CN: “Our Next Driver of Value is Well Under Way”

JJ Ruest, CN President and CEO, has reason to smile as his company was named a top employer for the fourth straight year. CN photo.

CN reported its financial and operating results for 4Q19 as well as the year ended Dec. 31, 2019. The former includes revenues of C$3.584 billion, a 6% decrease, while the latter showed revenues of C$14.917 billion, a 4% increase.

“We remain focused on executing our strategy of long-term sustainable growth at low incremental cost,” said JJ Ruest, CN President and CEO, and Railway Age’s 2019 Railroader of the Year. “Our strategic deployment of technology, the next step in our Precision Scheduled Railroading model and our next driver of value, is well under way. At the same time, we continue to closely monitor the freight volume environment and rightsize our resources and costs to demand.

“Over the past two years, CN invested C$7.4 billion in capital expenditures to increase capacity, efficiency and resiliency of the network. In 2020, our capital program will decrease to C$3 billion, generating higher free cash flow. CN’s strong balance sheet provides us with the financial flexibility and resiliency required in the current turbulent economic environment.”

4Q19 compared to 4Q18

• Results impacted by eight-day labor strike and weak freight demand.
• Diluted earnings per share (EPS) of C$1.22, a decrease of 22%, and adjusted diluted EPS of C$1.25, a decrease of 16%.
• Operating ratio of 66%, an increase of 4.1 points, and adjusted operating ratio of 65.2%, an increase of 4 points.
• Operating income of C$1.218 billion, a decrease of 16%, and adjusted operating income of C$1.249 billion, a decrease of 16%.
• RTMs, measuring the weight and distance of freight transported by CN, declined by 13%. Freight revenue per RTM increased by 9%.
• Operating expenses for the quarter remained flat, when compared to the same period in 2018. The increases in purchased services and material expense, due to the inclusion of TransX, and depreciation expense, were offset by lower costs from decreased volumes of traffic and lower incentive compensation.

Full-Year 2019/2018 Comparison

• Diluted EPS of C$5.83, a decrease of 1% and adjusted diluted EPS of C$5.80, an increase of 5%.
• Operating ratio of 62.5%, an increase of 0.9 points, and adjusted operating ratio of 61.7%, an increase of 0.2 points.
• Operating income of C$5.593 billion, an increase of 2%, and adjusted operating income of C$5.708 billion, an increase of 3%.
• Adjusted return on invested capital (adjusted ROIC) of 15.1%, a decrease of 0.6 points.
• RTMs declined by 3%.
• Freight revenue per RTM increased by 8%, mainly driven by freight rate increases, the inclusion of TransX in the intermodal commodity group and the positive translation impact of a weaker Canadian dollar.

The 4% increase to C$14.917 billion in annual revenues was mainly attributable to freight rate increases, the inclusion of TransX in the intermodal commodity group within the domestic market, the positive translation impact of a weaker Canadian dollar and higher volumes of petroleum crude, natural gas liquids and refined petroleum products in the first nine months. These factors were partly offset by lower volumes of a broad range of forest products, reduced U.S. thermal coal exports via the Gulf Coast and lower shipments of frac sand.

2020 Outlook, Shareholder Distribution

“We have growth opportunities that we anticipate will translate into low single-digit volume growth in 2020 in terms of revenue ton-miles (RTMs), despite continued weakness in the broad freight environment,” said Ruest.

CN is targeting to deliver EPS growth in the mid single-digit range this year compared to adjusted diluted EPS of C$5.80 in 2019.

CN is also targeting free cash flow in the range of C$3 billion to C$3.3 billion in 2020 compared to C$2 billion in 2019.

The Company’s Board of Directors approved a 7% increase to CN’s 2020 quarterly cash dividend, effective for 1Q20. This is the 24th consecutive year of dividend increase, “demonstrating our confidence in the long-term financial health of the Company.” In addition, the Company’s Board of Directors also approved a new normal course issuer bid that permits CN to purchase, for cancellation, over a 12-month period up to 16 million common shares, starting on Feb. 1, 2020, and ending no later than Jan. 31, 2021.

Download CN’s earnings presentation:

The Cowen Insight

“CN’s reported adjusted 4Q19 EPS of C$1.25 was16% below last year’s result but above our and Street expectations of C$1.22 and C$1.19, respectively,” noted Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Operating income decreased 14% y/y to C$1.249 billion, also above our and consensus estimates of C$1.201 billion and C$1.234 billion, respectively. The operating ratio (OR) of 65.2% was 150~ bps better than our estimate, ~20 bps worse than consensus’ expectation, and ~330 bps worse than last year.

“Revenue decreased 6% to C$3.584 billion, just shy of our estimate of C$3.610 billion but above Street expectations of C$3.530 billion. Carloads decreased 7.3% in the quarter, better than the Street’s expectation of an 8.8% decrease, while average revenue per carload only increased 2% compared to the Street’s 3.7% expectation. On a carload by carload basis, every carload type beat street revenue estimates other than Automotive which was slightly below. (‘Other Revenue’ missed consensus by ~C$12 million.)

“CN highlighted a number of exciting opportunities that lie ahead—in particular we note the increase in crude oil by rail shipments, with 2019 the most shipments in annual carloads in at least five years. Second, we highlight capacity expansion projects in Vancouver and the Port of Prince Rupert, which together will be able to handle more than 1.5 million incremental TEUs by 2022. Finally, management noted continued headcount reductions and other cost efficiencies that should aid margins.

“Pricing commentary (limited as it is from the entire rail group now) on CN’s conference call continues to sound relatively positive, with management continuing to expect to price ahead of rail cost inflation. We note that, with significant share shift between CN and Canadian Pacific in intermodal, coal and other carload types over the next few years, yields may change due to mix shifts, but pricing will likely be a constant. This is in line with results from our pre-earnings 4Q19 Rail Shipper Survey, where rail pricing expectations were flat sequentially—impressive in our view, given the dropoff in 4Q19 rail industry volumes.”