MONTREAL — CN today reported its financial and operating results for the quarter and year ended Dec. 31, 2008.
Fourth-quarter 2008 highlights
* Net income was C$573 million, or C$1.21 per diluted share, including a deferred income tax recovery of C$42 million, or C$0.09 per diluted share.
* Revenues increased 13 per cent over Q4-2007 to C$2,200 million, while operating expenses rose 15 per cent to C$1,380 million.
* Operating income was C$820 million, an increase of 11 per cent from the year earlier results, with the operating ratio increasing six-tenths of a point to 62.7 per cent.
* Strong full-year 2008 free cash flow of C$794 million.(1)
Net income for the fourth quarter of 2008 was C$573 million, or C$1.21 per diluted share, including a deferred income tax recovery of C$42 million (C$0.09 per diluted share) resulting from the resolution of various income tax matters and adjustments related to tax filings of prior years. Excluding this item, adjusted fourth-quarter 2008 net income was C$531 million, or C$1.12 per diluted share.(1)
Net income for the comparable quarter of 2007 was C$833 million, or C$1.68 per diluted share, including a net deferred income tax recovery of C$284 million (C$0.57 per diluted share) resulting from the enactment of corporate income tax rate changes in Canada, and after-tax gains of C$64 million (C$0.13 per diluted share) on the sale of CN’s Central Station Complex (CSC) in Montreal and C$41 million (C$0.08 per diluted share) on the sale of the Company’s investment in English Welsh and Scottish Railway (EWS). Excluding these items, CN’s adjusted fourth-quarter 2007 net income was C$444 million, or C$0.90 per diluted share.(1)
E. Hunter Harrison, president and chief executive officer, said: “CN turned in a solid fourth-quarter 2008 performance despite significantly lower volumes. Two factors acted as shock absorbers, offsetting the impact of the weaker volumes on our results. One was the decline in the value of the Canadian dollar versus the American dollar, which had a net positive translation impact on the conversion of U.S. dollar-denominated revenues and expenses into Canadian dollars. The second was the two-month lag in CN’s fuel surcharge catching up to lower fuel prices.”
“The North American economy is in recession, and we do not know how long or deep it will be,” said Harrison. “And, although overall freight demand is much weaker, the basic driver of our business – demand for reliable, efficient, cost-effective transportation – remains intact. To meet our long-term objectives, we will continue to maintain pricing discipline and pursue opportunities that extend beyond business-cycle considerations.
“At the same time we will continue to do what’s necessary to manage our assets and costs effectively in response to lower traffic volumes. CN, as one of the rail industry’s most efficient operators, is well positioned to face the challenges of the current economic environment, and we are committed to making additional productivity improvements.”
Harrison added: “CN has a very resilient business model and a highly talented and dedicated team of railroaders, as demonstrated by our 2008 results. Looking ahead, 2009 will present even greater challenges, but we expect to continue to deliver value to our customers and shareholders.”
Fourth-quarter 2008 results
Fourth-quarter 2008 results from operations were affected by significant weakness in almost all markets, primarily as a result of the current economic environment.
Revenue ton-miles, a measurement of the relative weight and distance of rail freight transported by the Company, declined by 10 per cent during the quarter versus the comparable period of 2007.
Revenues for the final quarter of 2008 increased 13 per cent to C$2,200 million. The increase was mainly due to the positive C$230-million translation impact of the weaker Canadian dollar on U.S. dollar-denominated revenues and freight rate increases, including a higher fuel surcharge resulting from year-over-year net increases in applicable fuel prices. These gains were partly offset by lower volumes in almost all commodity groups due to weak market conditions. In addition, the decision of the Canadian Transportation Agency (CTA) to retroactively reduce rail revenue entitlement for grain transportation and the CTA’s determination that CN exceeded the revenue cap for the 2007-08 crop year reduced grain revenues by C$26 million. Associated penalties of C$4 million increased the Company’s casualty and other expense.
Operating expenses for the fourth quarter increased by 15 per cent to C$1,380 million, primarily owing to the C$145-million negative translation impact of the weaker Canadian dollar on U.S. dollar-denominated expenses, and increased casualty and other and labor and fringe benefit expenses. These factors were partly offset by lower fuel costs, as a result of a decrease in the average price per U.S. gallon of fuel during the quarter.
Operating income increased 11 per cent to C$820 million, while the operating ratio, defined as operating expenses as a percentage of revenues, increased by 0.6 of a point to 62.7 per cent.
The fluctuation of the Canadian dollar relative to the U.S. dollar, which affects the conversion of the Company’s U.S. dollar-denominated revenues and expenses, increased fourth-quarter 2008 net income by approximately C$45 million, or 10 cents per diluted share.
Full-year 2008 results
Net income for 2008 was C$1,895 million, or C$3.95 per diluted share, compared with net income of C$2,158 million, or C$4.25 per diluted share, for 2007.
CN’s 2008 net income included a deferred income tax recovery of C$117 million (C$0.24 per diluted share), of which C$83 million was due to the resolution of various income tax matters and adjustments related to tax filings of prior years, C$23 million was due to lower corporate income tax rates in Canada, and C$11 million was due to net capital losses arising from the reorganization of a subsidiary. Excluding the deferred income tax recovery, adjusted 2008 net income was C$1,778 million, or C$3.71 per diluted share.(1)
Included in 2007 net income was a net deferred income tax recovery of C$328 million (C$0.64 per diluted share), resulting mainly from the enactment of corporate income tax rate changes in Canada, and gains on the sales of the CSC of C$64 million after-tax (C$0.13 per diluted share) and the Company’s investment in EWS of C$41 million after-tax (C$0.08 per diluted share). Excluding benefits from favourable tax adjustments and major asset sales, adjusted net income for 2007 was C$1,725 million, or C$3.40 per diluted share.(1)
Operating income for 2008 increased to C$2,894 million from C$2,876 million in 2007.
Revenues for 2008 increased by seven per cent to C$8,482 million, mainly due to freight rate increases, of which approximately half were related to a higher fuel surcharge resulting from year-over-year net increases in applicable fuel prices, and higher volumes in specific commodity groups, particularly metals and minerals, intermodal, and coal, which also reflect the negative impact of a conductors’ strike on first-quarter 2007 volumes.
These gains were partly offset by lower volumes due to weakness in specific markets, particularly forest products and automotive, the impact of harsh weather conditions in Canada and the U.S. Midwest during first-quarter 2008, and reduced grain volumes as a result of depleted stockpiles. In addition, the decision of the CTA to retroactively reduce rail revenue entitlement for grain transportation and the CTA’s determination that CN exceeded the revenue cap for the 2007-08 crop year reduced grain revenues by C$26 million. Associated penalties of C$4 million increased the Company’s casualty and other expense.
In the first nine months of the year, CN experienced a C$245 million negative translation impact of the stronger Canadian dollar on U.S. dollar-denominated revenues that was almost entirely offset in the fourth quarter as a result of the weakened Canadian dollar.
Revenue ton-miles, a measurement of the relative weight and distance of rail freight transported by the Company, declined by three per cent in 2008 from the 2007 level.
CN’s 2008 operating expenses increased by 11 per cent, to C$5,588 million, mainly due to higher fuel costs and increases in purchased services and material and in casualty and other expenses. These factors were partly offset by lower labor and fringe benefits expense.
In the first nine months of the year, CN experienced a positive C$145 million translation impact of the stronger Canadian dollar on U.S. dollar-denominated expenses that was almost entirely offset in the fourth quarter as a result of the weakened Canadian dollar.
The operating ratio was 65.9 per cent in 2008, compared with 63.6 per cent in 2007, a 2.3-point increase.
The fluctuation of the Canadian dollar relative to the U.S. dollar reduced 2008 net income by approximately C$10 million, or C$0.02 per diluted share.