Canadian Pacific Railway Limited (CP)

Q3 2011 Earnings Call

October 25, 2011 11:00 am ET


Janet Weiss - Assistant Vice-President of Investor Relations

Kathryn B. McQuade - Chief Financial Officer and Executive Vice President

J. Michael Franczak - Executive Vice President of Operations

Jane A. O’Hagan - Chief Marketing Officer and Executive Vice President

Frederic J. Green - Chief Executive officer, President, Director and Member of Health, Safety, Security & Environment Committee


William J. Greene - Morgan Stanley, Research Division

Scott H. Group - Wolfe Trahan & Co.

Ken Hoexter - BofA Merrill Lynch, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Cherilyn Radbourne - TD Newcrest Capital Inc., Research Division

Turan Quettawala - Scotia Capital Inc., Research Division

Garrett L. Chase - Barclays Capital, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Kanchana Pinnapureddy

Benoit Poirier - Desjardins Securities Inc., Research Division

Christian Wetherbee - Citigroup Inc, Research Division

David Tyerman - Canaccord Genuity, Research Division

David F. Newman - Cormark Securities Inc., Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Jacob Bout - CIBC World Markets Inc., Research Division



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Good morning. My name is Alicia, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Third Quarter 2011 Conference Call. [Operator Instructions] Ms. Weiss, you may begin your conference.

Janet Weiss

Thank you, Alicia, and good morning and thanks for joining us. The presenters today will be Fred Green our President and CEO; Jane O'Hagan, EVP and Chief Marketing Officer; Mike Franczak, EVP of Operations; and Kathryn McQuade, our EVP and Chief Financial Officer. Also joining us on the call today is Brian Grassby, our Senior Vice President, Finance and Comptroller. The slides accompanying today's teleconference are available on our website.

Now 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 2 and 3 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 4.

Finally, when we do go to Q&A, in the interest of time and in fairness to your peers, I'd ask you to limit your questions to one primary question. If we have time and you've got additional questions, you can re-queue and, time permitting, we'll circle back. Here then is our President and CEO, Fred Green.

Frederic J. Green

Thank you, Janet. Good morning, and thank you for joining us. This morning, CP reported third quarter diluted EPS of $1.10, which includes the $0.04 of expense related to the early redemption of our 2013 notes. Sequentially, EPS grew by 47%, and our operating ratio improved by 600 basis points as we transition from the first half challenges back to a normal operation.

As you'll hear from the team, our third quarter is a two-part story, with our results in the first half of the quarter reflecting the end of flood-related challenges, which extended through July, and the start of normalized operation. Our results in the second half of the quarter reflect a railroad back in its rhythm and gaining momentum. I'm satisfied with our progress and I'm particularly pleased on 2 fronts: service where our on-time performance of our most time-sensitive traffic improved to well over 90%; and yard and train performance, whereas you'll hear from Mike, we're driving efficiency improvements on several fronts. There are many puts and takes in the quarter's results, but the key takeaways of the railroad is now back and on a path of steady improvement. I'll also note that the October metrics are even stronger than September, and that Mike and his team are delivering a great product for Jane and her group to sell.

I'm going to turn it over to Jane, Mike and Kathryn to provide more color on our results and outlook, and then come back and wrap up with some concluding thoughts. Over to you, Jane.

Jane A. O’Hagan

Thank you, Fred. Good morning. Starting on Slide 7, with an overview of the revenue performance in the quarter. Overall, freight revenues improved 5% for the quarter, with revenue ton miles up nearly 4%, as positive mix continue to drive growth. On the quarter, the FX impact was minus 3%, so on a currency adjusted basis, revenues grew 8.2%. Fuel surcharge revenues generated nearly 5% of that gain, and the combination of price and mix was nearly 6% offset by the reduced carloads of 2.5%. Renewals and same-store price are tracking in line with our previously stated targets of 3% to 4% and 2% to 3% respectively, and we expect the trend to continue for the remainder of the year.

I'll now move to a summary of the market performance and provide some perspective on future quarters. For clarity, I'll speak to currency adjusted revenues. Grain revenue was up 1% on 3% fewer carloads, with strength in Canadian grain offsetting reduced demand on our U.S. franchise. Our Q3 Canadian grain carloads were driven by increased market share and strong global demand for canola and high-quality wheat and durum. In fact, since the start of the new crop year on August 1, we have originated on average 13% more carloads per month than the same period last year. This speaks to the strength of our customer relationships, our elevator network and the scheduled grain operations model.

The Western Canadian grain harvest is essentially complete, and estimated production for the 6 majors is about 45 million metric tons, up 6% from last year. Markets for Canadian grains are strong, so looking through this fall and into 2012, the combination of production, carryover stock and our improved operations should enable year-over-year growth.

As we move to mid-2012, compares will get tougher as we start to lap our improvements and ship both grain supplies dwindle will feel the effects of the nearly 6 million unseated acres bias to CP's Southern Prairie rail network. I'll also remind you that effective August 1, the grain revenue entitlement for the crop year 2011, 2012 was increased by 3.5%. The revenue entitlement is volume-variable, and the 3.5% increase is the average for the crop year, but our pricing can and does vary over the course of the year.

Moving to our U.S. grain franchise. Flooding and late-season weather have reduced the quantity and the quality of the U.S. Midwest harvest. Overall, crop production in the areas we serve is estimated to be down roughly 1% versus last year, with wheat production in North Dakota down substantially. With global supplies of feed grain competing with U.S. corn and soybean, the U.S. experienced a soft export market in the quarter, which resulted in an 11% reduction in the carloadings compared to Q3 2010. Looking forward, lower U.S. wheat production combined with volatile corn and bean export markets make forecasting through the first half of 2012 difficult.

On coal, revenues were up 26% on a 2% carload increase. Canadian export coal volumes coupled with the new PRB export thermal coal movements we referenced in Q2 have offset the reduced short haul U.S. carloads. As noted last quarter, we are on track to move more volumes in the second half than the first half of 2011 with average revenue per car continuing at about the current run rate.

Looking to 2012, the long-term demand fundamentals remain in place and Teck has indicated they will continue to ramp-up production capabilities. We are watching the near-term economic condition, but to date, rail demand has remained positive.

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