Although 2019 was another record year for both of Canada’s railways, by the fourth quarter revenues increased only marginally (CP), or declined (CN).
For the fourth quarter CN’s revenues declined by 5.9 per cent, but for the year increased by 4.2 per cent to $14.9 billion. Despite steadily increasing revenues during the past few years, CN’s operating margins have been under pressure, declining from 44.1 per cent in 2016 to 40.2 per cent the following year, and to 37.5 per cent in 2019, the lowest since 2013. Cash flow from operations remained essentially identical to 2018’s record level of $5.9 billion. However, “free” cash flow, the amount remaining from operating cash flow after subtracting net capital expenditures and acquisitions made during the year and dividends paid to investors, decreased to $514 million, the lowest produced by CN since Canadian Sailings started maintaining financial performance data in 2010. For the year ended December 31, 2019, CN sustained record high capital expenditures and acquisition costs (TransX Group of Companies).
During the year, CN repurchased 14.3 million shares at a cash cost of $1.7 billion. Shareholders’ equity rose from $17.6 billion as at the end of 2018 to $18.0 billion as at the end of 2019. As at the end of 2018, 41.2 per cent of CN’s total assets were financed by equity, a slight deterioration over the year-end 2018 ratio of 42.8 per cent, and 2017’s year-end ratio of 44.3 per cent.
CP’s 2019 revenues increased 6.5 per cent to a record $7.8 billion during the year and, and its gross margin for the year rose to a record 40.1 per cent, demonstrating that the management has solidified its firm control over expense levels. Net income before taxes during the year rose from $2.6 to $3.1 billion. Cash flow from operations rose strongly from $2.7 billion in 2018 to $3.0 billion in 2019. However, after record capital expenditures, “free” cash flow, residual cash flow after capital expenditures and payment of dividends, declined from $891 million in 2018 to $783 million in 2019.
During the year, CP repurchased 3.8 million shares at a cash cost of $568 million. CP’s balance sheet as of December 31, 2018 shows that 31.6 per cent of its total assets were financed by equity, virtually unchanged from the year before period.
During the past six years, CN’s revenues grew at a compound annual rate of 6.8 per cent, while those of CP grew at 4.5 per cent. However, whereas CN’s gross profits grew at a rate of 7.4 per cent, CP’s accelerated at a rate of more than 20 per cent, albeit from a low base. 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. In 2019, CP’s gross margin of 40.1 per cent was well in excess of CN’s 37.5 per cent.
During 2019, CN did well in petroleum and chemicals, with revenues up 15 per cent to $3.1 billion, achieved on the back of a 6 per cent increase in revenue tonne miles, and an 8 per cent increase in rail freight revenue per revenue tonne mile. It also did well in intermodal, with a 9 per cent revenue increase to $3.8 billion. All other business segments remained flat, or suffered from modest declines. Revenue tonne miles decreased by 3 per cent overall. On the bright side, freight revenues per RTM were up by an average of 8 per cent, and up by 13 per cent for intermodal.
During the year, CN saw a general deterioration of cost and efficiency key performance indicators.
During the year, CP recorded strong revenue gains in its energy, chemicals and plastics business segment, achieved primarily through a 17 per cent increase in freight revenue per revenue tonne mile. Grains, forest products and automotive also did well. Although carloads were down by 7.8 per cent in the fourth quarter, they were up by more than 26 per cent for the year. By the end of 2019, the energy, chemicals and plastics segment had surpassed intermodal as CP’s most important business segment, responsible for 20.1 per cent of CP’s revenues, 19 per cent of its revenue tonne miles, and 12.9 per cent of its carloads.
Importantly, CP did well on most of its key performance indicators.
Given the rail blockades in the first quarter of 2020, deteriorating economic conditions resulting from the Covid-19 virus, and unprecedented plunge in oil prices, 2020 is bound to be a challenging year for both carriers.