This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Canadian National Railway Company (CNI: chart) on January 22, 2008.
Management:
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
- Net profit was C$833 million compared to C$499 million last year.
- Operating expenses decreased 3% to C$1,205 million.
- Revenues declined 3% to C$1,941 million.
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 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 three per cent 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 three per cent 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 six per cent over the same period in 2006.
- Operating expenses decreased three per cent 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 significantly 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.
The company closed two transactions, the EWS sales to the German Railroad and the sale and lease back of complex in Montreal Central Station.
- Together they delivered a gain of C$155 million, also closed a C$465 million of cash flow, so good for ATF and good for cash flow.
- The quarter had another one time item, the benefit from the lower corporate taxes that’s been announced by the Federal Government here in Canada. BFIT benefit was close to C$300 million, so with this the company has EPS, as reported of C$1.68, excluding the one-time item that is the two transactions and the BFIT benefit, the quarter came in at 90 cents per share which is basically flat year-over-year.
Purchase services and material and equipment ramp were up 3% on a year-over-year basis, FX adjusted.
- Depreciation is up 8%, this reflects the normal increase that you would see due to capital expenditure, but also the fact that the company has not quite completed, but it has assessed estimates for a new depreciation study of Canadian assets, and that impacted quarter by close to C$7 to C$8 million.
- A run rate of the increase to depreciation expense so those categories that the company has completed are in the range of C$35 million.
- Casualty and other are at around C$66 million. The company is around C$30 million lower than the run rate expected. The reason to be lower is because the company has had continuing benefit in terms of personal injury reserves both FELA cases, but also occupational disease claims are coming down based on actuarial study. The benefit was around C$40 million but the company had a C$40 million last year when it did its fourth quarter actuarial study during the fourth quarter of 2006.
- On free cash flow, the company delivers C$828 million on the strength of the cash generated from the sale of DWF and Central Station, if excluding those gains. But also the cash back installment which the company did during the year on account of 2006 taxes, run rate free cash flow would have been in the range of C$650 to C$675 million. The company paid during the year, basically C$860 million in cash taxes, because it paid both the 2006 installment and normal installment now that the company is cash tax payable on account of 2007.
Chemical side of the business was up 8%, especially imported methanol shipment over the Port of Kitimat on the West Coast.
- The metals and minerals group up 11%, all sub groups in the metals and mineral segment posted increases, in addition to the iron ore business.
- Positive results in all of the metals sub groups, strong demands for steel slabs, plate and aluminum.
- Construction materials were stronger than they had been earlier in the year and good shipment of dimensional load, such as windmills and large pieces of machinery in the quarter
- Forest product saw a decline.
- Lumber and panel producing customer continue to face difficult markets, their rationalizing capacity and curtailing production if demand continues to decrease.
- Carloads in this area were down 12 and 25 %, respectively for lumber and panel.
- Paper results down 8% largely due to the closure of a mill in Eastern Canada which had just started operations earlier in the year.
- Wood posted relatively flat volumes versus last year, but export prices stayed strong.
Automotive business segment was up 7%, solid quarter performance, finished vehicles and vehicle parts up 5% and 11%, respectively.
- Gains were driven by new vehicle models as well as strong import traffic through the port of Vancouver.
- Bulk was in total 8% as the demand for services from bulk customers continues to be solid and growing.
- Canadian coal in total was up 12%, but Canadian coal, again strong quarter, up 44% driven by strong demand for the metallurgical coal to the export markets, coupled with new mind capacity which didn’t come on in Western Canada.
