(The Canadian Pacific Railway issued the following news release on October 30.)
— Freight volumes up 5% driven by grain, sulphur, fertilizers, intermodal
— Stronger Canadian dollar reduced revenues by $53 million, operating income by $17 million
— Crews trained, new locomotives and freight cars acquired for rebound in bulk commodities
— Employee productivity up 5% on workload basis
CALGARY — Canadian Pacific Railway (TSX/NYSE: CP) reported a 45-per-cent increase in net income to $95 million in the third quarter of 2003, compared with $65 million in the same period last year. Diluted earnings per share were $0.59 in the three-month period ending Sept. 30, 2003, compared with $0.41 in the third quarter of 2002.
Excluding foreign exchange losses on long-term debt, income was $99 million in the third quarter of 2003, compared with $108 million in the same period of 2002. Diluted earnings per share on this basis were $0.62, compared with $0.68.
Business strengthened progressively through the third quarter of 2003, generating higher freight volumes than in any previous July-to-September period. However, results were negatively affected by the conversion of U.S. dollar-denominated revenues and expenses to Canadian dollars. The 13-per-cent year-over-year appreciation in the Canadian dollar in third-quarter 2003 reduced revenue by $53 million and reduced expenses by $36 million. The net impact on operating income was $17 million, and on net income before foreign exchange on long-term debt the net impact was $7 million (or $0.05 per diluted share on this basis). CPR’s operating income was $209 million, down 7 per cent from third-quarter 2002, and its operating ratio was 76.9 per cent, compared with 75.6 per cent.
“The quarter played out as we expected it would, with steady growth in freight traffic as the period progressed and continued gains in our pricing initiatives,” Rob Ritchie, President and Chief Executive Officer of CPR, said. “We made a decision to accelerate our track work program in Western Canada in anticipation of a strong fourth quarter. We also brought on 35 additional high-capacity locomotives in September, four months ahead of schedule, and trained more crews for our western service areas. In addition, we will by mid-November have expanded our grain car fleet with about 2,800 cars and by year-end will have changed out a large part of our intermodal car fleet for 2,000 more productive and standardized double-stack cars.
“While the accelerated track work had a short-term negative impact on the fluidity of our network, it has expanded CPR’s freight capacity for a fourth-quarter rebound that is developing as expected. A larger grain crop has begun moving off the prairies, our intermodal business remains robust and we are ready for a recovery of coal volumes.”
Total revenues were $904 million in the third quarter of 2003, compared with $917 million in third-quarter 2002. Without the impact of foreign exchange, freight revenue would have grown by 5 per cent.
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Grain revenue increased $15 million, or 9 per cent ($26 million prior to the effects of foreign exchange), reflecting strong U.S. volumes and movement of a substantially larger Canadian crop
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Intermodal revenue increased $6 million, or 2 per cent ($16 million prior to the effects of foreign exchange), driven by solid West Coast imports
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Sulphur and fertilizer revenues were up $5 million, or 5 per cent ($9 million prior to the effects of foreign exchange), reflecting strong exports of sulphur and potash
Operating expenses were $696 million in the third quarter of 2003, up marginally over the same period of 2002, including the beneficial impact of foreign exchange.
Compensation and benefits expense remained flat. Job reductions related to productivity measures announced in June 2003 were partially offset by selective hiring to handle business in growth areas. In addition, lower variable incentive compensation costs and foreign exchange rates offset higher costs associated with inflation and pensions.
CPR’s fuel expense was also flat despite higher volumes of freight and a 15-per-cent increase in the price of crude in the third quarter, compared with the same period of 2002. The railway’s hedging program, improved fuel efficiency and foreign exchange offset volume-related consumption and the sharply higher crude prices.
“Our key productivity indicators moved in the right direction in the quarter,” Mr. Ritchie said. “There were improvements in safety, employee productivity, train weights and lengths, and fuel consumption rates. We also successfully implemented a pilot for our new freight yard management system. These accomplishments were made in the quarter even as we expanded track maintenance programs and successfully managed a seven-week strike by our traffic controllers.”
YEAR-TO-DATE RESULTS
For the first nine months of 2003, CPR’s net income declined to $226 million, from $370 million in the same period of 2002. Diluted earnings per share were $1.42, compared with $2.33.
Income in the first three quarters of 2003, excluding foreign exchange gains on long-term debt and non-recurring items, was $224 million, compared with $287 million in the same period last year. Non-recurring items included a benefit of $72 million in 2002 from an income tax settlement and a special charge of $150 million after tax in 2003, which recognizes the cost of productivity measures and a write-down to fair value of under-performing assets. On the same basis, diluted earnings per share were $1.40, compared with $1.81.
A 10-per-cent year-over-year appreciation in the Canadian dollar against the U.S. dollar during the first nine months of 2003 reduced revenue by $112 million, operating income by $32 million, and net income before foreign exchange on long-term debt by $12 million (or $0.08 per diluted share on this basis).
Operating income, excluding the special charge, was $517 million in the first nine months of 2003, a decline of 16 per cent from the same period of 2002. While the stronger Canadian dollar reduced revenues by $112 million, it had a favourable impact on expenses of $81 million. Persistently high fuel prices and severe winter operating conditions also contributed to the decline. Excluding the special charge, CPR’s operating ratio for the same period was 80.8 per cent, compared with 77.2 per cent.
Year to date, total revenues were $2,697 million, compared with $2,715 million in the first nine months of 2002. Excluding the effects of the stronger Canadian dollar, freight revenue grew in line with a 4-per-cent increase in volumes. Intermodal volumes were up 9 per cent, mainly due to growth in the international container market, and sulphur and fertilizer volumes increased 15 per cent. Grain volumes rose 3 per cent. Industrial products volumes were up 3 per cent. Forest products volumes were flat. Automotive volumes declined 11 per cent and coal volumes were down 3 per cent.
Operating expenses, excluding the special charge, were $2,180 million in the first nine months of 2003, compared with $2,097 million in the same period of 2002. High fuel prices, net of hedging gains, as well as increased volumes were responsible for an increase of $36 million, or 14 per cent, in fuel expense. Purchased service expense increased $32 million, or 8 per cent, due to sharply higher insurance premiums, a rise in derailment costs early in 2003, and the benefit of a $15-million insurance settlement in the first quarter of 2002. Depreciation and amortization expense increased $22 million, or 8 per cent, due to investments in new assets. A decline of $9 million, or 5 per cent, in equipment rent expense was due primarily to foreign exchange.
NON-RECURRING ITEMS AND FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT
In the third quarter of 2003, CPR had a foreign exchange loss on long-term debt of $4 million ($4 million after tax), compared with a loss of $47 million ($43 million after tax) in the third quarter of 2002.
Results for the first nine months of 2003 include a special charge of $228 million ($150 million after tax) related to eliminating 820 job positions, writing down to fair value under-performing assets, and restructuring CPR’s Northeastern U.S. network. The special charge is comprised of: a $105-million accrual ($69 million after tax) to eliminate 370 job positions in 2003, 330 in 2004, and 120 in 2005; a $116-million write-down ($75 million after tax) of CPR’s investment in its Northeastern U.S. operations to more accurately reflect the current fair value of the operations and the impact of restructuring; and a $7-million write-off ($6 million after tax) of non-beneficial assets as CPR absorbs its supply chain management subsidiary into the railway and ends its participation in an industry-wide procurement entity. In the same period of 2002, CPR had a $72-million income tax benefit stemming from a favourable tax court ruling related to prior years.
Foreign exchange gains on long-term debt in the first nine months of 2003 were $165 million ($152 million after tax). In the same period of 2002, CPR had foreign exchange gains on long-term debt of $7 million ($11 million after tax).
Note on Non-GAAP Earnings Measures: CPR’s results, excluding (or before) foreign exchange gains and losses on long-term debt and non-recurring items as described in this news release, are presented to provide the reader with information that is readily comparable to the prior period’s results. By excluding foreign exchange gains and losses on long-term debt, the impact of volatile short-term exchange rate fluctuations, which can only be realized when long-term debt matures or is settled, is largely eliminated. By also excluding non-recurring items, the results better reflect ongoing operations at CPR. It should be noted that operating results, excluding non-recurring items and foreign exchange gains and losses on long-term debt, have no standardized meanings and are not defined by Canadian generally accepted accounting principles and, therefore, may not be readily comparable to similar measures of other companies. A reconciliation of income, excluding non-recurring items and foreign exchange gains and losses on long-term debt, to net income as presented in the financial statements is detailed in the Summary of Rail Data.
This news release contains forward-looking information. Actual future results may differ materially. The risks, uncertainties and other factors that could influence actual results are described in CPR’s annual report and annual information form, and may be updated in CPR’s consolidated interim financial statements and interim Management’s Discussion and Analysis, which are filed with securities regulators from time to time. However, CPR undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events, or otherwise. Financial results in this news release are reported in Canadian dollars.
Canadian Pacific Railway, recognized internationally for its scheduled railway operations, is a transcontinental carrier operating in Canada and the U.S. Its 14,000-mile rail network serves the principal centers of Canada, from Montreal to Vancouver, and the U.S. Northeast and Midwest regions. CPR feeds directly into America’s heartland from the East and West coasts. Alliances with other carriers extend its market reach throughout the U.S. and into Mexico.