This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Canadian National Railway Company (CNI: chart) on January 22, 2008.
President and Chief Executive Officer: E. Hunter Harrison
Chief Financial Officer and Executive Vice President: Claude Mongeau
Executive Vice President of Sales and Marketing: James M. Foote
Key Investors Issues
- EPS were C$1.68 per share compared to 95 Canadian cents per share last year.
- Net income was C$833 million compared to C$499 million a year earlier.
- Revenue fell 3% to C$1.94 billion from C$2 billion a year ago.
Fourth Quarter Highlights
Net income was C$833 million, including a deferred income tax recovery of C$284 million (C$0.57 per share) resulting from the enactment of corporate income tax rate changes in Canada, and the after-tax gains on the sale of the CSC of C$64 million (C$0.13 per share) and the company''s investment in EWS of C$41 million (C$0.08 per share).
- Excluding the three items, CN reported adjusted diluted EPS of C$0.90.
- Fourth-quarter 2006 net income was C$499 million (C$0.95 per share), including a deferred income tax recovery of C$27 million (C$0.05 per share) attributable to the resolution of matters relating to prior years'' income taxes. Excluding the deferred income tax recovery, fourth-quarter 2006 adjusted net income was C$472 million (adjusted EPS of C$0.90).
Revenues declined 3% to C$1,941 million.
- The decrease was mainly due to the translation impact of a stronger Canadian dollar on U.S. dollar-denominated revenues and weakness in the forest products market.
- Revenue ton-miles, a measurement of the relative weight and distance of rail freight transported by the company, increased by 3% versus the comparable period of 2006. 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, declined 6% over the same period in 2006.
Operating expenses decreased 3% to C$1,205 million, largely as a result of decreased labor and fringe benefits expense and the translation impact of a stronger Canadian dollar on U.S. dollar-denominated expenses.
These factors were partially offset by higher fuel expense.
- The operating ratio, defined as operating expenses as a percentage of revenues, was 62.1%, compared with 62.2% for the fourth quarter of 2006, a 0.1-point decrease.
Four of commodity groups - intermodal, petroleum and chemicals, metals and minerals, and coal - generated increased revenues.
- However, tough market conditions reduced forest products revenues by 19%. Operating expenses declined three per cent, allowing the company to deliver an operating ratio of 62.1%.
- The company is pleased with the start in the fourth quarter of new Prince Rupert intermodal service. Transit times have been consistently on target.
- The company is cautious about the state of the North American economy, continued weakness in the U.S. housing market, and the strength of the Canadian dollar vis-a-vis the U.S. dollar. At the same time, it sees opportunities for new traffic, the strongest being intermodal as a result of the new Prince Rupert gateway for containerized goods moving between Asia and North America. The company sees a number of opportunities in bulk and industrial products, including those related to the continuing oil boom in western Canada. Recent acquisitions have strengthened freight franchise in that region.
Fiscal 2007 Highlights
- Net income was C$2,158 million, with earnings per share of C$4.25. The 2007 results included a deferred income tax recovery of C$328 million (C$0.64 per share) resulting mainly from the enactment of corporate income tax rate changes in Canada, as well as the gains on the sale of the CSC of C$64 million (C$0.13 per share) and the company''s investment in EWS of C$41 million (C$0.08 per share). Year-earlier net income was C$2,087 million (C$3.91 per share). Included in the 2006 figures was a deferred income tax recovery of C$277 million (C$0.51 per share), resulting from the enactment of lower corporate income tax rates in Canada and the resolution of matters pertaining to prior years'' income taxes.
- Excluding benefits from favorable tax adjustments and major asset sales, adjusted net income for 2007 was C$1,725 million, or C$3.40 per share, compared with adjusted 2006 net income of C$1,810 million, or C$3.40 per share.
- Revenues totaled C$7,897 million, compared with C$7,929 million for 2006. The decline in revenues was mainly a result of the translation impact of the stronger Canadian dollar on U.S. dollar-denominated revenues, weakness in specific markets, particularly forest products, the United Transportation Union (UTU) strike, and adverse weather conditions in the first half of 2007. Largely offsetting these factors were the impact of net freight rate increases, which included lower fuel surcharge revenues as a result of applicable fuel prices, and an overall improvement in traffic mix.
- Revenue ton-miles declined one per cent from the comparable period of 2006, while rail freight revenue per ton-mile was essentially flat.
- Operating expenses increased two per cent to C$5,021 million, mainly due to increased fuel costs and equipment rents, which were partly offset by the translation impact of a stronger Canadian dollar and decreased labor and fringe benefits expense.
- Operating income declined five per cent to C$2,876 million. The operating ratio was 63.6%, compared with 61.8% in 2006, a 1.8-point increase.
- In addition to the weather conditions and operational challenges in the first half of 2007, CN''s results in 2007 included the impact of the first-quarter 2007 strike by 2,800 UTU members, for which the company estimated the negative impact on first-quarter 2007 operating income and net income to be approximately C$50 million and C$35 million, respectively, (C$0.07 per share).
- The strengthening Canadian dollar relative to the U.S. dollar, which affected the conversion of CN''s U.S. dollar-denominated revenues and expenses, resulted in a reduction to net income of approximately C$35 million, or C$0.07 per share.
Fiscal 2008 Outlook
