22 July 2008
Canadian Pacific Pulls Back Profit Forecast
Canadian Pacific Railway locomotives work the Calgary yard
in this
May 2007 photo.
Canadian Pacific Railway Ltd. has pulled back its
full-year profit forecast after delivering a 40 percent decline in second-quarter earnings, hit by surging
fuel costs, flooding in the Midwest and a slackening U.S. economy.
Citing "substantially higher fuel assumptions and the deteriorating economic conditions," the Calgary-based
railway said Tuesday it now expects full-year earnings per share of between $4 and $4.20, down from its previous guidance
of $4.40 to $4.60.
Management predicts revenue will grow by six to eight percent over last year, up from previous guidance of four to six percent,
"due mostly to increased fuel recovery, offset somewhat by volume declines."
But operating expenses are expected to increase by 11 to 13 percent over 2007, revised from the earlier outlook of six to eight
percent, due mainly to soaring crude oil prices, which the company predicts to be in the US$140 per barrel range for the remainder of
2008.
The guidance reduction appears worse than expected, UBS analyst Fadi Chamoun wrote in a note to clients.
However, barring a further hit from the strong Canadian dollar or a new surge in diesel fuel costs, Chamoun sees CP at a positive
turning point, "with pricing growth accelerating, fuel recovery improving, comps getting easier, and (foreign exchange)/fuel
headwinds moderating going into 2009."
Canadian Pacific said it earned $155 million or $1 per share in the April-June period, down from $257 million or $1.64 per
share in the year-ago quarter.
Revenue was essentially unchanged at $1.22 billion, while the railway's operating ratio - operating costs as a proportion of revenue -
deteriorated to 79.4 percent, from 74.7 percent a year earlier.
"CP experienced a challenging second quarter with rising fuel prices, a significant lag in fuel recovery, economic softness, and
Midwest flooding," chief executive Fred Green told an analyst conference call Tuesday.
"These challenges overshadowed positive pricing gains and steady progress in operational fluidity."
Fuel costs were the railway's "biggest headwind" during the quarter, taking a 43-cent bite out of earnings per
share, said chief financial officer Mike Lambert.
In response, the railway is putting an "intense focus" on fuel conservation, added chief operating officer Kathryn McQuade.
"Some of the things we're doing to reduce our fuel consumption rate include a focus on train handling, train design... and
shutting down everything when it's not in use - not only locomotives, but all of our vehicles as well," she said.
Major flooding in the U.S. Midwest during the quarter shut down Canadian Pacific's main line between Minneapolis and Chicago for 20
days.
The flooding added between $3 million and $4 million in costs, as the railway kept shipments moving by rerouting traffic north of the
Great Lakes.
"With the outage behind us, we're back on our plan and I'm confident you will see continued improvement in our fluidity,"
McQuade said.
Because of a slowdown in the U.S. economy, Canadian Pacific saw its car loads for automotive and forest products fall by more than 10
percent, Lambert said.
Last year, Canadian Pacific agreed to acquire Dakota, Minnesota & Eastern Railroad Corp. for US$1.48 billion, which would help it
tap Midwest markets.
McQuade said the railway has "encountered no surprises" in the transaction and the U.S. Surface Transportation Board should
render its final decision by 30 Sep 2008. Canadian Pacific is expected to officially take control of DM&E a month later.
Shares in the rail carrier declined 2.3 percent, sliding $1.33 to $65.10 at midafternoon on the Toronto Stock
Exchange.
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