(The following article by Robert Gibbens was posted on the Montreal Gazette website on July 21.)
MONTREAL — Canadian National Railway Co., with the highest profit margin among North American railroads, ran flat out in the second quarter and set records for freight hauling, revenue and profits.
A mix of higher prices and fuel surcharges, together with rising efficiency, strong marketing and tight cost control enabled CN to post total net income of $729 million, or $1.35 a share, in the June quarter, up 75 per cent from $416 million, or 74 cents a share, a year earlier.
But this included a deferred income tax recovery of $250 million or 46 cents a share. Without this, net earnings were $479 million, or 89 cents a share, up 22 per cent from a year earlier and 3 cents above analysts’ estimates.
Revenue hit $1.946 million, up 6 per cent and shipments rose 4.1 per cent, including a 9.8-per-cent gain in consumer goods moving by container from Asia to North America. Operating margin, a key measure of efficiency, improved to 58.6 per cent, an industry record.
CEO Hunter Harrison told analysts that CN will match or possibly exceed earlier “guidance” that full 2006 earnings will be up 10 per cent to 15 per cent.
Asked about signs of a weakening in the U.S. economy, he replied: “There are a few weak spots such as housing, but a 1.9-million annual rate of new starts is pretty good and we do see a strong second half for our business.”
Harrison noted operating income was $805 million, up 13 per cent, and first-half free cash flow was $740 billion, providing strong support for CN’s 2006 capital spending program of $1.5 billion.
CN is buying back a further 28 million shares, or 5.3 per cent of the total outstanding, in the next 12 months – it has just wrapped up a 30-million-share buyback announced last July.
Costs rose one per cent, with a 26-per-cent surge in fuel expense offset partly by productivity gains. The railroad moved seven per cent more freight as tallied in tons per mile. The workforce dropped by 3.5 per cent, reducing wage costs. About 60 per cent of CN’s revenue comes in U.S. dollars and the high Canadian dollar reduced profit by $25 million.
Harrison noted a falloff in forest products, CN’s largest cargo, but said lumber inventories are low as producers focus on maintenance, and business will pick up in the second half. The spread of the British Columbia beetle infestation means heavy volumes of affected lumber will move through Chicago.
Intermodal traffic gained 17 per cent and the China trade is still increasing, he said. CN expects big things once the new Prince Rupert container terminal opens next year.
“The demand for bookings is already impressive,” Harrison said.
First-half net income was $1.09 billion, up 53 per cent, and revenue rose seven per cent to $3.79 billion.
“These are good times for rails,” said Daniel Ortwerth, Edward Jones analyst in St. Louis. “The world economoy is strong and CN is showing it can deliver. They keep setting the bar and clearing it.”
CN also said a two-day strike by 250 track maintenance workers in its U.S. network ended after the Teamsters Union agreed to resume bargaining.
CN shares lost $1.65, or 3.3 per cent, to close at $47.50 in Toronto. The 52-week range is $55.95 to $38.51.
Union Pacific, the biggest U.S. railroad by sales, said second-quarter revenue rose 17 per cent to $3.92 billion U.S. and net earnings were $390 million U.S., or $1.44 a share, up 67 per cent from a year earlier, as freight traffic grew and higher prices absorbed fuel increases.