- Price including fuel offset by the CTA grain adjustments added $0.45.
- The DM&E contributed $0.04 which is in line with the guidance of $0.15 to $0.17 for the year.
- All other, including changes in the province of Manitoba tax rate and the impact of FX cost us a $0.01. Overall, Canadian Pacific Railway ended the quarter at $0.97.
Compensation and benefits were down 2% driven mostly by lower employee incentive program cost and lower pension expense.
- Squarely the single largest impact this quarter was fuel which was up 42%.
- Material costs were up 6% due to higher input cost most notably the cost of fuel for the company’s highway vehicles.
Equipment rent improved 12% due in part to higher recoveries on locomotive.
- Including productivity improvement, equipment rents is expected to remain in the $45 to $50 million range for the remainder of the year.
- Appreciation and amortization was up 6% which is in-line with expectations.
- Purchase, services, and other were up 12% due in most part to higher casualty cost.
Although the company’s safety performance was excellent, Canadian Pacific Railway did save a few costly insurance and had some true ups from incidents in previous quarters. The low end operating expenses were up to 10%.
Outlook:
On the top line, volumes in the quarter came in lower than planned. On expenses, fuel was the bigger headwind than the company anticipated. Not only did both of these items affect the quarterly result, they also affected the company’s outlook for the balance of the year.
Total revenues are expected to be up between 6% and 8%.
This includes a large lift from fuel revenues off set by a lower car load estimate, particularly in forest products and automotive.
Total operating expenses are expected to be up 11% to 13% due to the rising price of fuel.
This includes updating four-year-assumptions around crude oil to $US121 per barrel to a $US140 for the second half and crack margins to $US23 per barrel. That is $US27 for the second half and all-in cost to between $US3.80 and $US3.90 per gallon. With these headwinds the company will continue to focus on driving pricing gains and strengthening its fuel recovery and cost management program. That will not be enough to offset the challenges the company is facing.
The company is updating its guidance to reflect its higher fuel cost assumptions and the deteriorating North American economic conditions.
The company now expects its full year adjusted diluted earnings per share to be in a range of $4 to $4.20.
Looking at capital, the guidance range is unchanged although the company is continually evaluating and reprioritizing these plans.
With the lower earnings, free cash flow is now expected to be approximately $150 million for the year. All of these numbers are based on a full-year tax rate of between 26% and 27% excluding the impact of DM&E equity pick up.
Key questions and answers from the second quarter fiscal 2008 earnings call conducted by Canadian Pacific Railway Limited (CP) on July 22, 2008.
Cherylin Radbourne (Scotia Capital):
We have heard about how the Midwest flooding impacted CP zone operations. Could you just speak to how the DM&E and the IC&E were impacted by the flooding and whether they fully recovered their operations as yet?
Kathryn McQuade: DM&E did have some line outages particularly on the ice property. However they are back in service as of several weeks ago and they are still on plan for the financial targets that they set us at the beginning of the year.
Cherylin Radbourne (Scotia Capital):
A question with respect to the confidence that you expressed in terms of the bulk volumes in the second half of the year. Can you speak to what gives you confidence and visibility to those bulk volumes in the fourth quarter?
