Both of Canada’s major railways felt the effects of a weak economy, and capacity constraints, exacerbated by bad weather, and produced somewhat disappointing financial results. Both carriers restated the financials pertaining to the first quarter of 2017, but we chose to maintain them as originally presented. As is evident from the table, net income as a percentage of revenues tumbled from 34 per cent in 2016 to 21 per cent in 2018 at CP, while at CN net income as a percentage of revenues dropped from 26.7 per cent in 2016 to 23.2 per cent in 2018. Both carriers have spent vast sums of cash repurchasing their own shares over the past few years, with CN in particular picking up the pace of these repurchases. Stock repurchases help maintain earnings per share numbers, as the company’s earnings are divided by a reduced number of outstanding shares. On the other hand, as is evident from the numbers, one could argue that share repurchases were financed entirely or in part through borrowed funds, and for that reason, have the effect of weakening the balance sheet, compared to what it would look like without the repurchases.
Whereas at CP rail freight revenues rose 4 per cent during the quarter, they declined slightly at CN. However, CN managed to increase rail freight revenues per RTM (by 4.2 per cent). At CP, gross tonne miles (GTM) rose by 5.8 per cent, while at CN gross tonne miles dropped by 2.7 per cent. Given that at the end of the quarter, CN had 9.2 per cent more employees than a year earlier, GTMs per employee dropped 11 per cent. At CP, however, GTMs per employee actually rose by 1.3 per cent.
At both carriers, the operating ratio (defined as operating expenses as a percentage of revenues) took a hit, rising from 58-59 per cent in each of 2016 and 2017 to just over 67.5 per cent in 2018. All in all, the first quarter of 2018 was a quarter that many at both carriers would prefer to forget.
During the quarter, CN’s revenues increased by just over 8 per cent to $3.3 billion. “Free” cash flow, defined as the amount remaining from operating cash flow after subtracting net investments made during the quarter and dividends paid to investors, dropped slightly into negative territory, from $547 million during the first quarter of 2017.
CP’s revenues increased by four per cent during the quarter to $1.66 billion. “Free” cash flow rose from $11 million to $78 million.
CN’s brightest spots were coal and intermodal, which both produced respectable gains in revenue tonne miles and rail freight revenue per tonne mile. Grains and fertilizers represented CN’s worst performing category, with revenue tonne miles down by 12 per cent, and revenue per tonne mile up by 1 per cent.
CN’s average number of employees rose from 22,396 to 24,467 during the period. Terminal dwell time increased significantly from 15.6 hours to 21.3, and train velocity decreased from 25.7 miles per hour to 21.8.
For CP, the bright spot was potash which, although carried at lower prices, enjoyed strong demand. Similarly, there was strong demand for transportation of energy products, chemicals and plastics, although there too revenues per RTM were down. Demand for intermodal was also strong and, with RTMs slightly in excess of the year-ago period, the sector did well. On the other hand, grain shipments fell about 9 per cent, which caused the category to lose its top revenue status for the quarter to intermodal.
CP’s average number of employees rose from 11,648 during Q1 of 2016 to 12,173. Terminal dwell time increased from 7.1 hours to 7.9, and train velocity decreased from 22.3 miles per hour to 20.6.
Both carriers announced plans to increase their number of employees, and to embark on a period of heavy capital expenditures to increase capacity and efficiency.