(Canadian Pacific Railway issued the following on July 22.)
CALGARY, Alberta — Canadian Pacific Railway Limited (TSX/NYSE: CP) announced its second-quarter results today. Net income in the second quarter was $155 million, a decrease of 40 percent from $257 million in 2007, and diluted earnings per share was $1.00, a decrease from $1.64 in the second quarter of 2007.
* Q2 2008 Earnings Release and Financial Reports
SUMMARY OF SECOND-QUARTER 2008 COMPARED WITH SECOND-QUARTER 2007
* Total revenues were essentially flat at $1.22 billion
* Income before foreign exchange gains and losses on long-term debt and other specified items decreased to $150 million from $175 million
* Adjusted diluted earnings per share decreased to $0.97 from $1.12
* Operating ratio was 79.4 per cent compared with 74.7 per cent
“This was a tough quarter with the unprecedented rise in fuel prices, the North American economic downturn, and prolonged flooding on our US mainline,” said Fred Green, President and CEO. “Combined, these had a significant impact on CP’s earnings.”
“We see the current economic conditions continuing, and CP is taking aggressive steps which should position us well for 2009,” continued Mr. Green. “I have accelerated a rigorous process to improve our productivity, efficiency, and yield.”
Freight revenues increased almost two per cent despite a decrease in traffic. This was mainly due to pricing, inclusive of fuel recoveries. CP experienced strong growth in industrial and consumer products of 17 per cent, intermodal of nine per cent and coal of six per cent. This was offset by decreases in forest products of 21 per cent, grain of nine per cent, sulphur and fertilizers of five per cent, and automotive of two per cent.
Operating expenses increased seven per cent with fuel up 34 per cent and purchased services and other, depreciation and amortization and materials up from two to nine per cent. This was offset by a decrease in equipment rents of 20 per cent and compensation and benefits of four per cent.
SUMMARY OF FIRST-HALF 2008 COMPARED WITH FIRST-HALF 2007
Net income for the first half of 2008 was $246 million compared with $385 million in 2007, a decrease of 36 per cent. Diluted earnings per share was $1.59 down from $2.46.
Freight revenues increased two per cent to $2.3 billion and operating expenses were up seven per cent to $1.9 billion.
EXCLUDING FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER SPECIFIED ITEMS
* Income decreased to $267 million from $297 million.
* Diluted earnings per share were $1.72 down from $1.90.
* Operating ratio deteriorated 400 basis points to 81.0 per cent from 77.0 per cent.
2008 OUTLOOK
“We continue to focus on driving positive pricing gains and strengthening our fuel recovery and cost management programs,” said Mike Lambert, Chief Financial Officer. “However, these will not be enough to offset the challenges we are facing with the higher price of fuel and the slowing North American economy. We are updating our guidance to reflect our substantially higher fuel assumptions and the deteriorating economic conditions. We now expect our full-year adjusted diluted earnings per share to be in the range of $4.00 to $4.20, down from our previous guidance of $4.40 to $4.60.”
The 2008 estimate assumes an average currency exchange rate of the U.S. dollar at par with the Canadian dollar. Crude oil prices are expected to average US $121 per barrel for the year (versus the previous assumption of US $98 per barrel) with the second half averaging roughly US $140 per barrel. Crack spreads are expected to average US $23 per barrel for the year (versus the previous assumption of US $20 per barrel) with the second half averaging US $27 per barrel. The estimated average all-in fuel price is expected to be between US $3.80 and $3.90 per U.S. gallon for the year.
CP strives to mitigate the impact of any changes in WTI and crack margins through fuel recovery programs. However, these programs do not completely offset the changes in expense caused by changes in WTI and crack margins.
The approximate net annual impact on EPS of changes in WTI and crack margins given CP’s current portfolio of freight contracts is as follows:
* A change in WTI of US $2 per barrel impacts EPS by $0.01
* A change in crack margins of US $1 per barrel impacts EPS by $0.02
These sensitivities do not consider the impact of the lagged implementation of changes in fuel surcharges from the timing of actual expenses incurred. This lag is due to regulatory notice requirements for rail price adjustments.
CP expects to grow total revenue by six to eight per cent in 2008, up from previous guidance of four to six per cent due mostly to increased fuel recovery, offset somewhat by volume declines. Total operating expenses are expected to increase by 11 to 13 per cent, revised from the previous guidance of six to eight per cent due principally to higher fuel cost.
CP expects its normalized tax rate to be between 26 per cent and 27 per cent, excluding the impact of the Dakota Minnesota & Eastern Railroad (DM&E) equity pick-up, a change from the previous outlook of 27 per cent to 29 per cent as a result of decreasing Canadian provincial tax rates.
CP expects free cash to be approximately $150 million, adjusted downwards from the previous outlook of approximately $200 million in 2008, due to lower projected earnings.
The 2008 outlook includes the projected after tax earnings of the DM&E on an equity accounting basis for the full year.
FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER SPECIFIED ITEMS
CP had a foreign exchange gain on long-term debt of $7 million ($5 million after tax) in the second quarter of 2008, compared with a foreign exchange gain on long-term debt of $89 million ($65 million after tax) in the second quarter of 2007. There were no other specified items in the second quarter of 2008. There was a future income tax benefit of $17 million in the second quarter of 2007 resulting from a reduction in the Canadian federal income tax rate.
For the first six months of 2008, CP had a foreign exchange loss on long-term debt of $10 million ($6 million after tax) compared with a foreign exchange gain of $97 million ($71 million after tax) in the first half of 2007.
At June 30, 2008 CP held investments in Canadian Non-Bank Asset Backed Commercial Paper (ABCP) with an original cost of approximately $144 million. In the third-quarter of 2007, CP adjusted the estimated fair value of the investment and took a charge of $21 million ($15 million after tax) and classified the investments as long-term investments. In the first quarter of 2008, in recognition of current market conditions impacting these investments, CP further adjusted the estimated fair value of the investments and took an additional charge of $21 million ($15 million after tax). The estimated fair value of the investments as at June 30, 2008 was unchanged from the estimated fair value at March 31, 2008.
Continuing uncertainties regarding the value of the assets which underlie the ABCP, the amount and timing of cash flows and the outcome of the restructuring process could give rise to a material change in the value of the Company’s investments in ABCP which would impact the Company’s near-term earnings.
In the first quarter of 2008, the company recorded a $21 million ($15 million after tax) impairment of the company’s investment in ABCP. Other than the future income tax benefit of $17 million mentioned above, there were no additional other specified items in the first half of 2007.