TRAINS: David Lassen
CALGARY, Alberta — Canadian Pacific’s earnings slumped in the third quarter due to pandemic-related volume declines, but the railway boosted its outlook for the year and expects to set a fourth-quarter operating ratio record as traffic growth accelerates.
CP on Tuesday morning reported its operating income decreased 10%, to $779 million, as revenue fell 6%, to $1.86 billion. Earnings per share, adjusted for the impact of one-time items, declined 11%, to $4.12.
The railway’s operating ratio was 58.2%, a 2.1-point increase over last year’s third quarter.
“I have a tremendous amount of pride about these results,” CEO Keith Creel told investors and analysts on the railway’s earnings call. “We continued our strong operational performance … focusing on productivity as well as balancing service, train weights, train lengths as businesses came back to the railroad.”
To help cut costs as volume sank, CP moved its tonnage on fewer but longer trains. CP built on its record train lengths and weights set in the second quarter while also reporting 87% on-time performance based on compliance with trip plans.
Quarterly volume fell 7% on a carload basis or by 6% when measured by revenue ton-miles, the favorite metric of the Canadian railways.
CP’s grain volume was up 17%, including a record quarter for Canadian grain; potash increased 20% to record tonnage; and automotive traffic grew 7%. Everything else was down due to the economic impact of the pandemic, including sharp declines in energy, chemicals, and plastics (minus-30%), coal (minus-22%), and metals, minerals, and consumer products (minus-19%).
CP handled only 5,000 carloads of Canadian crude oil, an 80% decline for the quarter. Excluding the impact of the crude oil decline, the railway’s energy, chemicals, and plastics traffic was off by just 2% for the quarter and grew in September, Chief Marketing Officer John Brooks says.
CP fine-tuned its outlook for the year and now expects its earnings per share to grow by mid-single digits, up from the prior outlook of simply growth. The railway also upgraded its tonnage outlook to a low-single digit decline in revenue ton-miles. Previously CP expected a mid-single digit decline in RTMs. The railway stuck with its plan to spend $1.6 billion on capital projects.
Executives said it was possible, given the railway’s growth opportunities, that CP’s 2021 operating ratio could be in the mid-50% range as long as there isn’t an unforeseen economic shock.
CP is counting on a number of growth projects and contract wins to boost traffic and revenue next year. Among them: Handling Maersk international intermodal traffic at the ports of Vancouver and Montreal beginning in March; a new plastics plant near Edmonton, Alberta; and a diluent recovery unit that will ship predictable volumes of Canadian crude to a Gulf Coast refinery on Kansas City Southern; new auto compounds; new transload centers; expanded grain elevators; and the acquisition of regional Central Maine & Quebec.
Brooks says the key cog in the CP’s growth engine is continuing to develop the railway’s vacant land in key areas across the system.
Executives did not quantify how the Maersk deal, announced on Monday, would boost revenue or CP’s international intermodal volumes. But Creel did say that the new Vancouver transload center CP is building with Maersk, announced last month, will make the steamship company an anchor customer based on the total service offering, not just price.
“It’s not in our interest to do contract swapping,” Creel says. A number of international intermodal contracts have switched between CP and rival Canadian National in recent years.
The Maersk transload center being built in CP’s Vancouver Intermodal Facility will involve shuttling containers to the port via rail rather than truck, which the companies said would take thousands of trucks off the road every day while reducing greenhouse gas emissions.
