CN said it has since turned the corner, returning to more efficient operations, but will bump up its capital spending plan by C$100 million ($97.39 million), to C$2 billion, to make its network more resilient and productive.
The company performed relatively well during brutal winter weather, but more encouraging is their prospect for growth in the burgeoning crude-by-rail market, said Raymond James analyst Steve Hansen.
"They're tracking at a 60,000 carload run rate now on the crude-by-rail side - that's up quite significantly from the 30,000 carloads they did last year. And they're just getting going on unit train volumes now," he said.
Unit trains, those which have the same origin and destination, are more efficient.
Crude-By-Rail Growth
CN executives said during a conference call with analysts that its crude-by-rail revenue was up 300 percent during the quarter with about C$75 million of its book business directly in crude.
"The organic growth prospects for crude-by-rail at CN are very significant. We also expect solid demand from the buoyant North American energy sector," said Executive Vice-President and Chief Marketing Officer Jean-Jacques Ruest.
The company said it was in discussions with larger-scale refineries and integrated producers that are looking at building capabilities to unload at their refineries.
CN said it hopes major terminals will be built in Alberta and announced that new terminals will be opening both in the U.S. Gulf and Western Canada in the coming months.
CN also said it sees continued growth in its inter modal market, which handles shipping containers, driven by growth from West Coast ports. A recovering U.S. housing market is also expected to power growth in lumber and panel demand.
The company said both offshore and domestic demand for potash remains strong and it sees robust petroleum coke shipments.
Net income for the period ended March 31 fell to C$555 million, from C$775 million, CN said, while adjusted earnings per share rose to C$1.22, from C$1.18 in the same period last year.
Revenue was up 5 percent at C$2.47 billion, while car loadings increased 2 percent, the Montreal-based company said.
On average, analysts were expecting adjusted earnings of C$1.21 a share on revenue of C$2.49 billion, according to Thomson Reuters I/B/E/S.
For its first quarter, CN said revenue growth largely reflected freight rate increases and higher freight volumes, partly offset by the impact of winter weather on operations and volumes.
A lower tax rate gave CN results a 7 Canadian cent per share lift, which helped mask a weak quarter, RBC Capital Markets analyst Walter Spracklin said in a note to clients.
CN's operating ratio, a core measure of railway productivity, deteriorated by 2.2 points to 68.4 percent in the quarter. A lower ratio, which measures operating costs as a percentage of revenue, indicates greater efficiency.
"At the end of it all, service was not where it needed to be, and we are going to be working hard to recover," Chief Executive Claude Mongeau said during the call.
"The outlier impact this year is something we don't want to repeat in the future, and so we are preparing ourselves to have stronger service into next year."
Affirms Outlook
CN maintained its 2013 forecast for earnings per share to grow in the high-single digits on a percentage basis from C$5.61 in 2012. That would mark a big slowdown from last year's 16 percent gain.
It still sees modest economic growth in North America, with carloads increasing by 3 to 4 percent, and targets free cash flow in the range of C$800-C$900 million.
CN shares have climbed about 8 percent year-to-date on broad investor support for the sector, but dramatically lagged the 24 percent increase of smaller rival Canadian Pacific Railway Ltd over the same period. (Reuters)
