IN THE NEWS / INDUSTRY CANADA: Preliminary Financial statistics for enterprises -- Third quarter 1998 (preliminary)
Fri, 20 Nov 1998 16:43 EST
NOV 20, 1998, M2 Communications - Operating profits of businesses increased 3.7% in the third quarter following two quarters of decline. Despite the improvement, profits remained 9.1% below year earlier levels. The electronic equipment and computers industry and the telecommunication carriers led the profit gains. As well, an upbeat natural gas sector elevated operating profits in the petroleum and natural gas industry. Notable profit declines were posted in transportation services and motor vehicles, parts and accessories. Overall, exactly one half of the 30 industry groups boosted third quarter profits, while the other half reported profit declines.
Non-financial sector bounces back
Following declines of 6.0% and 8.7% in the first two quarters of 1998, operating profits of non-financial businesses rebounded 5.1% in the third quarter. At $19.1 billion, non-financial profits were still 7.5% below the peak profit levels achieved in the third quarter of 1997.
Operating profits in the electronic equipment and computers industry surged 80.6% to $1.5 billion, continuing the volatile pattern of quarterly profits of the past several years. Operating revenue advanced a noteworthy 7.8% to a record $17.8 billion. While a portion of the recent gains resulted from restructuring within the industry, overall the sector has registered significant growth -- spurred by expanding demand for wireless communication products and high speed networks.
The telecommunication carriers doubled their third quarter profits to $1.2 billion. This returned profits to more typical quarterly levels, following last quarter's downward spike arising from one-time reorganization charges.
Notes to readers
These quarterly financial statistics cover the domestic activities of non-government corporations. Operating profits exclude expense deductions for income taxes, interest on borrowing and asset writeoffs. Capital gains and investment income are excluded from the operating profits of non-financial industries, but are included in the operating profits of financial industries.
Users of the quarterly financial statistics should note that commencing with the first quarter of 1999, significant changes will be implemented to the survey, which will affect the comparability and the historical continuity of the financial statistics.
Users should be advised that the statistics will be collected and compiled on the new North American Industrial Classification (NAICS) basis to provide for greater international comparability of economic data, and will differ markedly from the Standard Industrial Classification for Companies and Enterprises (SIC-C) now in use.
In addition, changes will be made to certain methodological aspects of the survey, including the transition to a different survey frame, the reselection of a new sample, and modification to the stratification, imputation, estimation and the seasonal adjustment methods. While these changes will improve the quality and reliability of the statistics, they will nonetheless affect the user's ability to relate and compare the data to that currently produced on the SIC-C basis under existing methodology. Other key aspects of the survey, including the financial variables collected and available should remain essentially unchanged.
Petroleum and natural gas industry profits increased to $2.6 billion in the third quarter from $2.1 billion in the second quarter. Despite the increase, profits remained 23.2% below the third quarter of 1997 levels, and were 40.0% below the record $4.3 billion in profits earned in the final quarter of 1996.
Resource sector profits were curtailed by crude oil prices which were down over 20% in the quarter, despite some improvement in September. A worldwide oversupply of crude oil led to production cutbacks in some oil producing nations, but low Asian demand and the generally weakening global economy have slowed consumption and sustained the glut in world oil reserves. Exports of crude oil, principally to the United States, continued their upward trend in the quarter. Exports comprise almost 60% of Canadian crude oil production and U.S. demand for Canadian crude has been strong for several quarters.
Prices for refined petroleum products were down 18.6% in September from a year earlier. Profit margins were squeezed in refining and marketing operations due to excess supply and deteriorating prices. While domestic sales of refined petroleum products did increase in the quarter, lower selling prices, particularily for motor gasoline, tempered the profit gains. Upbeat results from the natural gas sector softened the effects of the low oil prices in the energy sector. Natural gas prices have registered double digit growth from last year in response to robust demand from the United States. With new natural gas pipeline facilities coming on stream, the lucrative U.S. market will become more accessible for Canadian producers and should sustain natural gas prices. However, energy sector cash flows are reeling from the effects of the low oil prices, resulting in the lowest oil and natural gas exploration and drilling levels in years. As a result, many natural gas producers have expressed concerns about potential supply shortages in response to the expanding natural gas demand.
Third quarter profits in the wood and paper industry recovered 29.7% to $1.4 billion, the highest profits earned in three years. Domestic demand for lumber products picked up in the quarter, buoyed by the end to labour disputes in the Ontario construction industry. U.S. demand for Canadian lumber was strong, but softwood exports were limited by the Canada-U.S. Softwood Lumber Agreement. Housing starts in both Canada and the United States showed some resilience early in the quarter, as U.S. housing starts hit an 11 year high in July. However, by quarter end both domestic and U.S. starts were faltering.
The continuing weakness in Japanese housing markets has forced many Canadian producers to implement restructuring and cost-cutting as a priority. As reported in the July Raw Materials Price Index, low-cost producers in Scandinavia, Europe and South America are making it difficult for Canadian lumber producers to bounce back to higher prices. Lumber prices did edge up in the quarter but remained at historically low levels.
Profits in the non-ferrous metals industry recovered 29.1% to $0.4 billion in the third quarter following two quarters of decline. Despite the gain, profits were still 36.0% below year earlier levels. Third quarter profit gains were largely the result of major cost-cutting initiatives, as selling prices for most non-ferrous metals remained depressed. Despite signs of strengthening late in the quarter, zinc, copper, nickel and aluminum prices were all well below 1997 levels. Continuing soft demand from Asian markets and the moderating growth in the U.S. economy have lessened demand and prices for most non-ferrous metals. As well, increased Russian nickel exports onto the world market has further exacerbated the woes of Canadian producers. Gold prices remained stagnant, but several producers dampened the price effect by entering into hedging contracts that reaped selling prices well ahead of market levels.
Operating profits in the transportation services industry tumbled 47.1% to $0.4 billion, the third straight quarter of decline. The airline sector suffered from weakening worldwide passenger and cargo markets. In addition, the weak Canadian dollar has further eroded profits because significant expenses are incurred in U.S. currency. A September strike by Air Canada pilots, coupled with extensive price discounting in the airline sector, compounded the third quarter profit slide. Rail, trucking and other modes of transportation have also been pinched by the softening North American economies.
Motor vehicles, parts and accessories industry profits fell 15.9% to $1.5 billion. This decline came on the heels of a 32.5% second quarter profit fall and reduced profits to their lowest level in almost two years. Domestic and export sales of motor vehicles and parts suffered early in the quarter in the wake of the auto sector strike in the United States. The third quarter ended with robust sales activity, however, as consumers took advantage of generous finance and leasing incentive programs.
Profits unchanged in the financial sector Operating profits for the eight financial industries in total remained unchanged at $6.5 billion, following significant declines in the first two quarters of 1998.
Life insurers saw their profits dip to $0.4 billion from $0.7 billion in the second quarter. Consumer and business financing corporations took advantage of higher interest revenue to boost operating profits 21.7% to $1.1 billion. Profits at the chartered banks edged up 1.7% to $4.1 billion. Lower interest expenses and provisions for future loan losses were only partially offset by a decline in operating revenue.
Profitability ratios up marginally (all industries) The annualized return on shareholders' equity edged up to 7.4% in the third quarter from 7.3% in the previous quarter. After-tax profits increased 5.6% to $11.8 billion, while shareholders' equity expanded 3.6% to $636.9 billion. The operating profit margin reversed two quarters of decline and strengthened to 6.8% in the third quarter from 6.6% in the second quarter. Profit margins peaked at 7.6% in the final quarter of 1997.
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