CN expects to outpace 'sluggish' 2012 economy by growing crude, lumber volumes

MONTREAL – Canadian National Railway expects to outpace a “sluggish” but modestly improving North American economy this year through gains from the growing transportation of crude and a resurgence in lumber exports to meet growing U.S. housing starts.

The country’s largest railway is boosting its dividend by 15 per cent after ending 2012 on a strong note with a higher fourth-quarter profit, record-high revenues and the prospect for even better results in 2013.

“We are determined to outpace base economic conditions by leveraging our franchise diversity, our pipeline of strategic initiatives and our continuously improving service levels to drive our topline growth above economic conditions,” president and CEO Claude Mongeau said Tuesday during a conference call.

CN earned $610 million or $1.41 per diluted share for the period ended Dec. 31, in line with analyst estimates.

That compared to $1.32 per share or $592 million a year earlier. Excluding an income tax recovery last year, adjusted profits were $581 million and $1.30 per share.

Revenues grew by 6.6 per cent to a record $2.53 billion, from $2.38 billion a year ago.

For the full year, CN earned $2.68 billion, or $6.12 per share, compared to $2.46 billion or $5.41 per share in 2011. Revenues grew to $9.92 billion, up from $9.03 billion a year earlier.

Adjusting for one time items, the full year profit increased 16 per cent to $5.61 per share or $2.46 billion, up from $4.84 per share or $2.2 billion in the prior year.

Analysts polled by Thomson Reuters expected adjusted earnings per share of $5.60 on revenue of $9.93 billion.

The Montreal-based North American railway (TSX:CNR) said its strong results and positive outlook support a higher quarterly cash dividend of 43 cents per common share.

Mongeau said the railroad capped a strong year by delivering “impressive” results from transporting the second highest quarterly volumes and largest full-year volumes in its history.

Crude oil was a new area of business in which CN outpaced the market and which presents a “huge opportunity” because of Canada’s position as an “energy powerhouse.”

“We have gas, we have oil and if we play our cards right and develop the proper transportation solutions — pipe and rail,” he told analysts.

“Open up export markets, open up supply chains that provide good netbacks — there’s a huge potential for transportation and infrastructure companies to help this booming oil and energy market for many, many years to come.”

Despite about $150 million in added pension expenses and a review of depreciation of assets, CN is aiming for high single-digit growth in 2013 diluted earnings per share over adjusted diluted earnings per share of $5.61 for 2012.

It also expects to generate $800 million to $900 million in free cash flow, including a normalized, higher level of cash taxes.

Chief financial officer Luc Jobin said the railway assumes North American industrial production will increase by about two per cent for the year, housing starts will be in the range of 950,000 units and U.S. auto sales will grow about five per cent to 15 million units.

“We continue to see a gradual, although modest improvement in the North American economy, combined with opportunities in domestic energy-related commodities, as well as other export resource markets,” he added.

Cameron Doerksen of National Bank Financial said the results were in line with expectations but the railway’s guidance was below the consensus forecast of analysts for 11 per cent growth.

“We note that CN typically provides relatively conservative guidance early in the year, but the company does face a $150-million pension expense headwind this year,” he wrote in a research note.

Coal led the segment revenue growth at 15 per cent, followed by petroleum and chemicals (13 per cent), grain and fertilizers (11 per cent), intermodal (seven per cent), and automotive (five per cent). Revenues declined for forest products (two per cent), and metals and minerals (one per cent).

Carloadings for the quarter rose three per cent to 1.27 million.

Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, increased by eight per cent over the year-earlier quarter.

CN’s industry-leading operating ratio improved 1.1 points to 63.6 per cent in the fourth quarter and 62.9 per cent for 2012. The ratio measures the percentage of revenue used to fund operations, so the lower the number the better.

Its free cash flow exceeded $1 billion after $700 million in voluntary pension plan contributions, down from $1.17 billion in 2011.

On the Toronto Stock Exchange, CN’s shares lost 89 cents at $93.87 in Tuesday afternoon trading.