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CN reports record second-quarter financial results

Railway achieved record Q2 diluted earnings per share (EPS)

MONTREAL, July 23, 2019 (GLOBE NEWSWIRE) -- CN (CNR.TO) (CNI) today reported its financial and operating results for the second quarter ended June 30, 2019.

“The CN team delivered record second-quarter results, and we remain optimistic on CN's volume prospects in the second half of the year while maintaining our vigilance on costs,” said JJ Ruest, president and chief executive officer of CN. “Our focus on delivering profitable growth and advanced technologies to modernize our scheduled railroading model is expected to continue driving long-term value creation for our shareholders.”

Financial results highlights
Second-quarter 2019 compared to second-quarter 2018

  • CN attained record second-quarter diluted EPS, as well as record quarterly revenues, operating income and adjusted diluted EPS. (1)
  • Revenues increased by nine per cent to C$3,959 million.
  • Diluted EPS increased by six per cent to C$1.88 and adjusted diluted EPS increased by 15 per cent to C$1.73. (1)
  • Operating ratio of 57.5 per cent, an improvement of 0.7 points.
  • Operating income increased by 11 per cent to C$1,682 million.

Reaffirmed 2019 financial outlook (2)
CN still aims to deliver 2019 adjusted diluted EPS growth in the low double-digit range this year versus last year's adjusted diluted EPS of C$5.50 (1) and continues to assume mid single-digit volume growth in 2019 in terms of revenue ton miles (RTMs).

Second-quarter 2019 revenues, traffic volumes and expenses
Revenues for the second quarter of 2019 were C$3,959 million, an increase of C$328 million or nine per cent, when compared to the same period in 2018. The increase in revenues was mainly due to the inclusion of TransX in the intermodal commodity group, the positive translation impact of a weaker Canadian dollar, freight rate increases, and higher volumes primarily from petroleum crude and Canadian and U.S. grain, which were partly offset by lower volumes of frac sand, lumber and potash.

RTMs, measuring the relative weight and distance of freight transported by CN, increased by two per cent from the year-earlier period. Freight revenue per RTM increased by eight per cent over the year-earlier period, mainly driven by the inclusion of TransX, the positive translation impact of a weaker Canadian dollar and freight rate increases.

Operating expenses for the second quarter increased by eight per cent to C$2,277 million, mainly driven by the inclusion of TransX, the negative translation impact of a weaker Canadian dollar, and higher costs resulting from increased volumes of traffic.

(1) Non-GAAP Measures

CN reports its financial results in accordance with United States generally accepted accounting principles (GAAP). CN also uses non-GAAP measures in this news release that do not have any standardized meaning prescribed by GAAP, such as adjusted performance measures. These non-GAAP measures may not be comparable to similar measures presented by other companies. For further details of these non-GAAP measures, including a reconciliation to the most directly comparable GAAP financial measures, refer to the attached supplementary schedule, Non-GAAP Measures.

CN's full-year adjusted diluted EPS outlook (2) excludes the expected impact of certain income and expense items, as well as those items noted in the reconciliation tables provided in the attached supplementary schedule, Non-GAAP Measures. However, management cannot individually quantify on a forward-looking basis the impact of these items on its EPS because these items, which could be significant, are difficult to predict and may be highly variable. As a result, CN does not provide a corresponding GAAP measure for, or reconciliation to, its adjusted diluted EPS outlook.

(2) 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.

2019 key assumptions
CN has made a number of economic and market assumptions in preparing its 2019 outlook. The Company now assumes that North American industrial production for the year will increase by approximately one per cent (compared to its June 4, 2019 assumption of approximately two per cent), and assumes U.S. housing starts of approximately 1.25 million units and U.S. motor vehicle sales of approximately 17 million units. For the 2018/2019 crop year, the grain crops in both Canada and the United States were in line with their respective three-year averages. The Company assumes that the 2019/2020 grain crop in Canada will be in line with the three-year average and now assumes that the 2019/2020 grain crop in the United States will be below the three-year average (compared to its June 4, 2019 assumption that the 2019/2020 grain crop in the United States would be in line with the three-year average). CN assumes total RTMs in 2019 will increase in the mid single digits versus 2018. CN assumes continued pricing above rail inflation. CN assumes that in 2019, the value of the Canadian dollar in U.S. currency will be approximately $0.75, and assumes that in 2019 the average price of crude oil (West Texas Intermediate) will be in the range of US$60 to US$65 per barrel. In 2019, CN plans to invest approximately C$3.9 billion in its capital program, of which C$1.6 billion is targeted toward track and railway infrastructure maintenance.

Forward-looking statements are not guarantees of future performance and involve 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; increases in maintenance and operating costs; security threats; reliance on technology and related cybersecurity risk; trade restrictions or other changes to international trade arrangements; transportation of hazardous materials; various events which could disrupt operations, including natural events such as severe weather, droughts, fires, floods and earthquakes; 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; timing and completion of capital programs; 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.

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/financial-results and on SEDAR at www.sedar.com as well as on the U.S. Securities and Exchange Commission's website at www.sec.gov through EDGAR.

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. 

Contacts:  
Media Investment Community
Jonathan Abecassis Paul Butcher
Senior Manager Vice-President
Media Relations Investor Relations
(514) 399-7956 (514) 399-0052


Selected Railroad Statistics – unaudited

  Three months ended June 30   Six months ended June 30
  2019   2018     2019   2018  
Financial measures          
Key financial performance indicators (1)          
Total revenues ($ millions) 3,959   3,631     7,503   6,825  
Freight revenues ($ millions) 3,759   3,418     7,172   6,484  
Operating income ($ millions) 1,682   1,519     2,762   2,549  
Adjusted operating income ($ millions) (2) 1,682   1,519     2,846   2,549  
Net income ($ millions) 1,362   1,310     2,148   2,051  
Adjusted net income ($ millions) (2) 1,250   1,120     2,098   1,861  
Diluted earnings per share ($) 1.88   1.77     2.96   2.77  
Adjusted diluted earnings per share ($) (2) 1.73   1.51     2.90   2.51  
Free cash flow ($ millions) (2) 513   974     799   1,296  
Gross property additions ($ millions) 1,182   840     2,100   1,265  
Share repurchases ($ millions) 445   385     877   1,016  
Dividends per share ($) 0.5375   0.4550     1.0750   0.9100  
Financial position (1)          
Total assets ($ millions) 43,002   39,805     43,002   39,805  
Total liabilities ($ millions) 25,020   22,436     25,020   22,436  
Shareholders' equity ($ millions) 17,982   17,369     17,982   17,369  
Financial ratio          
Operating ratio (%) 57.5   58.2     63.2   62.7  
Adjusted operating ratio (%) (2) 57.5   58.2     62.1   62.7  
Operational measures (3)          
Statistical operating data          
Gross ton miles (GTMs) (millions) 127,606   123,540     243,465   236,580  
Revenue ton miles (RTMs) (millions) 64,329   63,021     123,396   120,206  
Carloads (thousands) 1,538   1,506     2,956   2,914  
Route miles (includes Canada and the U.S.) 19,500   19,500     19,500   19,500  
Employees (end of period) 27,215   25,654     27,215   25,654  
Employees (average for the period) 27,116   25,275     26,570   24,871  
Key operating measures          
Freight revenue per RTM (cents) 5.84   5.42     5.81   5.39  
Freight revenue per carload ($) 2,444   2,270     2,426   2,225  
GTMs per average number of employees (thousands) 4,706   4,888     9,163   9,512  
Operating expenses per GTM (cents) 1.78   1.71     1.95   1.81  
Labor and fringe benefits expense per GTM (cents) 0.53   0.52     0.61   0.58  
Diesel fuel consumed (US gallons in millions) 114.9   113.7     232.4   226.5  
Average fuel price ($/US gallon) 3.31   3.37     3.17   3.26  
GTMs per US gallon of fuel consumed 1,111   1,087     1,048   1,045  
Car velocity (car miles per day) 214   196     192   177  
Through dwell (hours) 7.2   8.1     7.9   9.0  
Through network train speed (miles per hour) 19.0   18.2     18.0   17.7  
Locomotive utilization (trailing GTMs per total horsepower) 212   213     199   207  
Safety indicators (4)          
Injury frequency rate (per 200,000 person hours) 1.60   1.62     1.92   1.87  
Accident rate (per million train miles) 1.41   2.48     2.22   2.33  


(1) Amounts expressed in Canadian dollars and prepared in accordance with United States generally accepted accounting principles (GAAP), unless otherwise noted.
(2) See supplementary schedule entitled Non-GAAP Measures for an explanation of these non-GAAP measures.
(3) Statistical operating data, key operating measures and safety indicators are unaudited and based on estimated data available at such time and are subject to change as more complete information becomes available. Definitions of these indicators are provided on CN's website, www.cn.ca/glossary.   
(4) Based on Federal Railroad Administration (FRA) reporting criteria.


Supplementary Information – unaudited

  Three months ended June 30   Six months ended June 30
  2019   2018   % Change
Fav (Unfav)
  % Change at
constant
currency
Fav (Unfav) (1)
    2019   2018   % Change
Fav (Unfav)
  % Change at
constant
currency
Fav (Unfav) (1)
 
Revenues ($ millions) (2)                  
Petroleum and chemicals 775   616   26 % 23 %   1,510   1,180   28 % 24 %
Metals and minerals 440   447   (2 %) (4 %)   861   835   3 % %
Forest products 487   490   (1 %) (3 %)   943   912   3 % %
Coal 177   175   1 % %   340   317   7 % 5 %
Grain and fertilizers 641   591   8 % 7 %   1,218   1,130   8 % 6 %
Intermodal 992   863   15 % 14 %   1,842   1,677   10 % 8 %
Automotive 247   236   5 % 2 %   458   433   6 % 2 %
Total freight revenues 3,759   3,418   10 % 8 %   7,172   6,484   11 % 8 %
Other revenues 200   213   (6 %) (8 %)   331   341   (3 %) (6 %)
Total revenues 3,959   3,631   9 % 7 %   7,503   6,825   10 % 7 %
Revenue ton miles (RTMs) (millions) (3)                  
Petroleum and chemicals 14,357   11,553   24 % 24 %   27,106   22,172   22 % 22 %
Metals and minerals 6,832   7,544   (9 %) (9 %)   13,402   14,482   (7 %) (7 %)
Forest products 7,271   7,922   (8 %) (8 %)   14,089   14,883   (5 %) (5 %)
Coal 4,699   4,734   (1 %) (1 %)   8,993   8,442   7 % 7 %
Grain and fertilizers 15,045   14,585   3 % 3 %   28,912   28,190   3 % 3 %
Intermodal 15,034   15,533   (3 %) (3 %)   28,882   29,901   (3 %) (3 %)
Automotive 1,091   1,150   (5 %) (5 %)   2,012   2,136   (6 %) (6 %)
Total RTMs 64,329   63,021   2 % 2 %   123,396   120,206   3 % 3 %
Freight revenue / RTM (cents) (2) (3)                  
Petroleum and chemicals 5.40   5.33   1 % (1 %)   5.57   5.32   5 % 1 %
Metals and minerals 6.44   5.93   9 % 6 %   6.42   5.77   11 % 8 %
Forest products 6.70   6.19   8 % 5 %   6.69   6.13   9 % 6 %
Coal 3.77   3.70   2 % 1 %   3.78   3.76   1 % (2 %)
Grain and fertilizers 4.26   4.05   5 % 3 %   4.21   4.01   5 % 3 %
Intermodal 6.60   5.56   19 % 17 %   6.38   5.61   14 % 12 %
Automotive 22.64   20.52   10 % 7 %   22.76   20.27   12 % 9 %
Total freight revenue / RTM 5.84   5.42   8 % 6 %   5.81   5.39   8 % 5 %
Carloads (thousands) (3)                  
Petroleum and chemicals 174   155   12 % 12 %   342   308   11 % 11 %
Metals and minerals 269   265   2 % 2 %   504   507   (1 %) (1 %)
Forest products 100   109   (8 %) (8 %)   196   209   (6 %) (6 %)
Coal 90   86   5 % 5 %   170   166   2 % 2 %
Grain and fertilizers 167   162   3 % 3 %   316   307   3 % 3 %
Intermodal 663   657   1 % 1 %   1,287   1,281   % %
Automotive 75   72   4 % 4 %   141   136   4 % 4 %
Total carloads 1,538   1,506   2 % 2 %   2,956   2,914   1 % 1 %
Freight revenue / carload ($) (2) (3)                  
Petroleum and chemicals 4,454   3,974   12 % 9 %   4,415   3,831   15 % 12 %
Metals and minerals 1,636   1,687   (3 %) (6 %)   1,708   1,647   4 % %
Forest products 4,870   4,495   8 % 5 %   4,811   4,364   10 % 7 %
Coal 1,967   2,035   (3 %) (4 %)   2,000   1,910   5 % 3 %
Grain and fertilizers 3,838   3,648   5 % 3 %   3,854   3,681   5 % 3 %
Intermodal 1,496   1,314   14 % 12 %   1,431   1,309   9 % 8 %
Automotive 3,293   3,278   % (2 %)   3,248   3,184   2 % (1 %)
Total freight revenue / carload 2,444   2,270   8 % 5 %   2,426   2,225   9 % 6 %


(1) See supplementary schedule entitled Non-GAAP Measures for an explanation of this non-GAAP measure.
(2) Amounts expressed in Canadian dollars.
(3) Statistical operating data and related key operating measures are unaudited and based on estimated data available at such time and are subject to change as more complete information becomes available.


Non-GAAP Measures – unaudited

In this supplementary schedule, the "Company" or "CN" refers to Canadian National Railway Company, together with its wholly-owned subsidiaries. Financial information included in this schedule is expressed in Canadian dollars, unless otherwise noted.

CN reports its financial results in accordance with United States generally accepted accounting principles (GAAP). The Company also uses non-GAAP measures that do not have any standardized meaning prescribed by GAAP, including adjusted performance measures, constant currency, free cash flow and adjusted debt-to-adjusted EBITDA multiple. These non-GAAP measures 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.

Adjusted performance measures

Management believes that adjusted net income, adjusted earnings per share, adjusted operating income and adjusted operating ratio are useful measures of performance that can facilitate period-to-period comparisons, as they exclude items that do not necessarily arise as part of CN's normal day-to-day operations and could distort the analysis of trends in business performance. Management uses adjusted performance measures, which exclude certain income and expense items in its results that management believes are not reflective of CN's underlying business operations, to set performance goals and as a means to measure CN's performance. The exclusion of such income and expense items in these measures does not, however, imply that these items are necessarily non-recurring. These 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, 2019, the Company's adjusted net income was $1,250 million, or $1.73 per diluted share, and $2,098 million, or $2.90 per diluted share, respectively. The adjusted figures for the three and six months ended June 30, 2019 exclude a deferred income tax recovery of $112 million ($0.15 per diluted share), resulting from the enactment of a lower provincial corporate income tax rate. The adjusted figures for the six months ended June 30, 2019 also exclude a depreciation and amortization expense of $84 million, or $62 million after-tax ($0.09 per diluted share) in the first quarter, related to costs previously capitalized for a Positive Train Control (PTC) back office system following the deployment of a replacement system.

For the three and six months ended June 30, 2018, the Company's adjusted net income was $1,120 million, or $1.51 per diluted share, and $1,861 million, or $2.51 per diluted share, respectively. The adjusted figures for the three and six months ended June 30, 2018 exclude a gain on transfer of the Company’s capital lease in the passenger rail facilities in downtown Montreal together with its interests in related railway operating agreements (the “Central Station Railway Lease”) of $184 million, or $156 million after-tax ($0.21 per diluted share), and a gain on disposal of land located in Calgary, excluding the rail fixtures (the “Calgary Industrial Lead”), of $39 million, or $34 million after-tax ($0.05 per diluted share).

The following table provides a reconciliation of net income and earnings per share, as reported for the three and six months ended June 30, 2019 and 2018, to the adjusted performance measures presented herein:

  Three months ended June 30   Six months ended June 30
In millions, except per share data   2019       2018       2019       2018  
Net income $ 1,362     $ 1,310     $ 2,148     $ 2,051  
Adjustments:              
Depreciation and amortization         84      
Other income     (223 )       (223 )
Income tax expense (recovery) (1) (112 )   33     (134 )   33  
Adjusted net income $ 1,250     $ 1,120     $ 2,098     $ 1,861  
Basic earnings per share $ 1.89     $ 1.78     $ 2.97     $ 2.78  
Impact of adjustments, per share (0.16 )   (0.26 )   (0.07 )   (0.26 )
Adjusted basic earnings per share $ 1.73     $ 1.52     $ 2.90     $ 2.52  
Diluted earnings per share $ 1.88     $ 1.77     $ 2.96     $ 2.77  
Impact of adjustments, per share (0.15 )   (0.26 )   (0.06 )   (0.26 )
Adjusted diluted earnings per share $ 1.73     $ 1.51     $ 2.90     $ 2.51  


(1) The tax effect of adjustments reflects tax rates in the applicable jurisdiction and the nature of the item for tax purposes.


The following table provides a reconciliation of operating income and operating ratio, as reported for the three and six months ended June 30, 2019 and 2018, to the adjusted performance measures presented herein:

  Three months ended June 30   Six months ended June 30
In millions, except percentage 2019     2018     2019   2018  
Operating income $ 1,682     $ 1,519     $ 2,762   $ 2,549  
Adjustment: Depreciation and amortization         84    
Adjusted operating income $ 1,682     $ 1,519     $ 2,846   $ 2,549  
Operating ratio (1) 57.5 %   58.2 %   63.2 % 62.7 %
Impact of adjustment           (1.1) -pts  
Adjusted operating ratio 57.5 %   58.2 %   62.1 % 62.7 %


(1) Operating ratio is defined as operating expenses as a percentage of revenues.


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 in the prior year. The average foreign exchange rates were $1.34 and $1.33 per US$1.00 for the three and six months ended June 30, 2019, respectively, and $1.29 and $1.28 per US$1.00 for the three and six months ended June 30, 2018, respectively.

On a constant currency basis, the Company's net income for the three and six months ended June 30, 2019 would have been lower by $28 million ($0.04 per diluted share) and $58 million ($0.08 per diluted share), respectively.

Free cash flow

Management believes that free cash flow is a useful measure of liquidity 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 the impact of business 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, 2019 and 2018, to free cash flow:

  Three months ended June 30   Six months ended June 30
In millions   2019       2018       2019       2018  
Net cash provided by operating activities $ 1,716     $ 1,682     $ 2,713     $ 2,437  
Net cash used in investing activities (1,203 )   (708 )   (2,081 )   (1,141 )
Net cash provided before financing activities 513     974     632     1,296  
Adjustment: Acquisition, net of cash acquired (1)         167      
Free cash flow $ 513     $ 974     $ 799     $ 1,296  


(1) Relates to the acquisition of the TransX Group of Companies ("TransX"). See Note 3 - Business combination to CN's 2019 unaudited Interim Consolidated Financial Statements for additional information.


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 and other long-term obligations. 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,   2019       2018  
Debt $ 13,354     $ 11,874  
Adjustments:      
Operating lease liabilities, including current portion (1) 543     491  
Pension plans in deficiency 475     459  
Adjusted debt $ 14,372     $ 12,824  
Net income $ 4,425     $ 5,620  
Interest expense 510     482  
Income tax expense (recovery) 1,249     (396 )
Depreciation and amortization 1,479     1,285  
EBITDA 7,663     6,991  
Adjustments:      
Other income (166 )   (244 )
Other components of net periodic benefit income (312 )   (309 )
Operating lease cost (1) 202     195  
Adjusted EBITDA $ 7,387     $ 6,633  
Adjusted debt-to-adjusted EBITDA multiple (times) 1.95     1.93  


(1) The Company adopted Accounting Standards Update (ASU) 2016-02: Leases and related amendments (Topic 842) in the first quarter of 2019. The Company now includes operating lease liabilities, as defined by Topic 842, in adjusted debt and excludes operating lease cost, as defined by Topic 842, in adjusted EBITDA. Comparative balances previously referred to as present value of operating lease commitments and operating lease expense have not been adjusted and are now referred to as operating lease liabilities and operating lease cost, respectively. See Note 2 - Recent accounting pronouncements to CN's 2019 unaudited Interim Consolidated Financial Statements for additional information.