CPKC cautious heading into 2024
The uncertain macroeconomic environment, including when North American consumer sentiment will rebound and higher inflation might abate, has made Canadian Pacific Kansas City more cautious as it heads into 2024, according to comments during the railway’s third-quarter 2023 earnings call.
“I feel good about the synergies [resulting from the April merger of Canadian Pacific and Kansas City Southern] and the ramp-up as we look to next year. I do believe this pricing environment continues to be favorable as I look to next year,” CPKC President and CEO Keith Creel told investors during Wednesday’s call. But “it’s all about the macro in the base and how the intermodal business and some of these very heavy consumer-driven areas rebound or not. We’re just going to be very prudent about how we look at those volumes into 2024.”
Executives on the earnings call noted a number of challenges that CPKC (NYSE: CP) faced in the third quarter, which in turn dented the railway’s revenue and profit.
Besides “a softer demand environment,” according to Creel, CPKC also experienced volume setbacks from the strike at the Port of Vancouver. CPKC Chief Marketing Officer John Brooks noted that the strike at Vancouver as well as continued equipment failure at Canpotex’s Portland terminal led potash volumes to fall 28% in the third quarter.
“To say this has been a challenging supply chain year for our export potash volumes with Canpotex is a true understatement,” Brooks said.
Supply chain headwinds could persist into the fourth quarter and into 2024, executives continued.
Although the merger with Kansas City Southern has resulted in CPKC being “not as reliant on Canadian grain,” according to CPKC CFO Nadeem Velani, with the U.S. grain markets now making up more than half of the railway’s grain revenues, it has revised its forecast for Canadian grain downward.
And Brooks said while the railway anticipates opportunities to expand service out of the ports of Saint John in Atlantic Canada and Lázaro Cárdenas in Mexico, “we expect near-term headwinds as ocean carriers continue to blank sailings and rightsize their capacity in reaction to softer demand.”
Despite the macro uncertainties, CPKC expects to continue to move forward with its capital projects, including building a $75 million bridge at Laredo, Texas, expanding the yard at Bensenville, Illinois, and adding more sidings to the network, Brooks said.
However, CPKC could take a look at how it sources materials for these projects or finetune its long-term strategy for its locomotive fleet, Brooks said.
“We’re realists. We’re not immune to the macro challenges that we’re all facing with this economy,” Creel said in closing remarks. “But I can tell you, we’re focused on controlling what we can control. And that’s to operate safely always, efficiently and continue to sell to what is a very unique three-nation network that we’ve created that’s allowing us to grow uniquely at a macro level — be it share shift, be it customer solutions with new markets, be it take trucks off the road — in spite of the macroenvironment. And when the macro comes back and turns favorable, now it gets exciting.”
CPKC’s Q3 financial results
CPKC reported net profit of CA$780 million (US$565 million) in the third quarter of 2023, down 12% year over year (y/y) from CA$891 million. Diluted earnings per share in the third quarter was US84 cents, compared with 96 cents a year ago. (All figures except earnings per share are in Canadian dollars.)
Overall revenue totaled CA$3.3 billion in the third quarter, compared with CA$2.3 billion in the same period in 2022. The third-quarter 2023 revenue figure represents the financial results of a combined CP and Kansas City Southern against CP’s results alone in the third quarter of 2022. If calculating what a combined CP and KCS financial result would look like for the third quarter of 2022, revenue would be down 4% and total nearly CA$3.4 billion.
Operating expenses were CA$2.2 billion in the third quarter, compared with nearly CA$1.4 billion. That figure represents CP’s expenses for the third quarter of 2022. Combined operating expenses for the third quarter of 2023 would be CA$2.2 billion.
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