(Canadian Pacific issued the following new release on July 29.)
CALGARY — Canadian Pacific Railway said strong growth in five of its seven business lines in the second quarter of 2004 pushed revenue past the $1-billion mark. The revenue increase helped drive net income up 146 per cent to $84 million in the quarter ended June 30. This compares with second-quarter 2003 net income of $34 million, which included a special charge for job reductions, an asset write-down and network restructuring. Diluted earnings per share (EPS) in second-quarter 2004 were up 141 per cent to $0.53, from $0.22.
Excluding foreign exchange gains and losses on long-term debt and the 2003 special charge, income increased 23 per cent to $104 million in the second quarter of 2004, compared with $84 million in second-quarter 2003. On the same basis, diluted EPS were $0.65, compared with $0.53.
Rob Ritchie, President and Chief Executive Officer of CPR, said: “I am pleased with our performance this quarter. We handled significantly higher volumes of freight and still maintained a fluid level of operations. There has been steady improvement in most of our productivity measures and the overall results we expected to see are materializing.”
CPR’s operating income in the second quarter of 2004 increased 19 per cent to $221 million, from $186 million in last year’s second quarter, excluding the special charge. Its operating ratio for the three-month period was 78 per cent, a 1.7 percentage-point improvement.
Total revenues in the second quarter of 2004 were $1,005 million, an increase of $91 million, or 10 per cent, over $914 million in the same period of 2003.
– Bulk commodities generated $55 million, or almost two-thirds of the
increase, reflecting continuing strong demand.
– Intermodal revenue increased a further $21 million, or 9 per cent in
the second quarter of 2004, on top of a record second-quarter 2003.
– Revenues from industrial products were up $13 million, or 14 per cent,
reflecting the North American economy’s strength.
Operating expenses were $784 million in the second quarter of 2004, compared with $728 million the same period last year, excluding the special charge.
– Compensation and benefits expense increased $37 million,
or 13 per cent. More than half the increase was due to a normal level
of performance-based incentive compensation included in second-quarter
2004 results, compared with the same period of 2003. There were also
higher temporary costs to train additional crews.
– Depreciation and amortization expense was up $12 million, or
13 per cent, reflecting CPR’s investment in additional assets.
– Purchased services expense increased $10 million, or 7 per cent.
More than half the increase was due to outsourcing CPR’s computing
infrastructure, partly offset by associated savings in other areas of
expense.
Translation of U.S. dollar-denominated revenues and expenses into the stronger Canadian dollar had only a minor impact on second-quarter 2004 earnings. Revenues and expenses were reduced by approximately $22 million and $18 million, respectively, and there was virtually no impact on net income excluding foreign exchange gains and losses on long-term debt and the special charge.
Continued efficiencies from scheduled operations and a favourable hedge position largely offset the effects of a sharp increase in fuel prices and fuel consumed to move significantly more freight. CPR also adopted an improved fuel surcharge formula that ties surcharges more closely to current prices.
Progress continued on CPR’s MaxStax initiative to increase efficiency and margins in the intermodal business. CPR has completed about 80 per cent of its program to convert its intermodal fleet to high-capacity double-stack freight cars and is on track to achieve its goal of a 16-per-cent productivity improvement on intermodal trains. CPR also continued its disciplined approach to managing capacity, introducing an allocation system for import container traffic to eliminate demand surges.
CPR began implementation of its restructuring initiative to improve the profitability of its northeastern U.S. network. An agreement was reached with Norfolk Southern Railway to exchange trackage rights, freight haulage and rail yard operations in key areas of the region. The agreement, announced June 30, will also provide CPR with a new route between Detroit and Chicago that will be the shortest, fastest lane between the two hubs.
FIRST-HALF RESULTS
Net income was $107 million in the first six months of 2004, compared with $136 million in the same period of 2003. The decline was due to a loss on foreign exchange on long-term debt in the first half of 2004, compared with the first half of 2003 when CPR posted foreign exchange gains on long-term debt, partly offset by the 2003 special charge. Diluted EPS were $0.67 in the first half of 2004, compared with $0.86 in the year-earlier period.
Income, excluding the foreign exchange gains and losses on long-term debt and special charge, was $141 million in the first half of 2004, compared with $121 million in the same period of 2003. On the same basis, diluted EPS were $0.89 in the first six months of 2004, compared with $0.76.
Operating income was up 11 per cent to $337 million in the first half of 2004, compared with $304 million in first-half 2003, excluding the special charge. CPR’s operating ratio improved by almost a full percentage point to 82.2 per cent.
In the first six months of 2004, total revenues were $1,891 million, an increase of $98 million, and expenses, excluding the special charge, were $1,555 million, an increase of $66 million over the same period of 2003.
The translation impact of the stronger Canadian dollar reduced first-half 2004 revenues and expenses by approximately $81 million and $64 million, respectively. Excluding foreign exchange gains and losses on long-term debt and the special charge, income was reduced by approximately $4 million.
2004 OUTLOOK
“We expect freight volumes to remain robust for the remainder of 2004. To help handle the workload, we added 41 fuel-efficient, high-performance locomotives in the second quarter, and will bring another 34 on line in the fourth quarter,” Mr. Ritchie said. “We will continue to pursue value pricing opportunities created by the favourable conditions in our markets.”
He said CPR still expects diluted EPS growth, excluding foreign exchange gains and losses on long-term debt and other specified items, of between 5 per cent and 10 per cent in 2004 over restated and adjusted EPS of $2.07 in 2003, despite significantly higher fuel prices. This is based on a near-normal grain crop in Canada and includes the impact of the change in tax rates in the province of Ontario, oil prices averaging US$37 per barrel and an average exchange rate of $1.34 per U.S. dollar (US$0.75).
RESTATEMENT OF COMPARATIVE FIGURES FOR 2003
Comparative figures for prior periods have been restated for retroactively applied accounting changes. The changes relate to the implementation of new accounting rules under Canadian Generally Accepted Accounting Principles (GAAP) for asset retirement obligations introduced in the first quarter of 2004 and for the expensing of stock options introduced in the fourth quarter of 2003. The combined impact of the changes is an increase of $5 million in net income, or $0.04 in basic EPS previously reported for the second quarter of 2003. Notes 2, 7 and 10 to the financial statements further describe the impact of the accounting changes.
In the second quarter of 2004, CPR had a foreign exchange loss on long- term debt of $20 million ($20 million after tax), compared with a gain of $98 million ($92 million after tax) in the same period of 2003. There were no other specified items in the second quarter of 2004. However, other specified items in the second quarter of 2003 totaled $215 million ($141 million after tax) for a program to eliminate 820 job positions over the 2003-2005 period, a write-down to fair value of under-performing assets, and the restructuring of CPR’s northeastern U.S. network.
In the first half of 2004, CPR had a foreign exchange loss on long-term debt of $33 million ($34 million after tax), compared with a gain of $169 million ($156 million after tax) in the same period of 2003. There were no other specified items in the first half of 2004. Other specified items in the first half of 2003 were comprised solely of the special charge totaling $215 million ($141 million after tax).