CN reports Q2-2016 net income of C$858 million, or C$1.10 per diluted share

Adjusted diluted earnings per share (EPS) (1) decreased by three per cent to C$1.11

Record second-quarter operating ratio of 54.5 per cent

MONTREAL, July 25, 2016 /CNW/ - CN (TSX: CNR) (NYSE: CNI) today reported its financial and operating results for the second quarter and six-month period ended June 30, 2016.

Second-quarter 2016 financial highlights

  • Net income was C$858 million, compared with net income of C$886 million for second-quarter 2015. Q2-2016 diluted EPS remained flat at C$1.10. The decrease in net income was mainly due to lower operating income and other income, and higher interest expense; net of related income taxes.
  • Adjusted diluted EPS (1) of C$1.11 declined three per cent from year-earlier adjusted diluted EPS of C$1.15. The adjusted figures exclude the impact of deferred income tax adjustments resulting from higher provincial corporate income tax rates in both years.
  • Operating income declined five per cent to C$1,293 million.
  • Revenues decreased by nine per cent to C$2,842 million. Carloadings declined 12 per cent and revenue ton-miles declined 11 per cent.
  • Operating expenses declined 12 per cent to C$1,549 million.
  • Operating ratio of 54.5 per cent was a second-quarter record and an improvement of 1.9-points over the prior-year quarter.
  • Free cash flow (1) for the first six months of 2016 was C$1,169 million, compared with C$1,051 million for the year-earlier period.

 

Luc Jobin, president and chief executive officer, said: "CN continued to face a very challenging volume environment in the second quarter and maintained strong discipline in realigning resources to keep them in line with reduced freight demand. Service remained solid, key operating metrics advanced, and we continued to improve our safety record. An important product of our cost-management and productivity focus was a record second-quarter operating ratio of 54.5 per cent.

"We expect the second quarter to be the volume trough for the year. For the balance of 2016, we continue to expect some markets to remain strong, including lumber and panels, automotive, and refined petroleum products, and we anticipate a bumper grain crop in Canada. At the same time, international intermodal volumes are expected to remain challenging while shipments of commodities related to oil and gas development, such as crude oil, frac sand and drilling pipe, are expected to decrease relative to last year.

"Given these expectations, we reiterate our April 25, 2016, financial outlook of aiming to deliver 2016 EPS in line with last year's adjusted diluted EPS (1) of C$4.44." (2)

Foreign currency impact on results
Although CN reports its earnings in Canadian dollars, a large portion of its revenues and expenses is denominated in U.S. dollars. The fluctuation of the Canadian dollar relative to the U.S. dollar affects the conversion of the Company's U.S.-dollar-denominated revenues and expenses. On a constant currency basis, (1) CN's net income for the second quarter of 2016 would have been lower by C$23 million, or C$0.03 per diluted share. 

Second-quarter 2016 revenues, traffic volumes and expenses
Revenues for the second quarter of 2016 were C$2,842 million, a decrease of nine per cent, when compared to the same period in 2015. Revenues increased for forest products (four per cent), but were more than offset by revenue declines for coal (36 per cent), metals and minerals (17 per cent), petroleum and chemicals (16 per cent), grain and fertilizers (12 per cent), intermodal (four per cent), and automotive (one per cent).

The revenue decline was mainly attributable to decreased shipments of energy-related commodities including crude oil, frac sand, drilling pipe and semi-finished steel products as a result of declining energy markets; reduced shipments of coal due to weaker North American and global demand; lower volumes of Canadian grain to North American and export markets due to lower available supply; and lower applicable fuel surcharge rates. These factors were partly offset by the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues; freight rate increases; as well as increased shipments of lumber and panels to U.S. markets, and increased domestic retail intermodal shipments.

Carloadings for the quarter declined by 12 per cent to 1,249 thousand.

Revenue ton-miles (RTMs), measuring the relative weight and distance of rail freight transported by CN, declined by 11 per cent from the year-earlier quarter. Rail freight revenue per RTM, a measurement of yield defined as revenue earned on the movement of a ton of freight over one mile, increased by one per cent over the year-earlier period, driven by the positive translation impact of the weaker Canadian dollar and freight rate increases, partly offset by a significant increase in the average length of haul and lower applicable fuel surcharge rates.

Operating expenses for the second quarter decreased by 12 per cent to C$1,549 million, mainly due to lower costs resulting from decreased volumes of traffic, lower fuel prices, lower pension expense and cost-management initiatives, partly offset by the negative translation impact of a weaker Canadian dollar on U.S.-dollar-denominated expenses.

Forward-Looking Statements
Certain statements included in this news release constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995 and under Canadian securities laws. By their nature, forward-looking statements involve risks, uncertainties and assumptions. The Company cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. Forward-looking statements may be identified by the use of terminology such as "believes," "expects," anticipates," "assumes," "outlook," "plans," "targets," or other similar words. To the extent that CN has provided non-GAAP financial measures in its outlook, the Company may not be able to provide a reconciliation to the GAAP measures, due to unknown variables and uncertainty related to future results.

2016 key assumptions
CN has made a number of economic and market assumptions in preparing its 2016 outlook. The Company now assumes that North American industrial production for the year will be slightly negative (compared with its April 25, 2016, assumption that North American industrial production would increase by less than one per cent) and assumes U.S. housing starts in the range of 1.2 million units and U.S. motor vehicle sales of approximately 17.5 million units. For the 2015/2016 crop year, the Canadian grain crop was in line with the five-year average and the U.S. grain crop was above the five-year average. The Company now assumes 2016/2017 grain crops in both Canada and the U.S. will be above their respective five-year averages (compared with its April 25, 2016, assumption that both the Canadian and U.S. 2016/2017 grain crops would be in line with their respective five-year averages). With these assumptions, CN now expects total carloads for 2016 will decrease in the mid-single-digit range (compared with its April 25, 2016, assumption that total carloadings for the year would decline four to five per cent versus 2015). CN expects continued pricing improvement above inflation. CN assumes that in 2016 the value of the Canadian dollar in U.S. currency will be in the range of $0.75 to $0.80, and that the average price of crude oil (West Texas Intermediate) will be in the range of US$35 to US$45 per barrel. CN plans to invest approximately C$2.75 billion in its capital program, of which C$1.5 billion is targeted toward track infrastructure.

Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company to be materially different from the outlook or any future results or performance implied by such statements. Accordingly, readers are advised not to place undue reliance on forward-looking statements. Important risk factors that could affect the forward-looking statements include, but are not limited to, the effects of general economic and business conditions; industry competition; inflation, currency and interest rate fluctuations; changes in fuel prices; legislative and/or regulatory developments; compliance with environmental laws and regulations; actions by regulators; security threats; reliance on technology; transportation of hazardous materials; various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes; effects of climate change; labor negotiations and disruptions; environmental claims; uncertainties of investigations, proceedings or other types of claims and litigation; risks and liabilities arising from derailments; and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to Management's Discussion and Analysis (MD&A) in CN's annual and interim reports, Annual Information Form and Form 40-F, filed with Canadian and U.S. securities regulators and available on CN's website, for a description of major risk factors.

Forward-looking statements reflect information as of the date on which they are made. CN assumes no obligation to update or revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable securities laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related matters, or any other forward-looking statement.

1)

See discussion and reconciliation of non-GAAP measures in the attached supplementary schedule, Non-GAAP Measures.

2)

See Forward-Looking Statements for a summary of the key assumptions and risks regarding CN's 2016 outlook.

 

This earnings news release, as well as additional information, including the Financial Statements, Notes thereto and MD&A, is contained in CN's Quarterly Review available on the Company's website at www.cn.ca/quarterly-releases and on SEDAR at www.sedar.com as well as on EDGAR at www.sec.gov

CN is a true backbone of the economy, transporting more than C$250 billion worth of goods annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods, across a rail network of approximately 20,000 route-miles spanning Canada and mid-America. CN – Canadian National Railway Company, along with its operating railway subsidiaries – serves the cities and ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans, and Mobile, Ala., and the metropolitan areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth, Minn./Superior, Wis., and Jackson, Miss., with connections to all points in North America. For more information about CN, visit the Company's website at www.cn.ca.

Selected Railroad Statistics – unaudited



Three months ended June 30


Six months ended June 30


2016

2015


2016

2015







Financial measures












Key financial performance indicators (1)






Total revenues ($ millions)

2,842

3,125


5,806

6,223

Rail freight revenues ($ millions)

2,646

2,927


5,491

5,907

Operating income ($ millions)

1,293

1,362


2,510

2,425

Net income ($ millions)

858

886


1,650

1,590

Diluted earnings per share ($)

1.10

1.10


2.10

1.96

Adjusted diluted earnings per share ($) (2)

1.11

1.15


2.11

2.01

Free cash flow ($ millions) (2)

585

530


1,169

1,051

Gross property additions ($ millions)

670

659


1,139

1,127

Share repurchases ($ millions)

533

404


1,053

833

Dividends per share ($)

0.3750

0.3125


0.7500

0.6250







Financial position (1)






Total assets ($ millions) (3)

36,094

33,498


36,094

33,498

Total liabilities ($ millions) (3)

21,281

19,544


21,281

19,544

Shareholders' equity ($ millions)

14,813

13,954


14,813

13,954







Financial ratio






Operating ratio (%)

54.5

56.4


56.8

61.0







Operational measures (4)












Statistical operating data






Gross ton miles (GTMs) (millions)

99,999

110,709


203,467

222,099

Revenue ton miles (RTMs) (millions)

49,717

55,713


101,973

112,842

Carloads (thousands)

1,249

1,414


2,504

2,767

Route miles (includes Canada and the U.S.)

19,600

19,500


19,600

19,500

Employees (end of period)

22,162

24,529


22,162

24,529

Employees (average for the period)

22,230

24,897


22,462

24,981







Key operating measures






Rail freight revenue per RTM (cents)

5.32

5.25


5.38

5.23

Rail freight revenue per carload ($)

2,118

2,070


2,193

2,135

GTMs per average number of employees (thousands)

4,498

4,447


9,058

8,891

Operating expenses per GTM (cents)

1.55

1.59


1.62

1.71

Labor and fringe benefits expense per GTM (cents)

0.47

0.49


0.52

0.54

Diesel fuel consumed (US gallons in millions)

93.6

106.0


197.3

220.3

Average fuel price ($/US gallon)

2.30

2.73


2.18

2.79

GTMs per US gallon of fuel consumed

1,068

1,044


1,031

1,008

Terminal dwell (hours)

13.6

14.6


14.0

15.7

Train velocity (miles per hour)

27.6

26.2


27.5

25.5







Safety indicators (5)






Injury frequency rate (per 200,000 person hours)

1.48

1.46


1.57

1.55

Accident rate (per million train miles)

1.57

2.49


1.33

2.48



(1)

Amounts expressed in Canadian dollars and prepared in accordance with United States generally accepted accounting principles, unless otherwise noted.

(2)

See supplementary schedule entitled Non-GAAP Measures for an explanation of this non-GAAP measure.

(3)

As a result of the retrospective adoption of new accounting standards in the fourth quarter of 2015, certain 2015 balances have been restated. See Note 2 – Recent accounting pronouncements to the Company's 2015 Annual Consolidated Financial Statements for additional information.

(4)

Statistical operating data, key operating measures and safety indicators are based on estimated data available at such time and are subject to change as more complete information becomes available, as such, certain of the comparative data have been restated. Definitions of these indicators are provided on our website, www.cn.ca/glossary.

(5)

Based on Federal Railroad Administration (FRA) reporting criteria.



 

Supplementary Information – unaudited

 

 


Three months ended June 30


Six months ended June 30














2016

2015

% Change

Fav (Unfav)


% Change at

constant

currency

Fav (Unfav) (2)


2016

2015

% Change

Fav (Unfav)


% Change at

constant

currency

Fav (Unfav) (2)

Revenues ($ millions) (1)












Petroleum and chemicals

492

586

(16%)


(19%)


1,070

1,229

(13%)


(17%)

Metals and minerals

292

351

(17%)


(19%)


602

728

(17%)


(22%)

Forest products

439

424

4%


-


901

842

7%


1%

Coal

95

148

(36%)


(38%)


188

307

(39%)


(42%)

Grain and fertilizers

432

489

(12%)


(14%)


954

1,024

(7%)


(11%)

Intermodal

697

728

(4%)


(6%)


1,390

1,417

(2%)


(5%)

Automotive

199

201

(1%)


(4%)


386

360

7%


1%

Total rail freight revenues

2,646

2,927

(10%)


(12%)


5,491

5,907

(7%)


(11%)

Other revenues

196

198

(1%)


(4%)


315

316

-


(4%)

Total revenues

2,842

3,125

(9%)


(12%)


5,806

6,223

(7%)


(11%)

Revenue ton miles (RTMs) (millions)












Petroleum and chemicals

9,575

12,425

(23%)


(23%)


20,881

26,042

(20%)


(20%)

Metals and minerals

4,751

5,430

(13%)


(13%)


9,454

11,141

(15%)


(15%)

Forest products

7,807

7,605

3%


3%


15,736

14,847

6%


6%

Coal

2,686

3,916

(31%)


(31%)


4,934

8,126

(39%)


(39%)

Grain and fertilizers

10,353

11,783

(12%)


(12%)


22,883

24,727

(7%)


(7%)

Intermodal

13,519

13,493

-


-


26,182

26,086

-


-

Automotive

1,026

1,061

(3%)


(3%)


1,903

1,873

2%


2%

Total RTMs

49,717

55,713

(11%)


(11%)


101,973

112,842

(10%)


(10%)

Rail freight revenue / RTM (cents)












Petroleum and chemicals

5.14

4.72

9%


5%


5.12

4.72

8%


3%

Metals and minerals

6.15

6.46

(5%)


(8%)


6.37

6.53

(2%)


(8%)

Forest products

5.62

5.58

1%


(3%)


5.73

5.67

1%


(5%)

Coal

3.54

3.78

(6%)


(9%)


3.81

3.78

1%


(4%)

Grain and fertilizers

4.17

4.15

-


(2%)


4.17

4.14

1%


(3%)

Intermodal

5.16

5.40

(4%)


(6%)


5.31

5.43

(2%)


(5%)

Automotive

19.40

18.94

2%


(1%)


20.28

19.22

6%


-

Total rail freight revenue per RTM

5.32

5.25

1%


(1%)


5.38

5.23

3%


(2%)

Carloads (thousands)












Petroleum and chemicals

141

158

(11%)


(11%)


294

322

(9%)


(9%)

Metals and minerals

186

243

(23%)


(23%)


364

480

(24%)


(24%)

Forest products

110

112

(2%)


(2%)


223

221

1%


1%

Coal

73

105

(30%)


(30%)


152

220

(31%)


(31%)

Grain and fertilizers

129

147

(12%)


(12%)


275

301

(9%)


(9%)

Intermodal

542

581

(7%)


(7%)


1,065

1,103

(3%)


(3%)

Automotive

68

68

-


-


131

120

9%


9%

Total carloads

1,249

1,414

(12%)


(12%)


2,504

2,767

(10%)


(10%)

Rail freight revenue / carload ($)












Petroleum and chemicals

3,489

3,709

(6%)


(9%)


3,639

3,817

(5%)


(10%)

Metals and minerals

1,570

1,444

9%


5%


1,654

1,517

9%


3%

Forest products

3,991

3,786

5%


2%


4,040

3,810

6%


-

Coal

1,301

1,410

(8%)


(11%)


1,237

1,395

(11%)


(16%)

Grain and fertilizers

3,349

3,327

1%


(2%)


3,469

3,402

2%


(2%)

Intermodal

1,286

1,253

3%


1%


1,305

1,285

2%


(1%)

Automotive

2,926

2,956

(1%)


(4%)


2,947

3,000

(2%)


(7%)

Total rail freight revenue per carload

2,118

2,070

2%


-


2,193

2,135

3%


(2%)


Statistical operating data and related key operating measures are based on estimated data available at such time and are subject to change as more complete
information becomes available.

(1)  Amounts expressed in Canadian dollars.

(2)  See supplementary schedule entitled Non-GAAP Measures for an explanation of this non-GAAP measure.

Non-GAAP Measures - unaudited

This supplementary schedule includes non-GAAP measures that do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies. From management's perspective, these non-GAAP measures are useful measures of performance and provide investors with supplementary information to assess the Company's results of operations and liquidity. These non-GAAP measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP.

All financial information included in this supplementary schedule is expressed in Canadian dollars, unless otherwise noted.

Adjusted performance measures

Management believes that adjusted net income and adjusted earnings per share are useful measures of performance that can facilitate period-to-period comparisons, as they exclude items that do not necessarily arise as part of the normal day-to-day operations of Canadian National Railway Company, together with its wholly-owned subsidiaries, collectively the "Company", and could distort the analysis of trends in business performance. The exclusion of such items in adjusted net income and adjusted earnings per share does not, however, imply that such items are necessarily non-recurring. These adjusted measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies.

For the three and six months ended June 30, 2016, the Company reported adjusted net income of $865 million, or $1.11 per diluted share, and $1,657 million, or $2.11 per diluted share, respectively. The adjusted figures for the three and six months ended June 30, 2016 exclude a deferred income tax expense of $7 million ($0.01 per diluted share) resulting from the enactment of a higher provincial corporate income tax rate.

For the three and six months ended June 30, 2015, the Company reported adjusted net income of $928 million, or $1.15 per diluted share, and $1,632 million, or $2.01 per diluted share, respectively. The adjusted figures for the three and six months ended June 30, 2015 exclude a deferred income tax expense of $42 million ($0.05 per diluted share) resulting from the enactment of a higher provincial corporate income tax rate.

The following table provides a reconciliation of net income and earnings per share, as reported for the three and six months ended June 30, 2016 and 2015, to the adjusted performance measures presented herein:



Three months ended June 30


Six months ended June 30

In millions, except per share data


2016


2015



2016


2015

Net income as reported

$

858

$

886


$

1,650

$

1,590

Adjustment: Income tax expense


7


42



7


42

Adjusted net income

$

865

$

928


$

1,657

$

1,632

Basic earnings per share as reported

$

1.10

$

1.10


$

2.11

$

1.97

Impact of adjustment, per share


0.01


0.05



0.01


0.05

Adjusted basic earnings per share

$

1.11

$

1.15


$

2.12

$

2.02

Diluted earnings per share as reported

$

1.10

$

1.10


$

2.10

$

1.96

Impact of adjustment, per share


0.01


0.05



0.01


0.05

Adjusted diluted earnings per share

$

1.11

$

1.15


$

2.11

$

2.01





















Constant currency

Financial results at constant currency allow results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons in the analysis of trends in business performance. Measures at constant currency are considered non-GAAP measures and do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies. Financial results at constant currency are obtained by translating the current period results denominated in US dollars at the foreign exchange rates of the comparable period of the prior year. The average foreign exchange rates were $1.29 and $1.33 per US$1.00, respectively, for the three and six months ended June 30, 2016, and $1.23 per US$1.00, for both the three and six months ended June 30, 2015.

On a constant currency basis, the Company's net income for the three and six months ended June 30, 2016 would have been lower by $23 million ($0.03 per diluted share) and $80 million ($0.10 per diluted share), respectively.

Free cash flow

Management believes that free cash flow is a useful measure of performance as it demonstrates the Company's ability to generate cash for debt obligations and for discretionary uses such as payment of dividends, share repurchases, and strategic opportunities. The Company defines its free cash flow measure as the difference between net cash provided by operating activities and net cash used in investing activities; adjusted for changes in restricted cash and cash equivalents and the impact of major acquisitions, if any. Free cash flow does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies.

The following table provides a reconciliation of net cash provided by operating activities as reported for the three and six months ended June 30, 2016 and 2015, to free cash flow:


Three months ended June 30


Six months ended June 30

In millions


2016


2015



2016


2015

Net cash provided by operating activities

$

1,271

$

1,203


$

2,336

$

2,195

Net cash used in investing activities


(674)


(662)



(1,154)


(1,143)

Net cash provided before financing activities


597


541



1,182


1,052

Adjustment: Change in restricted cash and cash equivalents


(12)


(11)



(13)


(1)

Free cash flow

$

585

$

530


$

1,169

$

1,051





















Adjusted debt-to-adjusted EBITDA multiple

Management believes that the adjusted debt-to-adjusted earnings before interest, income taxes, depreciation and amortization (EBITDA) multiple is a useful credit measure because it reflects the Company's ability to service its debt. The Company calculates the adjusted debt-to-adjusted EBITDA multiple as adjusted debt divided by adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies.

The following table provides a reconciliation of debt and net income to the adjusted measures presented below, which have been used to calculate the adjusted debt-to-adjusted EBITDA multiple:

In millions, unless otherwise indicated

As at and for the twelve months ended June 30,


2016


2015

Debt (1)



$

10,322

$

9,308

Adjustment: Present value of operating lease commitments (2)



561


647

Adjusted debt



$

10,883

$

9,955









Net income



$

3,598

$

3,287

Interest expense




469


397

Income tax expense




1,315


1,318

Depreciation and amortization




1,180


1,118

EBITDA




6,562


6,120

Adjustments:








Other income




(31)


(31)


Deemed interest on operating leases




27


30

Adjusted EBITDA



$

6,558

$

6,119

Adjusted debt-to-adjusted EBITDA multiple (times)




1.66


1.63



(1)

As a result of the retrospective adoption of a new accounting standard in the fourth quarter of 2015, the prior period debt balance has

been adjusted. There was no impact to the related financial ratio. See Note 2 - Recent accounting pronouncements to the Company's

2015 Annual Consolidated Financial Statements for additional information.

(2)

The operating lease commitments have been discounted using the Company's implicit interest rate for each of the periods presented.



The increase in the Company's adjusted debt-to-adjusted EBITDA multiple at June 30, 2016, as compared to the same period in 2015, was mainly due to an increased debt level as at June 30, 2016, resulting from the net issuance of debt and a weaker Canadian-to-US dollar foreign exchange rate, partly offset by a higher net income earned during the twelve months ended June 30, 2016, as compared to the twelve months ended June 30, 2015.

SOURCE CN



For further information: Media: Mark Hallman, Director, Communications and Public Affairs, (905) 669-3384; Investment Community: Paul Butcher, Vice-President, Investor Relations, (514) 399-0052

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