ratio of 62.5%, an improvement of 320 basis points; adjusted OR of 66.3%, an increase of 60 basis points.
- Diluted earnings per share (EPS) of C$1.37, a decrease of 4%; adjusted diluted EPS of C$1.23, an increase of 1%.
- CN recovered C$137 million, or C$102 million after-tax (C$0.14 per diluted share), of the C$486 million loss on assets held for sale recorded in the second quarter of 2020, the result of entering into a definitive agreement for the sale of non-core lines in Wisconsin, Michigan and Ontario.
Operating Metrics, 1Q2021 Vs. 1Q2020
Operating performance improved in the first quarter of 2021 when compared to the same period in 2020, “mainly due to the partial economic recovery and reduced impacts of the COVID-19 pandemic as well as the impacts of the illegal blockades in the first quarter of 2020.”
- Federal Railroad Administration* (FRA) personal injury and accident rates decreased 27% and 36%, respectively.
- Fuel efficiency improved 4% to 0.92 U.S. gallons of locomotive fuel consumed per 1,000 gross ton-miles.
- Train length (in feet) increased 5%.
- Through dwell (entire railroad, hours) remained flat.
- Car velocity (car-miles per day) increased 5%.
- Through network train speed (mph) decreased 1%.
Updated 2021 Financial Outlook
CN updated its 2021 financial outlook and is now targeting double-digit adjusted diluted EPS growth, vs. 2020 adjusted diluted EPS of C$5.31 compared to its financial outlook of Jan. 26, 2021, which called for adjusted diluted EPS growth in the high single-digit range. The railroad said it “now assumes high-single-digit volume growth in 2021 in terms of revenue ton-miles (RTMs). Furthermore, CN is still targeting free cash flow in the range of C$3.0 billion to C$3.3 billion in 2021, compared to C$3.2 billion in 2020.”
1Q2021 Revenues, Traffic Volumes and Expenses
CN 1Q2021 C$3.535 billion were in line with the prior year. Record first-quarter intermodal traffic and shipments of Canadian grain, and freight rate increases were offset by lower volumes for other commodity groups “caused mainly by the ongoing effects of the COVID-19 pandemic, the negative translation impact of a stronger Canadian dollar and lower applicable fuel surcharge rates. The unfavorable revenue impact of the polar vortex in February 2021 was similar in magnitude to the unfavorable revenue impact of the illegal blockades in February 2020.”
RTMs increased 5% from the year-earlier period. Freight revenue per RTM decreased 5% over the year-earlier period, “mainly driven by the negative translation impact of a stronger Canadian dollar, lower applicable fuel surcharge rates and an increase in the average length of haul; partly offset by freight rate increases.”
Operating expenses for the first quarter decreased by 5% to C$2.208 billion, “mainly due to a recovery of the loss on assets held for sale resulting from the Company entering into an agreement for the sale of non-core lines as well as the positive translation impact of a stronger Canadian dollar; partly offset by higher incentive compensation and higher fuel costs.”
Proposed combination with KCS
On April 20, 2021, CN announced a proposal to combine with Kansas City Southern, a counter-offer to the Canadian Pacific proposal announced March 21, 2021. KCS’s existing merger agreement with CP allowing CN and KCS to engage in discussions with respect to CN’s proposal. CN is proposing to use a voting trust structure identical to that proposed by CP, with the same trustee. CN said it “anticipates that the STB will approve CN’s proposed voting trust on the same timetable as CP’s proposal.”
Download CN’s 1Q2021 Financial Presentation:
Assumptions
- CN’s 2021 outlook is based upon “a number of economic and market assumptions:
- North American industrial production for the year will increase in the high-single-digit range
- U.S. housing starts of approximately 1.45 million units and U.S. motor vehicle sales of approximately 16 million units.
- For the 2020/2021 crop year, the grain crop in Canada was above its three-year average and the U.S. grain crop was in line with its three-year average. CN assumes that the 2021/2022 grain crops in both Canada and the U.S. will be in line with their respective three-year averages.
- Total RTMs will increase in the high-single-digit range.
- Continued pricing above rail inflation.
- Ihe value of the Canadian dollar in U.S. currency will be approximately $0.80.
- In 2021, the average price of WTI (West Texas Intermediate) crude oil will be approximately US$60 per barrel.
- CN plans to invest approximately C$3.0 billion in its capital program, of which C$1.6 billion is targeted toward track and railway infrastructure maintenance.
“Industry-outpacing growth in our intermodal business, as well as our strong financial performance, position CN to be the premier railway of the 21st century: an engine of North American economic growth and prosperity and both an operational and sustainability leader,” said CN President and CEO JJ Ruest. “Gains in safety, train length, car velocity, labor productivity, fuel efficiency and other key measures demonstrate our strong operational performance. Our proposal to combine with Kansas City Southern (KCS) will drive value to KCS and CN shareholders and significantly enhance customer choice and competition, while further reducing greenhouse gas emissions by converting truck to rail. We have a high degree of confidence in our business, our offer to KCS and our vision for the future. We could not have achieved these results without the extraordinary talent and dedication of our great team of railroaders, who have our respect and appreciation, as always.”
*Corrected by Railway Age from “Federal Railroad Association.”
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