(Source: CN press release, July 25, 2012)
MONTREAL — CN today reported its financial and operating results for the second quarter and six-month period ended June 30, 2012.
Second-quarter 2012 highlights:
• Net income was C$631 million, or C$1.44 per diluted share, versus year-earlier net income of C$538 million, or C$1.18 per diluted share.
• Adjusted diluted Q2-2012 earnings per share (EPS) — excluding a net income tax expense of C$0.06 per diluted share — rose 19 per cent to C$1.50. The net income tax expense resulted from the enactment of higher provincial income tax rates, partly offset by an income tax recovery from the recapitalization of a foreign investment. (1)
• Revenues increased 13 per cent to C$2,543 million, while revenue ton-miles rose eight per cent and carloadings increased four per cent.
• Operating income increased 13 per cent to C$985 million.
• The operating ratio was 61.3 per cent, unchanged from the year-earlier.
• Free cash flow for the first six months of 2012 totalled C$703 million, including the impact of Q1-2012 voluntary pension plan contributions totalling C$450 million, compared with free cash flow of C$823 million for the same period of 2011. (1)
Net income for first-half 2012 was C$1,406 million, or C$3.18 per diluted share, compared with net income of C$1,206 million, or C$2.63 per diluted share, for the comparable period of 2011.
Adjusted net income for the first six months of 2012 — excluding the net income tax expense of C$0.06 per diluted share, and the gain on the sale of rail lines (C$0.57 per diluted share) — was C$1,182 million, with adjusted diluted EPS increasing 24 per cent to C$2.67.
Claude Mongeau, president and chief executive officer, said: “CN’s team of railroaders continues to deliver impressive results, converting strong volume and revenue growth into solid bottom-line results. Our focus on maintaining a fluid network and solid execution allowed us to further improve our industry-leading service for the benefit of our customers and shareholders.
“Other than grain and fertilizers, CN registered solid traffic increases in every commodity group during the second quarter — intermodal, automotive, coal, petroleum and chemicals, and metals and minerals business units all registered double-digit gains in revenue ton-miles, with the rise in volumes due in part to economic growth, market share gains, and a labor disruption at a key competitor.”
Revised 2012 financial outlook (2)
CN’s first-half financial performance and assumption of continued positive economic conditions have prompted an upward revision of the Company’s 2012 financial outlook, last updated on April 23, 2012.
Under its revised 2012 outlook, CN aims to:
• Deliver up to 15 per cent growth in adjusted diluted EPS for the year, over adjusted diluted EPS of C$4.84 in 2011, despite an additional pension expense of approximately C$100 million. This compares with CN’s April outlook calling for a full 10 per cent growth in 2012 adjusted diluted EPS. (1)
• Generate free cash flow of approximately C$1 billion – taking into consideration a potential C$250 million additional voluntary pension contribution in the fourth quarter (for a potential total voluntary pension contribution of C$700 million in 2012). This compares with CN’s April outlook calling for free cash flow in the order of C$950 million. (1)
Mongeau said: “Our agenda of Operational and Service Excellence continues to gain momentum on all key fronts. If economic growth remains on track in the second half, we should deliver another banner year in 2012.”
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 and first-half 2012 net income would have been lower by C$13 million and C$17 million, respectively, or by C$0.03 and C$0.04 per diluted share, respectively. (1)
Second-quarter 2012 revenues, traffic volumes and expenses
The 13 per cent rise in second-quarter revenues mainly resulted from higher freight volumes, due in part to growth in North American and Asian economies, the Company’s performance above market conditions in a number of segments, as well as increased volumes as a result of a labor disruption at a key competitor; freight rate increases; the impact of a higher fuel surcharge resulting from year-over-year increases in applicable fuel prices and higher volumes; and the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues.
Revenues increased for metals and minerals (20 per cent), petroleum and chemicals (19 per cent), automotive (18 per cent), intermodal (16 per cent), coal (15 per cent), and forest products (nine per cent). Grain and fertilizers revenues declined one per cent.
Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, increased eight per cent 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 five per cent over the second quarter of 2011, driven by freight rate increases, the impact of a higher fuel surcharge and the positive translation impact of the weaker Canadian dollar, partly offset by an increase in the average length of haul.
Operating expenses for the second quarter increased by 12 per cent to C$1,558 million, mainly due to higher labor and fringe benefits expense, increased fuel costs, the negative translation impact of the weaker Canadian dollar on U.S.-dollar-denominated expenses, as well as increased purchased services and material expense.
(1) See discussion and reconciliation of non-GAAP adjusted performance-measures in the attached supplementary schedule, Non-GAAP Measures.
(2) See Forward-Looking Statements for a summary of the key assumptions and risks regarding CN’s 2012 outlook.