April 23, 2018 / 8:30 PM / 5 months ago

UPDATE 2-CN Rail's quarterly profit drops 16 pct, cuts 2018 outlook

(Adds comments from CEO, company spokesman, analyst)

By Allison Lampert and Anirban Paul

April 23 (Reuters) - Canadian National Railway Co on Monday posted a 16.2 percent fall in quarterly profit as operating expenses shot up during the harsh winter, and the country's largest railroad cut its 2018 outlook as capacity limits strained its ability to meet high demand.

The backlog led CN to recently reduce its crude by rail business, interim Chief Executive JJ Ruest told analysts on a conference call after the company released its results.

Crude shipments dropped nearly 40 percent during the first quarter ended March 31 on an annual basis, a CN spokesman said after the call.

Production has risen in the world's fifth largest oil producer, but full pipelines and a rail car shortage have made it difficult for drillers to ship out of Canada.

"In light of our capacity challenge, we've reduced our crude by rail business the last 2 quarters," Ruest said. "We don't really do any spot business."

Ruest said the railroad was adding workers, locomotives, along with new track and expanded rail yards, which he said would improve operations through the fourth quarter.

There's "more work to do, but by the time we get to the end of the year, things look pretty strong and pretty solid."

The company estimated 2018 adjusted earnings of C$5.10 ($3.97) to C$5.25 ($4.09), compared with its earlier forecast of C$5.25 to C$5.40.

Operating expenses rose 9 percent to C$2.16 billion in the quarter as the railroad operator spent more to move larger volumes in harsh winter conditions.

Operating ratio, a key metric watched closely by analysts, rose to 67.8 percent from 61.8 percent. A lower ratio indicates higher efficiency.

CN said total carloads rose 2.9 percent in the quarter, while rail freight revenue per carload decreased by 3.1 percent.

The Montreal-based company's net income fell to C$741 million ($576.83 million), or C$1 per share, from C$884 million, C$1.16 per share, a year earlier.

"While this result was slightly worse than expected, we believe that Canadian National's service is improving and will continue to improve as we move through 2018," wrote Edward Jones analyst Dan Sherman in a note to clients.

Excluding one-time items, CN earned C$1 per share, just a cent higher than analysts' average estimate, according to Thomson Reuters I/B/E/S.

Revenue, which dropped for the first time in four quarters, totaled C$3.19 billion compared with C$3.21 billion a year earlier. ($1 = 1.2846 Canadian dollars) (Reporting by Anirban Paul in Bengaluru; Editing by Arun Koyyur and Richard Chang)

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