A surge in oil and grain shipping volume after a long winter helped Canadian Pacific Railway Ltd. overcome congestion on some U.S. routes. Even as it faced traffic snarls in the key rail hub of Chicago, the Calgary-based company beat expectations and posted a 48-per-cent increase in profit in the second quarter.
“Over all, record quarter, record metrics, so I’m very pleased, to say the least,” Hunter Harrison, CP’s chief executive officer said on a conference call with analysts Thursday.
“The team has made great strides in my two years at CP and they continue to demonstrate resiliency by delivering these results despite continued operational challenges in the U.S. Midwest after a devastating winter.”
Revenue at Canada’s second-largest railway surged 12 per cent to $1.68-billion, while net income for the April-June period rose to $371-million, or $2.11 a share. Analysts had expected a per-share profit of $2.09 and revenue of $1.65-billion.
CP and other large North American railways are expected to enjoy high traffic volumes this year, as they clear the winter backlog of goods and benefit from a large grain harvest. However, higher costs due to increased congestion on the rails and longer stays at freight terminals are hurdles. The Chicago hub, in particular, is a choke point for rail traffic.
CP said it is also facing traffic delays in its Minneapolis-St. Paul corridor, a stretch it shares with U.S. carrier BNSF.
Keith Creel, CP president and chief operating officer, said the company has been working with BNSF on speeding up traffic in the area, as well as moving trains to other routes. “They’ve got plans to expand capacity, it just takes a little time to do it,” he said.
Fadi Chamoun, a BMO Nesbitt Burns analyst, said the congestion appears to have hampered growth in shipments of crude oil, fertilizer and U.S. grain.
The company said its operating ratio, a closely watched measure of expenses versus sales, improved to 65.1 per cent. Analysts surveyed by Bloomberg expected an operating ratio of 64.8 per cent. A lower operating ratio is better.
Since taking the helm at CP after a proxy fight led by activist investor Bill Ackman, Mr. Harrison has driven operational changes at the railway. He has idled rolling stock and locomotives while retooling operating routes in a bid to improve efficiency and profits.
“In the longer range outlook we have low 60s [operating ratio] in our sights,” Mr. Harrison said, adding, “We’re not going to get obsessed with that and miss opportunities for growth on the other side.”
The company reported for the first time a breakdown of revenue by commodity, a move Desjardins analyst Benoit Poirier said will provide new insight into its key grain and crude businesses.
In the second quarter, CP said revenue from Canadian grain – its biggest business segment – rose by 32 per cent from the year-earlier period. U.S grain revenue rose 26 per cent.
Crude oil shipments rose by 18 per cent. Sales fell in fertilizers (6 per cent), forest products (2 per cent) and international intermodal shipping (6 per cent).
In May, CP sold the western part of its Dakota, Minnesota and Eastern Railroad for net proceeds of $236-million, and said it expects the deal to be finalized in the third quarter.
Walter Spracklin, an equity analyst with Royal Bank of Canada, said the quarterly results were largely in line with his expectations. CP missed Mr. Spracklin’s per-share profit target of $2.13, but beat his revenue outlook.
Citi Canada analyst Christian Wetherbee said CP’s operating profit of $587-million exceeded his expectations by $18-million.
“We view results as another solid beat on an operating basis, as CP topped our targets on both revenues and operating ratio,” Mr. Wetherbee said in a note to clients.
Canadian National Railway reports quarterly results next week.