The Canadian National Railway set volume, revenue, earnings and safety records in 2012.
The company's full-year profit was C$2.68 billion ($2 billion), up from C$2.46 billion. During the quarter ended Dec. 31, net income was C$610 million (US$461 million) versus C$592 million for the prior-year quarter.
Montreal-based CN credited its end-to-end supply chain approach and strong revenue growth related to oil and gas development, particularly shipments of crude oil, as well as intermodal traffic, and exports of coal, petroleum coke, wheat and soybeans for its performance. Lumber and engineered wood shipments to the United States were also positive. Fourth-quarter revenue grew 8 percent, or C$150 million, to C$2.5 billion when measured at a constant currency.
For the year, operating income increased 12 percent to C$3.7 billion, while it's operating ratio improved 0.6 percent to 62.9 percent, further cementing the company's reputation as one of the best managed railroads in North America. In the fourth quarter, operating income increased 10 percent to C$922 million. Officials expressed satisfaction that they were able to improve productivity and service levels despite the highest volumes in the company's history.
Fourth-quarter volume was the second best on record, but CN was able to produce an 11 percent gain in yard productivity (cars per yard switching hour), including a 16 percent improvement in the Chicago area following heavy investments there, Keith Creel, the company's chief operating officer, said on an earnings call with analysts. CN is consolidating switching at an upgraded yard to improve efficiency. Train productivity, as measured in gross ton miles, increased 2 percent as the railroad continues to space locomotives at intervals to run larger trains.
Creel blamed a 1 percent decline in car velocity on a five-day shutdown of the mainline from Vancouver, B.C., due to a rock slide in November, and an earlier than normal arrival of harsh winter conditions.
The railroad reached a 91 percent rate for meeting timeframes given to customers for switching their cars from sidings to the mainline, up four points from 2011, and is delivering hopper cars for grain as scheduled 82 percent of the time, he said.
CN's revenue increased much more than it would have simply from regular growth in the economy, in large measure because of greater revenue-ton-miles from running more longer-haul traffic. Officials said the company was able to take market share in the intermodal sector from other railroads and from trucking.
Calendar-year revenues increased 10 percent to more than C$9.9 billion, with all business units registering gains, led by petroleum and chemicals at 15 percent to C$1.6 billion. Intermodal revenue grew 11 percent to C$2billion. The revenue increase was attributed to higher freight volumes, due in part to growth in North American and Asian economies, as well as increased volumes in the second quarter as a result of a labor disruption at competitor Canadian Pacific. Revenue gains also came from rate increases and higher fuel surcharges, and exchange rate fluctuations.
During the fourth quarter, incremental revenue for crude grew C$50 million, with 9,000 carloads. Revenue-ton-mileage growth was strong because CN is a long-haul carrier for crude, Chief Marketing Officer Jean-Jacques Ruest said. Crude-by-rail to refineries is growing because the price of oil from Canadian tar sands and U.S. shale fields is lower than North Sea Brent shipped by tanker from Europe. CN expects to double its revenue from crude in 2013.
“This could be a significant business for CN in 2013 and beyond," Ruest said.
International intermodal grew by $24 million and domestic intermodal was up $14 million, or 8 percent in both cases.
Iron ore volume plunged by 15,000 carloads on a quarterly basis, but the revenue impact was only $5 million, he said. Overall, the metals category saw revenue increases of 12 percent.
Revenue for steel pipe for energy pipelines and drilling grew 50 percent, or $12 million, in the quarter. Coal revenue was up 17 percent, or $25 million. Grain revenue grew $28 million despite the drought, mostly because of strong exports converted from barge because of the low level of the Mississippi River, Ruest said.
Revenues outpaced the 9 percent growth in operating expenses.
Carloads for the fourth quarter rose 3 percent to 1.27 million and for the year increased 4 percent to 5.06 million.
On the safety front, the railroad's injury frequency rate per 200,000 man hours fell to 1.31 from 1.55, and the accident rate per million train miles decreased to 2.10 from 2.25.
“For 2013, CN anticipates continued gradual improvement in the economy and further growth opportunities in intermodal, energy and other resource markets," Chief Executive Officer Claude Mongeau said in a news release. "Despite the challenge of an approximate C$150-million headwind related to increased pension expense and the impact of depreciation studies, CN is aiming for high single-digit growth in 2013 diluted earnings per share over adjusted diluted earnings per share of C$5.61 for 2012. CN also expects to generate 2013 free cash flow in the range of C$800 million to C$900 million, including a normalized, higher level of cash taxes."
Ruest said the U.S. housing recovery should boost the railroad's domestic lumber and intermodal shipments, and some idle mills that make wood panels are expected to open on its network in the second half of the year. The intermodal business is also set to expand with the recent addition of a service with a major U.S. retailer that's expanding into Canada.
The booming energy sector also should increase shipments of large-diameter pipes, aggregates, and specialty sand and condensates for shale-oil hydraulic fracturing, he added.
Chief Financial Officer Luc Jobin said the company assumes North American industrial production will increase about 2 percent, that U.S. housing starts will increase to about 950,000 units, and about 5 percent growth in automobile sales to about 15 million units in 2013, which should translate into a 3 percent to 4 percent growth in carloads.
"We continue to expect Canadian National’s volume growth to slightly outpace the volume growth rates posted by most other rails under our coverage due to the company’s business mix that includes being well positioned to serve the North American energy producing regions, continued intermodal volume growth, and exposure to Canadian bulk export commodities," Stifel Nicolaus said in a memo to its investors.
Officials said they will maintain the policy of pricing service at least as high as the rate of inflation for the rail industry.
Flush with free cash flow of C$1 billion despite a voluntary contribution of C$700 million to the corporate pension plan, the company announced a 15 percent increase in quarterly dividends. - Eric Kulisch