(CanWest News Service circulated the following story by Robert Gibbens on April 24.)
MONTREAL — Severe weather in the West in January, a two-week labour stoppage in February and avalanches and landslides in March hit Canadian National Railway Co.’s earnings in the first quarter, interrupting the “great run” it has achieved since going public in 1995.
CN came in with a net profit of $324 million or 63 cents a share, down 10 per cent from $362 million or 66 cents a share in the 2006 period, but chief executive officer Hunter Harrison told analysts CN will quickly regain speed in 2007 and still counts on a “great future.”
He was speaking from Moncton where CN holds its annual meeting later today. “The sun’s shining, no avalanches, mudslides, high winds or labour strife … life’s still good,” he quipped.
Harrison warned on March 29 that CN’s first-quarter earnings would drop by 10 per cent. The February stoppage was followed by more problems with the conductors and yard workers, leading to back-to-work legislation and appointment of a federal arbitrator.
“Our services remain in very strong demand,” he said, “and we see topline growth of five per cent to six per cent for all of 2007, half coming from freight rate rises and half from higher shipping volumes.”
Chief financial officer Claude Mongeau said CN could have delivered earnings of “about 73 cents a share” except for the impact of extreme weather and the labour confrontation.
The quarterly dividend is being held at 21 cents a share, but CN expects to spend a total of around $1.5 billion on share-buybacks this year. This will allow for normal capital spending on the continent-wide network and investment in new products and services.
He was optimistic outstanding labour issues can be settled rapidly with the arbitrator. Also other contract negotiations due this year and in 2008 should also be settled amicably, allowing CN’s vaunted efficiency record to pass by a first-quarter blip and continue to improve.
CN said the February work stoppage cost the bottom line $35 million. The United Transportation Union resumed stoppages this month after members rejected a one-year pact, saying management was using “harrassment” to boost productivity. Back-to-work legislation followed.
First-quarter revenue was $1.91 billion, up $9 million from $1.897 billion a year earlier. Operating income dipped 10 per cent to $561 million. The operating ratio – a key measure of efficiency – deteriorated slightly.
Topline performance reflected freight rate increases, a better traffic mix, and the impact of a weaker Canadian dollar on U.S. dollar income. Operating expense rose six per cent to $1.34 billion with higher casualty costs, equipment rents and purchased services and materials, partly offset by lower labour and benefit costs. CN reduced payroll by two per cent in the quarter and expects to continue the trend through 2007.
Harrison said average freight rates rose four per cent in the quarter, in line with CN’s longer-term forecasts. Higher shipments of leading commodities such as grain, coal and fertilizers should more than offset lower movements of lumber and building materials, but a turnaround in U.S. housing is still possible later this year.
“If the North American economy holds up,” he said, “our goal is still to deliver 10 per cent gain in per-share earnings and at least $100 million in free cash flow.”
The Federal Government named Alberta Labor Relations Board mediator Andrew Sims as arbitrator in CN’s dispute with the United Transportation Union. He has 90 days to find a binding solution.
CN shares closed down 45 cents or 0.8 per cent at $55.85. The 52-week range is $56.66-$44.43. The price has gained about 12 per cent this year alone.
CN spans Canada and mid-America from the Atlantic and Pacific Oceans to the Gulf of Mexico, serving the ports of Vancouver, Montreal, Halifax, New Orleans and Mobile and key cities such as Toronto, Chicago, Detroit, Minneapolis/St. Paul, Memphis and St. Louis, with connections to all points in North America.