Canadian National Sees Cost Squeeze as Foul Weather Persists

Jan 31, 2014 4:25 pm ET

Jan. 31 (Bloomberg) -- Canadian National Railway Co. said the weather-related issues that hampered revenue growth in late 2013 are continuing this month and will probably add to first- quarter expenses at Canada’s largest railroad.

Additional costs linked to “extreme” weather will probably amount to C$15 million ($13.4 million) in January, roughly equal to what the Montreal-based railroad spent in December, Chief Financial Officer Luc Jobin said yesterday after the company reported fourth-quarter results.

“They are going to have to make up a little bit of ground,” Jeff Nelson, an analyst at Edward Jones & Co. in St. Louis, said in a telephone interview. “They have a good track record and I expect that they’ll get the job done.” Nelson rates the shares hold.

Lower-than-normal temperatures in December forced Canadian National to run shorter trains and spend more on labor and fuel to clear the tracks. Fourth-quarter operating expenses climbed 10 percent -- outpacing an 8.3 percent increase in revenue -- as workforce costs soared 28 percent, the company said yesterday.

“We are dealing with very difficult conditions, which have an impact on our railroad operations,” Chief Executive Officer Claude Mongeau said yesterday on a conference call. “We are mindful that we’re not meeting the demand of our customers, and impacting them in terms of their ability to reach markets. We are doing our best to come out of it.”

Canadian National rose 0.5 percent to C$59.61 at the close in Toronto. The stock has gained 25 percent in the past 12 months, beating the 8 percent increase for the benchmark Standard & Poor’s/TSX Composite Index.

Below Estimates

Excluding some costs and gains, Canadian National reported fourth-quarter profit of 76 cents a share, below the average 77- cent estimate of analysts. Even so, the company boosted its dividend by 16 percent while affirming a December forecast that per-share profit in 2014 will increase by at least 10 percent.

“Given that the company did not materially exceed guidance last year, and considering the light fourth-quarter results and weather disruptions in the first quarter, this guidance may not be as conservative as we believe many had initially thought it was,” Jason Seidl, an analyst at Cowen & Co. in New York, said today in a note to clients. He rates the shares market perform.

Canadian National’s network spans Canada and the U.S., extending north to Fort McMurray, Alberta, and south to refineries on the Louisiana Gulf Coast. Winnipeg, Manitoba, where the railroad operates facilities such as a training center, recorded its second-coldest December since 1893, Canada’s Global TV reported last month.

‘Breaking Loose’

“We are managing priorities the best we can so that we can avoid creating undue hardship,” Mongeau said. “We will be breaking loose as soon as weather gives us a break to rethink and get the network back in a mode where we can meet demand and deal with the rollover that we have from December into January.”

Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said in a note to clients today that “while volume demand and accounting trends are positive, the challenging operating environment presents a headwind to 2014 results.”

The effect on the financial results “will depend on the duration and severity of unseasonably cold temperatures across the network,” said Spracklin, who rates the stock outperform.

Operating ratio, a measure of railroad efficiency that compares expenses to revenue, deteriorated to 64.8 percent in the quarter from 63.6 percent a year earlier, the company said.

Even so, Canadian National remained the most efficient railroad in North America, based on data compiled by Bloomberg. Union Pacific Corp. was next with a ratio of 65 percent.

Labor Costs

Fourth-quarter labor expenses soared to C$594 million from C$463 million a year earlier as the company paid higher wages and added staff. Fuel costs rose 5.5 percent to C$422 million, while purchased services and materials advanced 7.1 percent to C$364 million.

“We have our work cut out for us, and just like last year, we will need to work hard to recover the expenses,” Chief Operating Officer Jim Vena said on the call. “I am very confident that we got the team and we will deliver.”

--Editors: Stephen West, John Lear