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Canadian Pacific Eyes Macroeconomic Environment For Remainder Of 2019

FreightWaves

Canadian Pacific's (NYSE: CP) is willing to cut costs in the second half of 2019 should macroeconomic factors put pressure on demand for rail service, company executives said on July 16 during the railroad's second quarter earnings call.

"We continue to watch the demand environment closely, and should the macro environment change, we'll continue to adapt our costs base quickly," said CP chief financial officer Nadeem Velani.

CP's second quarter net income rose 66 percent amid a 13 percent increase in company revenue, the railroad reported on July 15. CP's financials are reported in Canadian dollars, except for earnings per share. The Canadian dollar equals US$0.77.

Second quarter net profit totaled C$724 million compared with C$436 million in the second quarter of 2018. Put another way, second quarter net profit was US$5.17 per diluted share in the second quarter of 2019, compared with US$3.04 per diluted share in the second quarter of 2018. 

Operating income in the second quarter rose 31 percent to C$822 million from C$627 million for the same period in 2018.

Second quarter revenue totaled C$1.98 billion, compared with C$1.75 billion in the second quarter of 2018. Freight revenues rose for all commodities except for the metals, minerals and consumer products category. 

Operating expenses were C$1.16 billion in the second quarter of 2019, compared with C$1.12 billion in the second quarter of 2018.

Meanwhile, CP's operating ratio was a record 58.4 percent in the second quarter of 2019, compared with 64.2 percent for the same quarter last year. 

Despite record second quarter revenues and record monthly volumes of potash and grain in the second quarter, CP was cautious about its expectations on whether it could maintain record-producing results in future quarters.

"Lots have been made about our tough comps in the back half of the year. But tough comps happen when a company performs," said CP chief executive officer Keith Creel, referring potential differences in financial and volume results in the second half of 2019 versus the second half of 2018.

Creel continued, "We're realists. We're going to stay humble, We're going to stay focused. We understand that the demand environment is not without its challenges, but you can rest assured this team is going to be focused, disciplined and committed and confident in delivering our guidance for the year."

Second quarter results and looking ahead

Company executives said its successes in the second quarter will support CP as the company engages in additional business in 2020 and 2021. Among the additional business is a new, three-year service contract effective January 1, 2020 with ocean carrier Yang Ming, in which CP will handle all of Yang Ming's traffic coming through the Port of Vancouver and the Global Container Terminal Deltaport. From there, the volumes will travel on CP's faster routes to inland destinations such as Chicago, Minneapolis and Toronto.

Other commodities that could see some upside in the second half of 2019 include Canadian grain and energy products, including continued shipments of crude-by-rail.

"While there's no doubt there's uncertainty in the macro environment and some softness in some of our lines of business, between the combination of our strong bulk franchise, coupled with new business that is moving now and new business that will be starting up in 2020, I have a high degree of confidence that we will continue to deliver the growth and outpace the industry," said CP marketing officer John Brooks.

Meanwhile, CP's operational metrics improved in the second quarter compared with the same period in 2018. Average terminal dwell time, which is the amount of time a train spends at a terminal, fell 4 percent to 6.4 hours, and average train speed rose 5 percent to 22.4 miles per hour.

Creel attributed his company's second quarter performance to the "strength" of precision scheduled railroading and CP's commitment to deliver business to customers and serve the broader economy.

"This quarter, we saw revenue growth across every line of business, strong operating metrics and our best-ever second quarter performance from a workload perspective, as measured by gross ton-miles," Creel said. 

He continued, "As has been proven time and again, our operating model can perform well in all economic conditions and we will remain disciplined in controlling our costs and doing what we said we would do. Our strategy for sustainable, profitable growth is working and we look forward to a strong finish to 2019."

 

Additions to CP's board of directors

In a separate announcement, CP said on July 15 that it was adding two members to its board of directors, Andrea Robertson and Ed R. Hamberger.

Robertson is president and chief executive officer of STARS Air Ambulance, and she has had a career in healthcare spanning nearly 30 years. 

Hamberger is a retired president of the Association of American Railroads, where he was the group's chief executive officer for over 20 years. 

"CP is crucial to the North American rail network, and it is a privilege to be part of this iconic railroad as it navigates the continued safety, technological and policy evolution of the industry," Hamberger said. 

Hamberger's appointment in particular could potentially be a nod to CP's potential plans for mergers and acquisitions, Susquehanna Financial Group analyst Bascome Majors said in a July 16 note on CP's second quarter results. Hamberger's experience and background carries weight in Washington, D.C., and it could be potentially supportive of mergers and acquisitions in the longer term, Majors said. 

Meanwhile, Creel said during the second quarter earnings call today that while it was not looking at acquiring trucking companies as its competitor Canadian National (NYSE: CNI) has done, CP is continuing to explore strategic partnerships.

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