CN Reports 4th Quarter Rise in Net Income

Canadian National said its 2016 fourth quarter net income increased 8 percent, but it continues to grapple with a mixed economic environment.

Canadian National “We saw weaker volumes during the year, but quickly adjusted as our dedicated team of railroaders maintained its focus on operational efficiency, while continuing to provide quality service to our customers and improve our safety performance,” said CN CEO Luc Jobin in a statement.

During the fourth quarter, CN earned net income of C$1.02 billion. The diluted earnings per share increased 12 percent to C$1.32, compared with the fourth quarter of 2015. Adjusted net income increased 1 percent to C$952 million, with adjusted diluted EPS increasing 4 percent to C$1.23.

Operating income increased 3 percent to C$1.39 billion. Revenues increased by 2 percent to C$3.22 billion. Carloadings increased 3 percent to 1,37 million and revenue ton miles increased 4 percent. The operating ratio improved by 0.6 points to 56.6 percent.

CN posted fourth quarter revenue increases for grain and fertilizers (14 percent), automotive (4  percent) and intermodal (1 percent).

Seeing declines were metals and minerals (6 percent), coal (6 percent), petroleum and chemicals (5 percent). Forest products revenue remained flat.

Operating expenses rose by 1 percent to C$1.82 billion. CN attributed that to higher casualty and other expenses, and higher depreciation and amortization expense, partly offset by lower pension expenses and lower costs resulting from operating productivity gains.

For all of 2016, net income increased 3 percent to C$3.64 billion, with diluted EPS rising 6 percent to C$4.67. Adjusted net income remained flat at C$3.58 billion, while adjusted diluted EPS increased 3 percent to C$4.59.

Operating income rose 1 percent to C$5.31 billion. Revenues decreased by 5 percent to C$12.04 billion. Carloadings and revenue ton-miles both declined by 5 percent in 2016.

The operating ratio for 2016 improved by 2.3 points to 55.9 percent. Free cash flow was a record C$2.52 billion, compared with C$2.37 billion in 2015.

The operating ratio was 55.9 percent in 2016, an improvement of 2.3 points over the 2015 operating ratio of 58.2 percent.

Annual revenues increased for automotive (6 percent), forest products (4 percent) and grain and fertilizers (1 percent), but was offset by declines for coal (29 percent), metals and minerals (15 percent), petroleum and chemicals (11 percent), and intermodal (2 percent).

In a statement CN said the decline in total revenues was mainly attributable to lower volumes of crude oil, coal and frac sand, as well as lower fuel surcharge rates. These factors were partly offset by the positive translation impact of the weaker Canadian dollar and freight rate increases.

Rail freight revenue per RTM remained flat compared with 2015, driven by lower fuel surcharge rates and an increase in the average length of haul. Other contributing facts included a positive translation impact of a weaker Canadian dollar and freight rate increases.

Operating expenses for 2016 decreased by 8 percent to C$6.73 billion. The decrease was mainly due to lower costs resulting from operating productivity gains, including cost-management initiatives and decreased volumes of traffic; lower pension expense; and lower fuel prices, partly offset by the negative translation impact of a weaker Canadian dollar on U.S.-dollar-denominated expenses.

“Overall, the economy remains challenging, but we remain optimistic and expect to see moderate volume growth in 2017,” Jobin said.

CN expects to deliver EPS growth in the mid-single-digit range in 2017 over adjusted diluted EPS of C$4.59 in 2016. In its news release, CN said it will continue to invest in the safety and efficiency of its network with a 2017 capital investment program of C$2.5 billion, which includes increased spending for Positive Train Control technology in the U.S.

CN has declared a 10 percent increase to it 2017 quarterly cash dividend.

For 2017, CN said it is assuming that North American industrial production will increase in the range of 1 percent to 2 percent, assumes U.S. housing starts in the range of 1.25 million units and U.S. motor vehicle sales of approximately 17.5 million units.

For the 2016-2017 crop year, the grain crops in the U.S. and Canada were above their respective five-year averages. The company assumes that the 2017-2018 grain crops in both Canada and the U.S. will be in line with their respective five-year averages.

With these assumptions, CN assumes total revenue ton miles for all freight categories in 2017 will increase in the range of 3 percent to 4 percent vs. 2016.

CN expects continued pricing improvement above inflation, believing that the value of the Canadian dollar in U.S. currency will be in the range of $0.75, and that the average price of crude oil (West Texas Intermediate) will be in the range of US$50 to US$60 per barrel.

In 2017, CN plans to invest approximately C$2.5 billion in its capital program, of which C$1.6 billion is targeted toward track infrastructure.

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