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CN Rail profits dip amid supply chain snarls, lower grain exports

MONTREAL — Canadian National Railway Co. on Tuesday lowered its earnings forecast for the year after profits sagged in its first quarter.
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A CN Rail locomotive pulls auto carrier cars in Dartmouth, N.S. on Thursday, Nov. 25, 2021. The Montreal-based Canadian National Railway Co. says it has launched its search for a francophone director to occupy a seat on a board that currently has no native French speakers.THE CANADIAN PRESS/Andrew Vaughan

MONTREAL — Canadian National Railway Co. on Tuesday lowered its earnings forecast for the year after profits sagged in its first quarter.

Citing tough operating conditions and "worldwide economic uncertainty," the company now predicts adjusted diluted earnings per share growth of between 15 and 20 per cent, versus its target of 20 per cent at the start of the year.

"We will bring this company back to being best in class," said Tracy Robinson, who came on board as CEO on Feb. 28. She arrived from TC Energy, where she headed the energy company's natural gas pipelines operations.

"There's been a big shock to the supply chain. And we're working very hard to get our rhythm back," Robinson told analysts on a conference call.

Higher fuel surcharges and freight rates along with bigger coal and U.S. grain export volumes boosted revenue five per cent. But a smaller overall grain crop, global supply snarls and a cold winter all contributed to a net earnings drop of six per cent last quarter.

"Harsh weather — mostly in Western Canada — and supply chain disruptions impacted our ability to fully capitalize on the strong demand environments in Q1. The uncertainty from the war in Ukraine and the continuing pandemic disruptions in China and elsewhere all suggest just a little bit of caution on the year," Robinson said.

The weaker grain crop — usually CN's top-selling commodity, but outpaced last quarter by oil and chemicals — saw those revenues fall 15 per cent year over year in the three months ended March 31.

Supply bottlenecks caused by global backups and choke points — particularly in China, where COVID-19 lockdowns are wreaking havoc on manufacturing and shipping — made for slower container traffic on the West Coast.

Meanwhile a frigid winter further reduced freight capacity, as low temperatures impair a train’s air-brake systems, necessitating shorter trains and slower speeds.

As a result, CN is now targeting an operating ratio — a measure of the railway's efficiency that divides operating expenses by net sales — of just under 60 per cent, compared to its more ambitious January goal of 57 per cent.

The Montreal-based company also said it has launched its search for a francophone director to sit on the board, which currently has no native French speakers.

The company's board met Tuesday morning to kick off the headhunt for a Quebec-based member whose mother tongue matches the province's official language.

The new addition would replace Jean Charest, a former Liberal premier who stepped down from the board on April 1 to pursue the federal Conservative leadership.

CN drew criticism from language advocates, Quebec investors, the premier and the prime minister last week after it announced a slate of 11 board nominees, none of whom are native French speakers or from the province.

Reading a statement in French on Tuesday, the CEO said she has relocated to Montreal and practised her French for the past two months.

CN, like fellow former Crown corporation Air Canada, is subject to Canada's Official Languages Act, which requires federal institutions to provide services in English or French on request.

Language issues in Quebec's corporate world exploded in November after Air Canada CEO Michael Rousseau's comments about his weak French skills sparked an uproar.

CN said it aims to appoint a new director "in the coming months" and that the 103-year-old company respects its long history in the province.

The country's largest railroad operator said net income for the first quarter dropped to $918 million from $976 million in the first three months of 2021.

Revenues rose five per cent year over year to $3.71 billion compared with $3.54 billion a year earlier.

On an adjusted bases, diluted earnings per share rose to $1.32 from $1.23 in the same period last year, slightly below analyst expectations of $1.38, according to financial data firm Refinitiv.

This report by The Canadian Press was first published April 26, 2022.

Companies in this story: (TSX:CNR)

Christopher Reynolds, The Canadian Press

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