A press release from Canadian National Railway; January 29, 2019:
Q4 results driven by solid top-line growth and significantly improved operating efficiency
MONTREAL, Jan. 29, 2019 (GLOBE NEWSWIRE) — CN (TSX: CNR) (NYSE: CNI) today reported its financial and operating results for the fourth quarter and year ended Dec. 31, 2018.
“I’m very pleased with our fourth quarter results and the strong finish to 2018,” said JJ Ruest, president and chief executive officer of CN. “With approximately C$1.3 billion of revenue growth in the final three quarters of the year, CN regained its position of strength and demonstrated again its ability to grow at low incremental cost. 2019 will be a year of building on this momentum.”
“We are focused on operational productivity and services that resonate with customers,” Ruest continued. “In 2019, our record capital program of C$3.9 billion will be focused on investing in the renewal of a more efficient and reliable locomotive fleet, adding network capacity to accommodate our solid pipeline of growth in diverse markets and bringing technology to our Precision Scheduled Railroading.”
Financial results highlights
Fourth-quarter 2018 compared to fourth-quarter 2017
- Revenues of C$3,808 million, an increase of 16 per cent.
- Diluted EPS of C$1.56, a decrease of 55 per cent and adjusted diluted EPS of C$1.49, an increase of 24 per cent. (1) Included in diluted EPS in the fourth quarter of 2017 was a deferred income tax recovery of C$2.35 per diluted share resulting from the enactment of a lower U.S. federal corporate income tax rate.
- Operating margin of 38.1 per cent, an increase of 0.8 points (operating ratio of 61.9 per cent). (2) (3)
- Adjusted operating margin of 38.8 per cent, an increase of 1.5 points (adjusted operating ratio of 61.2 per cent). (1)
- Operating income of C$1,452 million, an increase of 19 per cent. (2)
Full-year 2018 compared to full-year 2017
- Revenues of C$14,321 million, an increase of 10 per cent.
- Diluted EPS of C$5.87, a decrease of 19 per cent and adjusted diluted EPS of C$5.50, an increase of 10 per cent. (1) Included in diluted EPS in 2017 was a deferred income tax recovery of C$2.33 per diluted share resulting from the enactment of a lower U.S. federal corporate income tax rate.
- Operating margin of 38.4 per cent, a decrease of 1.8 points (operating ratio of 61.6 per cent). (2) (3)
- Adjusted operating margin of 38.5 per cent, a decrease of 1.7 points (adjusted operating ratio of 61.5 per cent). (1)
- Operating income of C$5,493 million, an increase of five per cent. (2)
- Adjusted return on invested capital (adjusted ROIC) of 15.7 per cent, a decrease of 0.2 points. (1)
2019 outlook and shareholder distribution (4)
“With
CN-specific growth opportunities, combined with a broadly positive
economic backdrop, we expect high single-digit volume growth in 2019 in
terms of revenue ton miles (RTMs),” said Ruest.
CN expects to deliver EPS growth in the low double-digit range this year compared to adjusted diluted EPS of C$5.50 in 2018. (1)
The Company’s Board of Directors today approved an 18 per cent increase to CN’s 2019 quarterly cash dividend, effective for the first quarter of 2019, demonstrating our confidence in the long-term financial health of the Company. In addition, the Company’s Board of Directors also approved a new normal course issuer bid that permits CN to purchase, for cancellation, over a 12-month period up to 22 million common shares, starting on Feb. 1, 2019, and ending no later than Jan. 31, 2020.
Foreign currency impact on results
Although
CN reports its earnings in Canadian dollars, a large portion of its
revenues and expenses is denominated in U.S. dollars. The fluctuation of
the Canadian dollar relative to the U.S. dollar affects the conversion
of the Company’s U.S.-dollar-denominated revenues and expenses. On a
constant currency basis, CN’s net income for the three months and year
ended Dec. 31, 2018 would have been lower by C$24 million (C$0.03 per
diluted share) and higher by C$4 million (C$0.01 per diluted share),
respectively. (1)
Fourth-quarter 2018 revenues, traffic volumes and expenses
Revenues
for the quarter increased by 16 per cent to C$3,808 million, when
compared to the same period in 2017. Revenues increased for petroleum
and chemicals (C$272 million or 50 per cent), intermodal (C$75 million
or nine per cent), grain and fertilizers (C$74 million or 13 per cent),
coal (C$30 million or 21 per cent), forest products (C$29 million or
seven per cent), metals and minerals (C$20 million or five per cent),
other revenues (C$13 million or seven per cent), and automotive (C$10
million or five per cent).
The increase in revenues was mainly attributable to higher volumes of petroleum crude and Canadian grain, freight rate increases, higher applicable fuel surcharge rates, and the positive translation impact of a weaker Canadian dollar; partly offset by lower volumes of frac sand.
Carloadings for the quarter increased by five per cent to 1,537 thousand.
RTMs, measuring the weight and distance of rail freight transported by CN, increased by 12 per cent. Rail freight revenue per RTM increased by four per cent.
Operating expenses for the quarter increased by 14 per cent to C$2,356 million, (2) mainly due to higher labor costs mainly as a result of an increase in headcount, and employee termination benefits and severance costs related to a workforce reduction program; higher fuel prices; higher costs as a result of increased volumes of traffic; and the negative translation impact of a weaker Canadian dollar.
Full-year 2018 revenues, traffic volumes and expenses
Revenues
for 2018 increased by 10 per cent to C$14,321 million, when compared to
2017. Revenues increased for petroleum and chemicals (C$452 million or
20 per cent), intermodal (C$265 million or eight per cent), metals and
minerals (C$166 million or 11 per cent), grain and fertilizers (C$143
million or six per cent), coal (C$126 million or 24 per cent), forest
products (C$98 million or five per cent), other revenues (C$25 million
or three per cent), and automotive (C$5 million or one per cent).
The increase in revenues was mainly attributable to freight rate increases, higher applicable fuel surcharge rates and higher volumes of petroleum crude, refined petroleum products, coal, international container traffic and Canadian grain.
Carloadings increased by four per cent to 5,976 thousand.
RTMs increased by five per cent. Rail freight revenue per RTM increased by five per cent, mainly driven by freight rate increases and higher applicable fuel surcharge rates.
Operating expenses increased by 13 per cent to C$8,828 million, (2) mainly due to higher fuel prices, higher costs as a result of increased volumes of traffic and operating performance below 2017 levels.
(1) Non-GAAP Measures
CN
reports its financial results in accordance with United States
generally accepted accounting principles (GAAP). CN also uses non-GAAP
measures in this news release that do not have any standardized meaning
prescribed by GAAP, including adjusted performance measures, constant
currency, free cash flow and adjusted ROIC. These non-GAAP measures may
not be comparable to similar measures presented by other companies. For
further details of these non-GAAP measures, including a reconciliation
to the most directly comparable GAAP financial measures, refer to the
attached supplementary schedule, Non-GAAP Measures.
CN’s full-year adjusted EPS outlook (4) excludes the expected impact of certain income and expense items. However, management cannot individually quantify on a forward-looking basis the impact of these items on its EPS because these items, which could be significant, are difficult to predict and may be highly variable. As a result, CN does not provide a corresponding GAAP measure for, or reconciliation to, its adjusted EPS outlook.
(2) Accounting Standard Update (ASU)
The
Company adopted ASU 2017-07: Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost in 2018 on a
retrospective basis. Comparative figures have been adjusted to conform
to the current presentation. The adoption of ASU 2017-07 had the effect
of increasing the Company’s operating ratio by 1.9 percentage points and
2.1 percentage points for the three months and year ended Dec. 31,
2018, respectively (2.3 percentage points and 2.4 percentage points for
the three months and year ended Dec. 31, 2017, respectively).
(3) Operating Margin
Operating margin is defined as operating income as a percentage of revenues.
(4) Forward-Looking Statements
Certain
statements included in this news release constitute “forward-looking
statements” within the meaning of the United States Private Securities
Litigation Reform Act of 1995 and under Canadian securities laws. By
their nature, forward-looking statements involve risks, uncertainties
and assumptions. The Company cautions that its assumptions may not
materialize and that current economic conditions render such
assumptions, although reasonable at the time they were made, subject to
greater uncertainty. Forward-looking statements may be identified by the
use of terminology such as “believes,” “expects,” “anticipates,”
“assumes,” “outlook,” “plans,” “targets,” or other similar words.
2019 key assumptions
CN
has made a number of economic and market assumptions in preparing its
2019 outlook. The Company assumes that North American industrial
production for the year will increase by approximately two per cent, and
assumes U.S. housing starts of approximately 1.28 million units and
U.S. motor vehicle sales of approximately 17 million units. For the
2018/2019 crop year, the grain crops in both Canada and the United
States were in line with their respective three-year averages. The
Company assumes that the 2019/2020 grain crops in both Canada and the
United States will be in line with their respective three-year averages.
CN assumes total RTMs in 2019 will increase in the high single digits
versus 2018. CN assumes continued pricing above inflation. CN assumes
that in 2019, the value of the Canadian dollar in U.S. currency will be
approximately $0.75, and assumes that in 2019 the average price of crude
oil (West Texas Intermediate) will be in the range of US$50 to US$55
per barrel. In 2019, CN plans to invest approximately C$3.9 billion in
its capital program, of which C$1.6 billion is targeted toward track and
railway infrastructure maintenance.
Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause the actual results or performance of the Company to be materially different from the outlook or any future results or performance implied by such statements. Accordingly, readers are advised not to place undue reliance on forward-looking statements. Important risk factors that could affect the forward-looking statements include, but are not limited to, the effects of general economic and business conditions; industry competition; inflation, currency and interest rate fluctuations; changes in fuel prices; legislative and/or regulatory developments; compliance with environmental laws and regulations; actions by regulators; increases in maintenance and operating costs; security threats; reliance on technology and related cybersecurity risk; trade restrictions or other changes to international trade arrangements; transportation of hazardous materials; various events which could disrupt operations, including natural events such as severe weather, droughts, fires, floods and earthquakes; climate change; labor negotiations and disruptions; environmental claims; uncertainties of investigations, proceedings or other types of claims and litigation; risks and liabilities arising from derailments; timing and completion of capital programs; and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to Management’s Discussion and Analysis in CN’s annual and interim reports, Annual Information Form and Form 40-F, filed with Canadian and U.S. securities regulators and available on CN’s website, for a description of major risk factors.
Forward-looking statements reflect information as of the date on which they are made. CN assumes no obligation to update or revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable securities laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related matters, or any other forward-looking statement.
This earnings news release is available on the Company’s website at www.cn.ca/financial-results and on SEDAR at www.sedar.com as well as on the U.S. Securities and Exchange Commission’s website at www.sec.gov through EDGAR.
CN is a true backbone of the economy whose team of approximately 26,000 railroaders transports more than C$250 billion worth of goods annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods, across a rail network of approximately 20,000 route-miles spanning Canada and mid-America. CN – Canadian National Railway Company, along with its operating railway subsidiaries – serves the cities and ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans, and Mobile, Ala., and the metropolitan areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth, Minn./Superior, Wis., and Jackson, Miss., with connections to all points in North America. For more information about CN, visit the Company’s website at www.cn.ca.