Canadian Pacific Railway Ltd. is standing by aggressive forecasts to boost profit and revenue in 2014, a year that began with a harsh winter that slowed rail traffic, hammered earnings expectations and ushered in a new era of railway regulation.
The Calgary-based railway in the first quarter posted a 16-per-cent rise in net income and a 1-per-cent increase in revenue, beating expectations that had been reduced as wintry weather snarled much of North America’s transportation networks.
CP, which operates a railroad between Montreal and the West Coast in addition to the northern and northeastern United States, said the coldest winter in years reduced its quarterly profit by up to 30 cents a share, drove up expenses by $25-million and cost it $75-million in revenue.
But in a conference call with analysts, chief executive officer Hunter Harrison said he was “comfortable” the company can meet its 2014 outlook for revenue growth of 6- to 7-per-cent with a 30-per-cent rise in earnings and an operating ratio of at least 65 per cent.
“So far so good,” Mr. Harrison said. “I’ve been doing this a long time and I haven’t missed too many numbers.”
The company said high grain volumes, and pent-up demand from the lumber and auto industries as rail congestion clears, will help it boost revenues as operational streamlining keeps expenses down. And growth in its domestic intermodal business should help offset lost contracts in its international shipping line.
CP also expects better margins from its growing crude-by-rail business, even after the construction of major pipelines that are planned in North America.
Headwinds for the coming year include continued traffic delays in the hub of Chicago, government-imposed orders to move minimum amounts of grain, and expanded “interswitching” rights of customers to ship with another railway at regulated rates that are not profitable.
The federal government has also moved up the review of the Canada Transportation Act to later this year, a process that could impose new regulations on Canada’s two major railways.
On Tuesday, CP posted a quarterly profit of $254-million or $1.44 a share, beating expectations of $1.41, even as freight revenue declined for a handful of its key businesses. Analysts had reduced their profit expectations at the nudging of executives who warned the bad winter was driving up costs, shortening train lengths for safety and increasing the time it takes to load and unload rail cars.
CP reported declines in revenues for coal (down 1 per cent), fertilizer (down 12 per cent), autos (down 9 per cent) and forest products (down 9 per cent). Revenue from grain shipments rose by 4 per cent, while industrial and consumer goods shipping rose by 11 per cent.
Royal Bank of Canada equity analyst Walter Spracklin said the freight volume declines were deeper than he expected. In a note to clients on Tuesday, he asked if the declines are due to something other than the severe winter. He noted CP’s earnings multiple implies the company will have to exceed its targets.
Since taking the helm of CP in 2012, Mr. Harrison has slashed jobs and idled rail cars and locomotives in a bid to improve efficiency and lift profits. On Tuesday, he denied he had an “obsession” with head count or cost cutting, and said the rough quarter will not change his plan to build a more efficient railway.
In the quarter, CP improved its operating ratio, an industry measure of expenses versus sales, to 72 per cent from almost 76 per cent. Mr. Harrison said the company could reduce this number to 63.
Keith Creel, CP chief operating officer, said cuts had nothing to do with the slow rail traffic in the winter. He said having more trains on the tracks would only have worsened congestion in places like Chicago, where as many as 12 trains a day are backed up.