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Despite a strong Canadian dollar, five-day labor strike, and severe late fall and early winter weather, CN capped off 2009 with a “solid finish” in the fourth quarter, senior executives said during an earnings Webcast and teleconference held yesterday afternoon.

Diluted earnings per share rose 2 percent to $1.16 (although adjusted diluted EPS dropped 20 percent to 85 cents), net income increased 2 percent to $548 million and operating expenses fell 11 percent to $1.2 billion compared with fourth-quarter 2008 figures. Analysts had expected adjusted earnings of 86 cents, according to Thomson Reuters.

“This is a good performance in spite of the headwinds we faced,” said President and Chief Executive Officer Claude Mongeau, who led his first earnings conference after taking CN’s helm Jan. 1. “The economy appears to be on firm footing.”

However, revenue declined 14 percent to $1.8 billion and CN’s operating ratio climbed 2.6 points to 65.3. On an adjusted basis, revenue fell only 8 percent. Adjusted grain/fertilizers revenue rose 1 percent, while forest products revenue tumbled 18 percent, metals/minerals revenue declined 12 percent, intermodal revenue dropped 10 percent, petroleum/chemicals revenue decreased 8 percent, automotive revenue fell 4 percent and coal revenue dipped 2 percent.

Although fourth-quarter carloads were flat on a year-over-year basis at 1.08 million units, volume increased 4 percent compared with third-quarter traffic. Coal, grain/fertilizers, petroleum/chemicals and automotive traffic posted gains in the quarter.

“We turned the corner on volume,” said Mongeau.

So much so, CN senior execs are projecting high single-digit carload growth in 2010. Merchandise traffic will be boosted by an increase in North American industrial production, an improved housing market and a turnaround in automotive manufacturing; bulk traffic will be driven by an improved Canadian grain export program, record U.S. corn and soybean crops, a strong Canadian metallurgical coal market and more potash moves to the United States; and intermodal traffic will be propelled by sequential growth in international volumes at the Port of Vancouver, continued volume growth at the Port of Prince Rupert and progressive recovery in domestic markets, said Jean-Jacques Ruest, who recently was named executive vice president and chief marketing officer.

“What we see in general is a large recovery in our carload volume,” he said. “I like what I see looking at volumes the last three weeks.”

CN execs also like the Class I’s cost-control performance. Fourth-quarter labor and fringe benefit expenses increased 4 percent, but fuel costs plummeted 27 percent, casualty and other costs fell 25 percent, equipment rents dropped 16 percent and purchased service/material costs decreased 15 percent.

“We continued to see some very solid cost management in the fourth quarter,” said EVP and Chief Financial Officer Luc Jobin. “Our labor expense was impacted by a much higher stock-based compensation expense to the tune of about $50 million. Excluding this item, our labor expense was actually lower by about 3 percent as we reduced our workforce by about 7 percent in the quarter.”

For the full year, CN’s revenue dropped 13 percent to $7 billion, net income declined 2 percent to $1.7 billion, operating expenses dropped 11 percent to $4.7 billion and operating ratio increased 1.4 points to 67.3 compared with 2008 figures.

Despite a number of lingering headwinds, CN expects a gradual economic recovery and sequential growth this year as a number of markets appear to be improving, said Mongeau.

“Our focus, our foundation, is on our ability to deliver,” he said. “But we will also be focusing on new growth opportunities as we are hopeful this economy will gain traction.”

— Jeff Stagl