(Source: CN press release, July 25, 2011)
MONTREAL — CN today reported its financial and operating results for the second quarter and first half ended June 30, 2011.
Second-quarter 2011 highlights
• Net income increased from the year-earlier quarter to C$538 million, with diluted earnings per share (EPS) rising four percent to C$1.18. The results included a net deferred income tax expense of C$40 million, or C$0.08 per diluted share, resulting from the enactment of state corporate income tax rate changes and other legislated state tax revisions.
• Excluding the net deferred income tax expense, adjusted diluted EPS for the second quarter of 2011 rose to C$1.26 — an increase of 12 percent over C$1.13 for the same quarter of 2010. (1)
• Revenues for second-quarter 2011 rose eight percent to C$2,260 million, while carloadings increased four percent and revenue ton-miles increased five percent.
• Operating income increased eight percent to C$874 million.
• CN’s operating ratio was 61.3 percent, essentially in line with the operating ratio of 61.2 percent for second-quarter 2010.
• Free cash flow for the first half of 2011 was C$823 million, compared with C$958 million for the same period of 2010. (1)
Claude Mongeau, president and chief executive officer, said: “CN delivered a solid second-quarter performance as a result of continued improvements in freight volumes and strong operational execution. CN railroaders responded quickly and effectively to a series of weather challenges including floods, forest fires and mudslides. Their tireless efforts and dedication helped to protect the integrity of our network, the reliability of the supply chain we serve and our service to customers.”
Mongeau said that all of CN’s commodity groups posted revenue gains during the quarter. Intermodal – CN’s largest revenue segment – was a bright spot, benefiting principally from higher import volumes over the ports of Vancouver and Prince Rupert and increased domestic retail shipments. Total intermodal volumes rose 10 percent and intermodal revenues increased 14 percent.
“Intermodal was one of the first areas where we applied our new end-to-end supply chain collaboration approach,” Mongeau said. “This approach is really starting to pay off, and we hope to enjoy gains in other segments of our business where we have brought forward a similar focus on innovation and service excellence.”
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. As such, the Company’s results are affected by exchange-rate fluctuations. On a constant currency basis that excludes the impact of fluctuations in foreign currency exchange rates, CN’s second-quarter 2011 net income would have been higher by C$14 million, or C$0.03 per diluted share.
Second-quarter 2011 revenues, traffic volumes and expenses
The eight percent rise in second-quarter revenues mainly resulted from higher freight volumes as a result of continued though modest improvements in North American and global economic conditions; the impact of a higher fuel surcharge, as a result of year-over-year increases in applicable fuel prices and higher volumes; and freight rate increases. These factors were partly offset by the negative translation impact of the stronger Canadian dollar on U.S.-dollar-denominated revenues.
Revenues increased for metals and minerals (17 percent), intermodal (14 percent), grain and fertilizers (13 percent), forest products (six percent), coal (five percent), petroleum and chemicals (three percent), and automotive (two percent).
Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, increased five percent from the year-earlier period.
Rail freight revenue per revenue ton-mile, a measurement of yield defined as revenue earned on the movement of a ton of freight over one mile, increased four percent over the second quarter of 2010, largely due to the impact of a higher fuel surcharge and freight rate increases, partly offset by the negative translation impact of the stronger Canadian dollar.
Operating expenses increased by eight percent to C$1,386 million, mainly owing to higher fuel costs, increased purchased services and materials expense, and higher labor and fringe benefits expense. These factors were partly offset by the positive translation impact of the stronger Canadian dollar on U.S.-dollar-denominated expenses, and lower casualty and other expense.
2011 financial outlook
CN remains comfortable with the financial guidance it issued on April 26, 2011. CN expects to generate double-digit diluted EPS growth of up to 15 percent in 2011, on an adjusted basis, compared with adjusted diluted EPS of C$4.20 achieved in 2010. CN also expects free cash flow for 2011 to be in the order of C$1.2 billion, which takes into consideration a potential C$200 million additional voluntary pension contribution.
Mongeau said: “I am pleased with CN’s second-quarter results. While there is some growing uncertainty about the pace of growth of the U.S. and global economies, we believe our performance in the first half of 2011 positions us to finish the year on a positive note.”