(CPR issued the following news release on April 24.)
CALGARY — Canadian Pacific Railway said today that despitethe ongoing impact of drought in the last grain-growing season, it was ableto increase its revenues to $879 million in first-quarter 2003, from $875million in the same period of 2002. However, higher fuel prices and a severe winter increased costs, leading to a decline in net income to $102 million in the first quarter of 2003, from $136 million in the same period of 2002. Diluted earnings per share were $0.64 in the three-month period ending March 31, 2003, compared with $0.86 in the first quarter of 2002.
Rob Ritchie, President and Chief Executive Officer of CPR, said: “We were successful at exceeding last year’s first-quarter revenues despite weather- related conditions that impeded the flow of traffic and despite a sizeable decline in grain volumes.
“Operating expenses proved a more difficult challenge, increasing 9 per cent. Even with CPR’s very strong hedge position, more than one third of the increase was due to fuel costs, largely driven by prices that reached record highs and remained high through the quarter. Prolonged periods of extreme cold and heavy snow buildup disrupted operations until mid-March and required additional resources to mitigate the effect on service levels. As a result, operating efficiencies and productivity declined temporarily,” Mr. Ritchie said.
“We made a decision to focus our efforts in the quarter on providing as high a level of service as possible for our customers during the severe weather conditions. While this increased CPR’s operating costs, protecting our customers’ interests as much as possible was the right decision. We saw the benefit in the quick rebound in business in the second half of March. These weather-related issues are behind us now, and we are taking action to reduce the quarter’s impact on full-year results.”
Excluding non-recurring items and foreign exchange gains and losses on long-term debt, income was $38 million in first-quarter 2003, compared with $68 million in the first quarter of 2002. Diluted earnings per share on this basis were $0.24 in first-quarter 2003, compared with $0.43 in the same period last year.
First-quarter 2003 operating income was $118 million, compared with $176 million in the first quarter of 2002. CPR’s operating ratio for the first quarter this year was 86.5 per cent, compared with 79.9 per cent in the first quarter last year.
Revenue was $879 million in the first three months of this year, compared with $875 million in the same period last year. Intermodal service continued to be the strongest growth area as revenues increased $19 million, or 9 per cent. The biggest gains were in the import-export segment of CPR’s intermodal business.
“This was the 6th consecutive first-quarter period of growth in CPR’s intermodal business,” Mr. Ritchie said. “The international container lines that diverted US shipments to the Port of Vancouver last year have rewarded us with their continued business. This is a validation of the competitive value of CPR’s Vancouver-Chicago corridor that can only lead to additional growth over time.”
Automotive revenues were up $5 million, or 6 per cent, reflecting new business in finished vehicles and continued strong consumer demand for models moved by CPR. Revenues from sulphur and fertilizers grew $5 million, or 5 per cent, as CPR expanded its share of the export potash market. Grain revenues were off $25 million, or 16 per cent, as CPR continued to move grain from the 2002 crop, which was just half the size of a normal Canadian grain crop. Revenues from forest products declined $5 million, or 6 per cent, due partly to weather-related service disruptions that affected car supply.
Operating expenses were $761 million in the first quarter of 2003, compared with $700 million in the same period of 2002. Purchased services expense was up $34 million, or 27 per cent, reflecting the benefit of a $15-million insurance settlement in first-quarter 2002, as well as sharply higher insurance premiums and a rise in derailment costs in the first quarter of 2003. In response to service disruptions caused by the severe winter conditions and derailments, CPR modified its operations to protect customer service levels during the quarter. This led to more train starts and higher expenses related to crews and maintenance.
Despite CPR’s 57-per-cent hedge position, fuel expense increased $22 million, or 26 per cent, as prices reached record highs and the severe winter caused consumption rates to rise. Depreciation and amortization expense increased $5 million, or 6 per cent, due to CPR’s investments in new assets. Compensation and benefits expense declined $4 million, or 1 per cent, due to favourable expense adjustments, which more than offset the impacts of inflation and higher pension expense. In reaction to the difficult first quarter, CPR announced in March that it will eliminate 300 positions in 2003 and implement other cost-reduction initiatives.
Excluding non-recurring items and foreign exchange gains and losses on long-term debt, CPR’s effective income tax rate remained virtually unchanged in first-quarter 2003, compared with the same period of 2002. An improvement of $8 million in other charges reflected foreign exchange gains realized in the quarter due to a strengthening Canadian dollar, compared with losses realized on a weakening dollar in the comparative period of 2002. The overall impact of foreign exchange on income, excluding foreign exchange gains and losses on long-term debt, is not significant. Interest expense decreased by $6 million in the quarter, largely a result of the early redemption of CPR’s 8.85% Debentures in June 2002.
NON-RECURRING ITEMS AND FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM
DEBT
Results for the first quarter of 2003 include a $71-million ($65 million after tax) foreign exchange gain on long-term debt. In the first quarter of 2002, CPR had a $4-million ($4 million after tax) foreign exchange loss on long-term debt and a $72-million income tax benefit stemming from a favourable tax court ruling related to prior years.
OUTLOOK
“CPR had a strong exit from the difficult first quarter as freight volumes rebounded,” Mr. Ritchie said. “We worked to regain the high levels of productivity and efficiency we had at the end of last year. We anticipate an improved Canadian grain crop but it will only begin to move off the prairies in the last quarter. Our most difficult challenge will be to fully recover the slippage in the first quarter while dealing with fuel prices that are unpredictable.”
CPR’s 14,000-mile network serves the principal centres of Canada, from Montreal to Vancouver, and the US Northeast and Midwest regions. CPR feeds directly into the Chicago hub from the East and West coasts. Alliances with other carriers extend CPR’s market reach beyond its own network and into the major business centres of the US and Mexico. For more information, visit CPR’s website at www.cpr.ca.