Keith E. Creel - Chief Operating Officer and Executive Vice President
Claude Mongeau - Chief Executive Officer, President, Director, Chairman of Donations & Sponsorships Committee and Member of Strategic Planning Committee
William J. Greene - Morgan Stanley, Research Division
Garrett L. Chase - Barclays Capital, Research Division
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
Canadian National Railway (CNI) Q4 2011 Earnings Call January 24, 2012 2:00 PM ET
Operator
[Operator Instructions] I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN's fourth quarter 2011 and full year 2011 financial results press release and analyst presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's website at www.cn.ca. [Operator Instructions]
Welcome to the CN Fourth Quarter 2011 and Full Year 2011 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Robert Noorigian, Vice President, Investor Relations. Ladies and gentlemen, Mr. Noorigian.
Robert Noorigian
All right. Thank you for joining us for CN's fourth quarter call. I'd like to remind you about the comments that have already been made regarding forward-looking statements.
With us today is Claude Mongeau, our President and Chief Executive Officer; Luc Jobin, Executive Vice President and Chief Financial Officer; Mr. Keith Creel, Executive Vice President and Chief Operating Officer; and JJ Ruest, Executive Vice President and Chief Marketing Officer.
As many of you already know, CN's Board of Directors yesterday decided to suspend certain payments and benefit compensation to Mr. Harrison. And we have filed proceedings to affirm CN's rights in the U.S. Federal Court in Illinois. We do not have any further comments on this matter, and we would ask that you would please focus on CN's outstanding fourth quarter financial results in your questions. In order to be fair to all the participants, please limit your questions to one each.
And with that, it's now my pleasure to introduce Mr. Claude Mongeau, CN's President and Chief Executive Officer.
Claude Mongeau
Thank you, Bob, and thank you for all of you to join us on this fourth quarter call. I'm very pleased with our performance in that last quarter of the year. I think we were helped with weather but we finished with record revenue performance. We have outstanding car loading volume and revenue performance, all the way to the end of the year, on December 31. So JJ will take you through that but overall, if I adjust for currency, our revenues are up 12%.
Clearly, if you look at it for the quarter but also for the full year, we were successful in outpacing the economy, but also in outpacing our peers. I think our car loadings for the full year were 4% versus an average for the industry that was up around 3.2%. So our game plan is working from a revenue standpoint. And we are bringing it to the bottom line. Solid financial results, our operating ratio at 64.7 reflects stellar productivity throughout the quarter, but we also had to face issues and headwind, and Luc will give you some details whether it's stock-based compensation or fuel lag, which we had to contend with.
EPS for the quarter, on a reported basis was $1.32, adjusted was $1.30. Either way, the EPS is up 20%, which is a strong performance on a year-over-year basis. And free cash flow the same, we finished the year with effectively just under $1.2 billion of free cash flow. And that included the benefit from a number of well-timed and very smart monetizations, which helped us deliver on that performance.
If I look at the full year, that theme of strong revenue performance was not just a fourth quarter phenomenon. It was really throughout the full year. We've had our record car loading performance, there's a range of commodities where we are back at peak level, and we brought that also to the revenue line with solid pricing and a very responsive fuel surcharge has helped us cover for increases in the price of diesel.
Strong financial performance backed up by very solid operational services. And as Keith will show you in a minute, in our operational performance, in our service performance, we are clearly trying to balance operational and service excellence, and it's helping us deliver those strong results. We are doing the trade-off in the right manner and it's helping us bringing additional income and additional business in support of our customers. It's really consistent with our strategy to be a true supply-chain enabler, to encourage collaboration and to find ways with our customers and transportation partners to go after efficiency, but also to help them win in the marketplace and help them grow their own business.
I was also very pleased that, just before Christmas actually, we had 2 collective agreements that have been, agreements in principle, that have been struck with the Teamsters, our locomotive engineers, and with our maintenance of way employees, the steel workers. And those 2 agreements are out for ratification, we should get the results pretty soon. But it was particularly pleasing to see that we were able to reach those collective agreements, actually before the term of the agreement, so we did not need any conciliation, any mediation. We struck a fair deal and we plan to build on those agreements to continue our push with our colleagues and railroaders on a go-forward basis.
So overall, I think 2011 was a solid year. We are delivering on our agenda and I will let the team give you some of the color and detail on that strong performance, starting with Keith on the operating results.
Keith E. Creel
Okay. Thanks, Claude. Your comments are certainly appreciated as you've stated and certainly with a clear understanding of our financial results demonstrates our railroad ran extremely well during the fourth quarter of 2011. I'm very proud of the men on this operating team who leveraged our precision railroading model with our ongoing innovation supply-chain collaboration efforts with our customers and our supply-chain partners. And these fourth quarter results establish a very solid proof point that, in fact, we can produce operational and service excellence in concert with each other. There's no doubt in the minds of my operating team that service and productivity gains are complementary when we jointly pursue them with our supply-chain partners in the spirit of innovation and teamwork. So the formula is working.
Let's take a few minutes to review how this rolled out during the fourth quarter. First, let's look at our operational excellence aside of our business approach. These are the same metrics we report on quarterly to provide a useful summary of our performance in the areas with the highest impact on our cost of service. Starting at the top-left corner is our GTMs per train mile or our trainload metric. The trainload continues to increase as we successfully absorb much of our revenue growth in our existing trains. With that said, we still have more opportunity in this area, not by making our biggest trains longer, but rather by increasing the size of the average train. We're leveraging our investments and distribute power alongside [indiscernible] opportunities or traffic level clients.
Loads were up 7% year-over-year in the fourth quarter as we moved this traffic through our terminals faster. We produced reduced terminal dwell and increased car velocity. So the operating metrics and performance are proving solid in the fourth quarter. Both train speed and locomotive productivity were essentially flat with our performance last year. I'll say this does not indicate a performance slippage, it's more of a reflection of our conscious decision that we took to take a small trade-off from productivity for the flexibility to reposition our assets. Specifically, we ramped up for the grain peak in the fall which we've seen on the revenue side as a benefit, and also on the coal portfolio by pushing coal to the export terminals to make sure that we constantly had inventory on hand for export loading. Of course, this required a few extra locomotives to make this happen. So overall, things on the operating side went very well in the fourth quarter under this increased volume that we've noted. And as a result, the stable operation that we have at CN, with our precision model, as well, gave myself and my senior team ample time to work with JJ and his team, and directly with our customers and partners, as we've raised the bar on service excellence.
So let's take a look at some of those results. Although this chart represents just 2 of the many customer service touch points we've converted and improved at CN, the results you see on order fulfillment and grain spotting reliability are 2 solid improvement examples our customers have experienced in 2011.
First on the Merchandise business side, car order fulfillment of our CN supply fleet improved 4 percentage points versus the same period last year. This was particularly positive as demand against these fleets increased 3% over the same period. A major contributor here is our car management excellence initiative, in which we've turned our car distributors into supply chain managers, greatly increased our communications with our customers, which has proven powerful combined with our overall fleet size and the renewal processes which our operating team, of course, delivers with solid sale execution. On the Bulk side, a key measure of our service success is the 7-point improvement in grain spotting reliability we've produced year-over-year. In the past, we measured our spotting performance to the week. We now measure spotting performance to the day. Our customers and our partners in the grain supply chain value this reliability, and they are rewarding us with higher demand. This approach allowed CN to supply 12% more cars year-over-year in the fourth quarter. In fact, the fourth quarter of 2011 was the best we've experienced in the past 10 years. On the Asset side of the equation, we also saw improvement. Car cycle time in the fourth quarter was reduced by 11%, which, of course, we supplied against demand for that additional business.
An additional meaningful proof point. We're happy to acknowledge several of the West Coast train terminals set unload records as well in the fourth quarter of 2011, which we feel strongly we helped enable through our scheduled grain plan and focus on end-to-end supply chain efficiency.
So I'll wrap my comments up by saying our strategy to balance operational and service excellence is delivering a high quality product while, at the same time, maintaining our industry-leading operation efficiency. I'm a firm believer that success breeds success. So no doubt, in 2012, we will continue this approach, both service and operation efficiency, pursuing that with tenacity as we continue weaving the CN way of doing business into our operating and corporate DNA.
Now over to JJ to speak to the growth that these efforts have supported.
