Canadian Pacific Railway Ltd. surprised pandemic-battered markets on Wednesday as it posted a better-than-expected profit, raised its outlook and resumed a share-buyback program.
Calgary-based CP said it cut costs, laid off workers and ran longer, heavier trains to squeeze a profit out of declining demand for rail shipments in the three months ending on June 30, as efforts to contain COVID-19 halted factories and kept consumers at home.
CP this week raised its dividend by about 15 per cent to 95 cents, declaring that its lean operating model gives it the “resiliency” to reward shareholders, even as economic activity plunges.
Still, CP’s profit fell by 10 per cent in the second quarter, amid “immense challenges” posed by the virus outbreak. CP said that for the three months ending June 30, profit dropped to $635-million, or $4.66 a share, from $724-million ($5.17) in the same period a year ago. Revenue fell by 9 per cent to $1.79-billion from the second quarter of 2019.
CP’s operating ratio, a gauge of sales versus costs, improved to 57 per cent from 58.4 per cent. (A lower figure is better). Expenses fell to $1-billion from $1.15-billion.
“CP delivered impressive results amid significant volatility and uncertainty,” said Walter Spracklin, a stock analyst at Royal Bank of Canada. He said the profit was driven by cost reductions, and that a higher dividend and share buybacks are measures unlikely to be matched by other railways.
In a statement accompanying the financial results released before markets opened Wednesday, CP said: “While economic uncertainty remains, we’re controlling what we can control – our costs.”
On a conference call with analysts on Wednesday morning, CP chief executive officer Keith Creel attributed the strong results to the railway’s precision scheduled railroading, a strategy that saves money by closely matching costs with demand. “An operating model that works on the upside and on the downside,” is how Mr. Creel described it. CP increased train weights and lengths by 7 per cent and 8 per cent, respectively, and laid off about 8 per cent of its workers in the quarter.
For 2020, CP expects a decline in revenue ton-miles of about 5 per cent but boosted its earnings outlook to call for “positive growth” in adjusted diluted profit, revising an earlier warning that profit would be flat.
CP’s share price ended flat Wednesday on the Toronto Stock Exchange, after an 8-per-cent gain this year that more than erased the stock’s plunge in March.
“Expectations were elevated coming into the results, but [the second quarter] was very strong, allowing the company to confirm earnings growth for the year,” said Christian Wetherbee, an analyst at Citigroup. “We continue to be impressed with the company’s robust operating performance. A 57-per-cent operating ratio in the context of a 12-per-cent [freight] volume decline is very good.”
In the second quarter, CP moved higher volumes of grain, potash and fertilizer, compared with the year-earlier period. Shipments declined for forest and automotive products, energy, containers and coal.
Volumes of energy, chemicals and plastics fell by 35 per cent, but revenue for the category, which includes oil, slipped by 3 per cent. The “significant” difference is due to damages CP collected from oil shippers who defaulted on their contacts, said John Brooks, CP’s marketing chief.
Crude-oil volumes fell by about 70 per cent to 8,000 carloads, compared with the year-earlier quarter, amid a steep decrease in the price of oil and a halt to much economic activity. Mr. Brooks said he expects “minimal” amounts of oil to move by rail for the rest of the year.
CP’s results come a day after larger rival Canadian National Railway Co. posted a 19-per-cent drop in revenue to $3.2-billion and a 59-per-cent drop in profit to $545-million (77 cents a share). Jean-Jacques Ruest, CN’s CEO, called the second quarter the worst he has seen.
CN highlighted cost-cutting efforts, including layoffs and idled locomotives, and said the low point for rail-freight demand likely happened in May.
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