Canadian Pacific CEO Discusses Q3 2010 Results – Earnings Call Transcript

Canadian Pacific CEO Discusses Q3 2010 Results â¿¿ Earnings Call Transcript
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Canadian Pacific Railway Limited (

CP

)

Q3 2010 Earnings Call Transcript

October 27, 2010 11:00 am ET

Executives

Janet Weiss – Assistant VP, IR

Fred Green – President and CEO

Kathryn McQuade – EVP and CFO

Jane O'Hagan – SVP, Marketing and Sales, and Chief Marketing Officer

Ed Harris – EVP and COO

Analysts

Scott Malat – Goldman Sachs

Walter Spracklin – RBC Capital Markets

Gary Chase – Barclays Capital

David Newman – Cormark Securities

Tom Wadewitz – J.P. Morgan

Cherilyn Radbourne – TD Newcrest

Bill Greene – Morgan Stanley

Ken Hoexter – Bank of America/Merrill Lynch

Benoit Poirier – Desjardins Securities

Chris Ceraso – Credit Suisse

Jeff Kauffman – Sterne, Agee

Scott Group – Wolfe Trahan & Co.

David Tyerman – Canaccord Genuity

Presentation

Operator

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Previous Statements by CP
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» Canadian Pacific Railway Limited. Q3 2009 Earnings Call Transcript

Good morning. My name is Beth and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Pacific third quarter 2010 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Ms. Weiss, you may begin your conference.

Janet Weiss

Thank you, Beth. Good morning and thank you for joining us. The presenters today will be Fred Green, our President and Chief Executive Officer; Kathryn McQuade, our Executive Vice President and Chief Financial Officer; Jane O'Hagan, Senior Vice President, Marketing and Sales and Chief Marketing Officer; Ed Harris, Executive Vice President and Chief Operations Officer. Also joining us on the call today is Brian Grassby, our VP and Controller. The slides accompanying today's teleconference are available on our website.

Before we get started, let me remind you that this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on slide one and two, in the press release and in the MD&A filed with Canadian and U.S. securities regulators. Please read carefully as these assumptions could change throughout the year.

All dollars quoted in the presentation are Canadian, unless otherwise stated. This presentation also contains non-GAAP measures. Please read slide three. Finally, when we do go to Q&A, in the interest of time and in fairness to your peers, we will be asking you to limit your questions to two. If you have an additional question, you may re-queue and time permitting, we will circle back. Here then is our President and CEO, Mr. Fred Green.

Fred Green

Thanks, Janet. Good morning, everyone. This morning, we released our third-quarter results reporting an operating ratio of 73.7% and adjusted earnings per share of $1.21, a 27% increase over last year. These results are consistent with our game plan to drive for a low 70s operating ratio as we discussed at our June Investor Day.

It has been a busy quarter and we've made positive progress on many fronts. On the marketing side, we announced the new 10-year agreement with Teck Coal and I believe that the collaboration and hard work by the Teck and CP teams have established the foundation for a very productive working relationship. This should enable Teck to fulfill its stated goal of growing its coal volumes by 50%, a very exciting prospect for both Teck and CP.

On the operation side, we initiated some organizational changes. We are consolidating from 11 service areas to six regions as part of our plan to ensure clear alignment and accountability. This step is an important pre-requisite for our focus on service reliability. And I expect that we will see benefits in 2011 with longer trains and improved on-time performance from Ed and his team.

Finally, on the finance side, in September, we elected to take advantage of today's low-cost financing environment to prefund our pension. Kathryn will tell you more about this, but it is an important building block for our goal of increased financial flexibility.

I'm pleased with the Q3 financial results. We are sustaining our cost performance and continuing to progress initiatives designed to deliver sustainable improvements. I expect to see improvements in both service reliability and productivity from our operations team going forward, which will serve both our customers and our shareholders well going forward.

I’ll now turn it over to Kathryn for our financial results, Jane for an overview of the revenues and then Ed for an operations update. Then I will come back and wrap up with a few closing comments. Over to you, Kathryn.

Kathryn McQuade

Thank you, Fred and good morning, everyone. Q3 was a good quarter with volumes and earnings continuing to improve. We leveraged our capacity, handling 14% more traffic while sustaining productivity and achieving a 73.7 operating ratio, our best OR in 3.5 years. In addition, we progressed our strategic higher priorities to strengthen the balance sheet by improving near-term liquidity with our debt offering and pension pre-payment.

So let's get into the numbers and begin with slide six, which provides a reconciliation of our GAAP, non-GAAP earnings we refer to as adjusted earnings. Reported net income was $197 million or $1.17 per share. When we take out FX on long-term debt and other specified items, our adjusted earnings were $205 million or $1.21 per share. In 2009, there were similar adjustments, as well as a large one-time after-tax gain of $68 million from the sale of properties, which masked our year-over-year improvements we saw this quarter.

Turning to slide seven and the FX-adjusted column on the right side, total revenues were up 18% due to higher volume, fuel surcharge revenues and price. Jane will provide more details on our freight revenues. Operating expense increased 14%, resulting in a 32% increase in adjusted operating income. Our operating ratio of 73.7% improved by 270 basis points.

Moving to slide eight and looking below operating income, interest expense increased reflecting the impact of our new debt issuance – issuances. And you will see a slight uptick in Q4 as well. Income tax expense before FX on long-term debt and other specified items increased due to higher earnings and the effective tax rate of 26% is in the range previously provided.

Looking to 2011, I expect our tax rate to stay in the range of 25% to 27%. The Canadian dollar remains strong and the headwind it created reduced EPS by $0.02 this quarter. Adjusted earnings and adjusted earnings per share were both up 27% over 2009.

Now, let's move to each expense line item starting with comp and benefits on slide nine. In total, including an FX gain of $5 million, comp and benefits was up $43 million or 13%. Volume-based expenses were up only $14 million, reflecting continuing productivity improvement on a 14% volume increase. And we sustained GPMs per average active expense employee at $4.4 million. Expense employees for the third quarter came in at just under $14,000 and should remain at a similar level for the rest of the year.

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