This is a summary of the second quarter fiscal 2008 earnings call conducted by Canadian Pacific Railway Ltd. (CP) on July 22, 2008.
Management:
President and CEO: Fred Green
CFO: Mike Lambert
COO: Kathryn McQuade
Assistant VP Industrialization: Janet Weiss
Senior VP of Marketing and Sales: Marcella Szel
Senior VP Operations: Brock Winter
VP and Comptroller: Brian Grassby
Key Investor Issues:
- The company earned $US 154.2 million or $US 0.99 per share down from $US 255.5 million, or $US 1.63 per share during the same period last year.
- Revenue was flat at $1.22 billion Canadian ($1.21 billion).
- The railroad company slashed its full-year profit guidance to a range of $4 to $4.20 per share Canadian, down from $4.40 to $4.60 outlook issued earlier.
- Despite the declining traffic, price increases boosted freight revenue by 2%.
Second Quarter Highlights:
Canadian Pacific experienced a challenging second quarter with rising fuel prices significant fuel recovery, economic softness, and Midwest flooding. These challenges overshadowed positive pricing gains and steady progress in operational fluidity. The revenue impact of the economic slow down will not be recovered in the short-term.
FRA personal injury frequency and FRA train active frequency both improved by 47% from a year ago.
This quarter, saw train speed improved by 2% and active course online improved by 6%. However, terminal dwelling core miles per day both came in flat. Canadian Pacific Railway started off the quarter with a strong recovery from winter and improvements across the company’s entire matrix. But flooding in the US Midwest took the company’s main line out of operations between Minneapolis and Chicago for 20 days and seriously disrupted the company’s network.
Typically the company operates 20 trains per day in this quarter.
In response, Canadian Pacific Railway retooled its integrated operating plan, used detours of other railroads and reroute the traffic north of the Great Lakes to keep shipments moving. This line outage and detours increased the company’s active course on line by over 2,000 and negatively impacted the company’s terminal dwell in car miles per day. This added an additional $3 to $4 million in cost.
In the quarter, operating expense, excluding fuel and foreign exchange impact was up by 2% from a year ago.
This was largely driven by higher purchase services at a resource sizing and preparation for the expected volume growth in the fourth quarter.
Headcount was up versus 2007, largely due to the distortion created by last year’s strike of unionized track maintenance employees in Canada.
Canadian Pacific Railway is focused on improving productivity and supplementing its IOP initiatives with an intense focus on fuel conservation. Some of the things the company is doing to reduce fuel consumption rate include the focus on train handling, train design to ensure that the company is operating at optimal horse power per ton ratio and shutting down everything when it is not needed, not only locomotives but all of the company’s vehicles as well.
In addition to the company’s fuel conservation activities, Canadian Pacific Railway is implementing more productive boat train models. Such as a pilot, Canadian Pacific Railway will initiate to run a 140Q Car Potash train to reduce train start, a 15% improvement in productivity. The company is also adjusting its IOP weekly to renew train starts in line with volume changes.
In the quarter Canadian Pacific Railway crossed two key milestones.
The STB determined that public hearings were not required and the deadline for submissions of final brief had passed. Canadian Pacific Railway has encountered no surprises and the STB should render a final decision by September 30, 2008. If approved, the effective date for controls will be October 30, 2008. The company continued to work with members of the DM&E teams to plan for its smooth transition.
In the second quarter the company delivered 5% revenue growth before FX.
Price, including fuel, was the major driver, offset in weaker volume due to the soft North American economy. Looking at the second half of the year, commodity fundamentals remain solid based on global food and nutrient markets and continued strength in coal. Alberta’s energy oriented economy is also delivering consistent growth. However, with WTI at historic highs and a vulnerable North American Economy, the depths and duration of the current slow down remains a significant uncertainty.
Grain revenue with a loss closed to 6% due to two factors:
- First, a 4% decline in car loads compared with 2007.
- Second, a reduced regulated grain revenue entitlement based on the Canadian Transportation Agency segue 19th position.
The company is progressing with its legal challenge to this position. However, the second quarter reported grain revenues reflect the reduction of $2.59 a ton.
