Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Half of 2003 (H1 2003) ending June 30, 2003; Full Year 2002 comparative data included.
Business Overview: CN is the only railroad in North America to cross the continent east-west and north-south, serving ports on the Atlantic, Pacific, and Gulf coasts. The company operates approximately 17,539 route miles and employs roughly 22,431 people (as of June 30, 2003). It is a merchandise-dominant carrier, with automotive, metals, chemicals, and forest products comprising about 60% of freight revenues.
Key Financial Metrics
All financial figures are in Canadian dollars (CAD) unless otherwise noted.
| Metric | H1 2003 (Unaudited) | H1 2002 (Unaudited) | Full Year 2002 |
|---|---|---|---|
| Revenues | $2,959 million | $3,060 million | $6,110 million |
| Operating Income | $811 million | $896 million | $1,469 million |
| Net Income | $496 million | $510 million | $800 million |
| Adjusted Net Income | $448 million | $510 million | $1,052 million |
| Adjusted Diluted EPS | $2.29 | $2.54 | $5.22 |
| Free Cash Flow | $350 million | $356 million | $513 million |
| Adjusted Operating Ratio | 72.6% | 70.7% | 69.4% |
| Debt to Total Capitalization | 38.9% | 41.7% | 40.0% |
| Dividend per Share | $0.50 | $0.43 | $0.86 |
Material Changes vs. Prior Period
- Revenue Decline: H1 2003 revenues decreased 6% to $2,959 million compared to H1 2002. This was primarily driven by a 2% decline in forest products revenues and a significant drop in grain revenues due to record drought in western Canada. The strengthening of the Canadian dollar against the U.S. dollar also negatively impacted revenue translation.
- Operating Ratio Deterioration: The adjusted operating ratio increased to 72.6% in H1 2003 from 70.7% in H1 2002. Management attributed this to the revenue decline and the impact of the stronger Canadian dollar.
- Volume Trends: Despite the revenue decline, carloads increased slightly to 2,090,000 in H1 2003 from 2,058,000 in H1 2002. Gross ton miles remained relatively flat at 153,824 million.
- Share Repurchases: As of June 30, 2003, CN had repurchased 11.8 million common shares for a total cash outflow of $772 million under a program authorized in late 2002.
Guidance, Outlook, and Risks
- Management Outlook: Management remains confident in the business model, citing strong free cash flow generation and an industry-leading operating ratio. The company expects to spend in excess of $1 billion on net capital additions in 2003, focusing on network fluidity, safety, and customer satisfaction.
- Business Unit Outlook:
- Grain: Positioned for recovery as growing conditions improve, though 2002 drought impacts persist.
- Intermodal: Expected to continue growing through 2003, driven by market share gains from trucking and new traffic through the Port of Vancouver.
- Automotive: North American vehicle sales expected to slow in 2003, but growth anticipated from increased participation in rail distribution.
- Petroleum & Chemicals: Cautious outlook for the second half of 2003 due to high natural gas prices and weak chemical demand.
- Risks and Contingencies:
- Currency Risk: Approximately 55% of revenues are U.S. dollar-denominated. A one-cent appreciation of the Canadian dollar impacts EPS by 3-4 cents.
- Labor Relations: Most Canadian union agreements expire at the end of 2003. Negotiations are expected to commence in September 2003. While work action is legally restricted in 2003, resolution of negotiations could materially affect financial results.
- Commodity Prices: Volatility in fuel prices and natural gas prices impacts both operating costs and customer demand.
- Unusual Items: H1 2003 net income includes a $48 million after-tax cumulative effect of a change in accounting policy regarding removal costs accrued in accumulated depreciation.
Investor Verification Checklist
- Currency Impact: Verify the sensitivity of future earnings to fluctuations in the CAD/USD exchange rate, given the significant portion of U.S. dollar-denominated revenue.
- Grain Recovery: Monitor weather conditions in western Canada to assess the timeline for recovery in grain traffic volumes and revenues.
- Labor Negotiations: Track the progress of upcoming Canadian labor negotiations (starting September 2003) for potential wage increases or work stoppages.
- Capital Expenditures: Confirm the execution of the planned $1 billion+ capital budget for 2003, specifically regarding network upgrades and equipment modernization.
- Share Repurchase Completion: Verify the completion of the remaining 1.2 million shares under the issuer bid program.