Both of Canada’s major railways announced second quarter results for the period ended June 30, and both produced great results, particularly CP. At CP, quarterly revenues rose 13 per cent, while CN’s revenues rose 11 per cent. However, while CN’s operating income rose 11 per cent, CP’s rose by 31 per cent.
At CN, operating expenses as a percentage of revenues declined slightly from 58.2 to 57.5 per cent. Cash flow from operations was up slightly to $1.72 billion from $1.68 billion, and “free” cash flow, the amount remaining from operating cash flow after subtracting net investments made during the quarter and dividends paid to investors, fell sharply from $640 million to $126 million. From Jan 1 to June 30, CN spent $864 million repurchasing its own shares (about $140 million less than in 2018), and paid $776 million in dividends. The total of these discretionary cash outflows ($1.64 billion) and the total spent on property additions and acquisitions ($2.08 billion) exceeded CN’s cash generated from operations, which caused the carrier to be a net borrower during the period. As of June 30, the company’s equity stood at $18.0 billion (as compared to $17.6 billion as at December 31, 2018). Total debt increased to $25.02 billion from $23.5 billion (Dec 31, 2018).
At CP, operating expenses as a percentage of revenues were reduced considerably, from 64.2 to 58.4 per cent, as a result of which net income received a strong boost, from $436 million during Q2 of 2018 to $724 million during the most recent quarter. Cash flow from operations, however, increased only modestly, from $711 million to $721 million, while “free” cash flow actually declined from $222 million to $175 million. From Jan 1 to June 30, CP spent $464 million repurchasing its own shares (a $95 million decrease from 2018 levels), and paid $182 million in dividends. The total of these discretionary cash outflows ($646 million) and the total spent on property additions and acquisitions ($674 million) exceeded CP’s cash generated from operations, which caused the carrier to be a net borrower during the period. As at June 30, the company’s equity increased to $7.2 billion (from $6.6 billion as at December 31, 2018), while total debt increased to $14.8 billion (from $14.6 billion).
For CN, results were specifically impacted by the inclusion of TransX in the intermodal group, freight rate increases, and higher volumes, particularly from petroleum and crude, and grains. Revenue tonne miles increased by 2 per cent, but freight revenues per revenue tonne mile (RTM) were up by 8 per cent. Revenues from the carriage of petroleum and chemicals were up by 26 per cent while intermodal revenues, CN’s most important revenue category, were up by 15 per cent. Intermodal also enjoyed the strongest growth of revenues per RTM, up an astonishing 19 per cent.
For CP, carriage of coal was the only commodity group with revenue growth in single digit territory. All others enjoyed increases in the range of 12-24 per cent. Total RTMs were up by 6 per cent during the quarter, and revenues per RTM were up by 7 per cent. Energy, chemicals and plastics RTMs rose by 9 per cent, while revenues per RTM rose an astounding 24 per cent. Potash enjoyed strong growth of RTMs (18 per cent), but suffered a slight decline in revenues per RTM (-1 per cent).
Both carriers have looked after their shareholders well during the past few years, with generous dividend payouts, and active share buyback programs. However, with more and more analysts cautioning about deteriorating economic conditions, one needs to wonder whether the two railways will curtail their share buyback programs further.