2018 was a great year for both of Canada’s railways.
For the fourth quarter CN’s revenues were up 16 per cent, and for the year revenues were up by 9.9 per cent to a record $14.3 billion. Operating income rose during the fourth quarter to $1.45 billion from $1.3 billion, resulting in a gross margin of 38.8 per cent. For the year, CN’s operating income rose to $5.5 billion from $5.25 billion, resulting in a gross margin of 38.4 per cent. Net income before taxes for the year rose 11.6 per cent to a record $5.7 billion. Cash flow from operations increased by 7.3 per cent to $5.9 billion. “Free” cash flow, the amount remaining from operating cash flow after subtracting net capital expenditures made during the year and dividends paid to investors, decreased from $1.6 billion to $1.25 billion.
During the year, CN repurchased 19 million shares at a cash cost of $2.0 billion. Shareholders’ equity rose from $16.66 billion as at the end of 2017 to $17.64 billion as at the end of 2018. As at the end of 2018, 42.8 per cent of CN’s total assets were financed by equity, a slight deterioration over the year-end 2017 ratio of 44.3 per cent.
CP’s revenues increased a record 12 per cent to $7.3 billion during the year and, after having revised its 2017 gross margins as a result of a change in accounting rules, its gross margin for the year rose to a record 38.7 per cent, demonstrating that the management has gained firm control over expense levels. Net income before taxes during the year rose from $2.5 to $2.6 billion. Cash flow from operations rose strongly from $2.2 billion in 2017 to $2.7 billion in 2018. “Free” cash flow, residual cash flow after capital expenditures and payment of dividends, rose from $577 million in 2017 to $891 million in 2018.
During the year, CP repurchased 4.7 million shares at a cash cost of just over $1.1 billion. CP’s balance sheet as of December 31, 2018 shows that 68.8 per cent of its total assets were been financed by short and long term debt, up slightly from the year before period, but down considerably from 2016’s 75.9 per cent.
During the past six years, CN’s revenues grew at a compound annual rate of 6.4 per cent, while those of CP grew at 4.8 per cent. However, whereas CN’s gross profits grew at a rate of 8.2 per cent, CP’s accelerated at a rate of more than 55 per cent, albeit from a low base. In addition, CP’s rate of cash flow generation grew by a robust 12.5 per cent annually during those years. The essential difference between the two carriers was that whereas CN had a lengthy record of tight cost control, CP’s numbers did not really start to improve until 2014. Starting in 2013, CP slashed operating expenses with a vengeance and actually produced a gross margin in 2018 of 38.7 per cent, which exceeded CN’s 38.4 per cent for the first time in its history.
During the fourth quarter, CN did well in all of its business units. However, the truly bright spot in 2018 was petroleum and chemicals, with revenues up 50 per cent to $815 million, achieved solely on the back of a 50 per cent increase in revenue tonne miles, since rail freight revenue per RTM actually declined slightly. Revenue tonne miles decreased for metals and minerals (11 per cent) and automotive (11 per cent), but increased by 12 per cent overall during the quarter. Total carloads increased by 4 per cent during the year, as compared to an increase of 10 per cent the year before. For 2019, CN anticipates mid-single digit volume growth.
At CN, crude volumes rose to 232,000 barrels/day in the fourth quarter, up from 129,000 in Q3. Volumes averaged 133,000 barrels/day for the full year 2018, still quite short of the 2014 record of 209,000 barrels/day. Negotiations continue with the government of Alberta to start shipping more crude-by-rail by the end of 2019 or early 2020.
CN continued to make progress with respect to efficiency measures, such as labour productivity, average train weight, train length, and train speed, average terminal dwell time and fuel efficiency.
During the fourth quarter, CP recorded gains in all of its business segments, and carried record volumes of Canadian grain, potash and domestic intermodal. Energy, chemicals and plastics showed a 49 per cent gain in revenues, fueled by a 16 per cent growth in freight rates and a 29 per cent increase in category revenue tonne miles. Carloads in the category were up by more than 16 per cent. Although intermodal is still by far CP’s most important segment (37 per cent of carloads and 20.6 per cent of revenues), energy, chemicals and plastics are rapidly catching up, and may well become CP’s most important revenue earners by the end of 2019. In October of 2018, Keith Creel, CP’s CEO said CP might match or exceed its record 2014 shipments of 110,000 carloads of crude oil in 2019, the equivalent of about 210,000 barrels per day. Actually, CP handled about 25,000 carloads of crude in the fourth quarter, and is well on its way to shattering its 2014 record in 2019.
Importantly, CP did well on all the usual efficiency measures, such as labour productivity, average train weight, train length, and train speed, average terminal dwell time and fuel efficiency. The management guided for mid single-digit volume growth in 2019.