Canadian National Railway Co. announced a new North American container shipping service Monday, upping its financial forecast for the year on the heels of record first-quarter revenues brought on by a bumper grain crop and higher oil prices.
Dubbed Falcon Premium, the intermodal service marks an agreement between CN, Union Pacific Railroad and GMXT, a Mexican railroad operator and metals miner. It connects CN’s tracks, which stretch from Vancouver to Halifax, with the UPR line in Chicago and GMXT terminals several hundred kilometres north of Mexico City.
In a bid to match rival CP Rail’s recent merger with Kansas City Southern, the deal also aims to nab customers south of the border from trucking companies with clients in auto parts, food, appliances and temperature-controlled products.
“How do we convert the Mexico business over from the road to intermodal?” asked chief marketing officer Doug MacDonald. “We need a consistent, quick transit time.”
He said CN’s new partners have shown they can persuade shippers to abandon trucks for railcars between Mexico and Chicago. “Now we’re layering on top of that CN’s network, where really there wasn’t that product before. It’s a brand new product coming into Eastern Canada, somewhat into Detroit and even into Western Canada.
“That’s how we’re going to take those trucks off the road, because they didn’t have an alternative before,” MacDonald said.
The agreement comes less than two weeks after the inauguration of Canadian Pacific Kansas City Ltd., which created the only railway stretching from Canada through to the U.S. and Mexico as North America’s two smallest Class 1 railways merged.
CN maintained a sunny outlook Monday despite the CEO’s expectation of a shrinking economy throughout much of the year, as volumes sag for shipping containers and some bulk cargo.
“Our current volumes reflect that we are in a mild recession. And we’re uncertain about how deep or how long it will go on. But what we’re modeling is negative North American industrial production for the full year,” said chief executive Tracy Robinson on a conference call with analysts, warning of thinner margins for parts of 2023.
CN said it expected growth of adjusted diluted earnings per share in the mid-single digits this year compared to 2022, up from a low single-digit target set in January.
While grains, coal and metals were still moving healthily this month, weaker volumes for container shipments, lumber and chemicals and plastics pulled down overall haulage figures by six per cent in April as measured in revenue ton miles — a key industry metric gauging how much a company makes per volume of freight transported — said CN chief financial officer Ghislain Houle.
Retail and wholesale inventory levels have remained high across the country, reducing demand for CN container shipping — its highest grossing segment — with volumes dropping 13 per cent year over year last quarter.
“Lumber remains uncertain as commodity prices are still at low levels, and housing demand is still low due to elevated interest rates despite a significant shortage of homes on the market,” said MacDonald said.
“Petroleum and chemicals production is directly tied to the economy, so we expect demand to be soft for most of the year.”
However, fat grain yields and the soaring price of fertilizer amid Russia’s ongoing invasion on Ukraine boosted CN’s first-quarter revenue on the combined segment by 43 per cent year over year, returning it to the railway’s No. 1 revenue earner among bulk products.
As overall volumes slip, the company plans to avoid cutting employees and focus on training locomotive engineers.
“We are not going to have a knee-jerk reaction and send people home while we have the mild recession,” Houle said.
CN reported revenues of $4.31 billion for the quarter ended March 31, a 16 per cent boost from $3.71 billion a year earlier.
Net income jumped to $1.22 billion in its first quarter from $918 million in the same period last year.
On an adjusted basis, diluted earnings increased 38 per cent to $1.82 from $1.32 a year ago, beating analyst expectations of $1.72 per share, according to financial data firm Refinitiv.
On Monday, the company’s board approved a second-quarter dividend of 79 cents per common share, to be paid after markets close on June 30.