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Canadian Pacific Railway Ltd. Q1 2010 Earnings Call Transcript

Canadian Pacific Railway Ltd. Q1 2010 Earnings Call Transcript

Canadian Pacific Railway Ltd. (CP)

Q1 2010 Earnings Conference Call

April 28, 2010 11:00 AM ET


Janet Weiss - AVP, IR

Fred Green - President & CEO

Kathryn McQuade - EVP & CFO

Ray Foot - GVP, Sales

Brock White - SVP, Operations


Walter Spracklin – RBC Capital Markets

Matt Troy – Citigroup

David Newman – National Bank Financial

Scott Group – Wolfe Trahan

Allison Landry – Credit Suisse

Ken Hoexter – Merrill Lynch

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Steve Hansen – Raymond James

Edward Wolfe – Wolfe Trahan



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Good morning, my name is (Sarah), and I will be your conference operator today. At this time I would like to welcome everyone to the Canadian Pacific's First 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).

Thank you. Ms Weiss, you may begin your conference.

Janet Weiss

Thank you, (Sarah). Good morning and thank you for joining us for our first quarter conference call. The presenters today will be Fred Green, our President and Chief Executive Officer; Kathryn McQuade, our Executive Vice President and Chief Financial Officer; Ray Foot, our Group VP of Sales; and Brock Winter, our Senior VP of Engineering and Mechanical. Also joining us on the call today is Ed Harris, EVP and Chief Operations Officer, Jane O'Hagan, Senior VP, Marketing & Sales and Chief Marketing Officer and 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 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 two. 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 additional questions, you can re-queue and time permitting we’ll circle back. Here then is our President and CEO, Fred Green.

Fred Green

Good morning everyone. As you’ve seen we’ve kicked off 2010 on a positive note and delivered adjusted EPS of $0.60 or 88% over Q1 2009. As we suggested in our January call, our goal was to be agile and nimble to respond to the uncertain and volatile market and I’m very pleased with our performance in this regard. But I’m not satisfied as we have more to improve by.

Looking at the quarter, we sustained our improvements in train productivity, we calibrated our resources perfectly to meet our commitment to service reliability and our productivity objectives and we posted another strong quarter in train safety performance. Additionally, we strengthened our bench with the addition of Ed Harris, Chief Operations Officer, and the promotion of Jane O'Hagan as Chief Marketing Officer. You’ll hear more about our future plans from both Ed and Jane at our June 2nd Investor Day, but for our Q1 results I’ll turn it over to Kathryn McQuade to report on our performance and the current market. Over to you Kathryn.

Kathryn McQuade

Thank you Fred and good morning everyone. Through Q1, we have continued to do an excellent job of managing cost and driving productivity. The hard work we did through 2009, set us up well to respond to market demand while realizing operating leverage as volumes recover. As you know, we transitioned to US GAAP in January 1, and many of you attended our March call, which outlined the major differences.

So today I will be speaking to earnings in US GAAP compared to 2009 US GAAP numbers. Let me start on slide six, with a reconciliation of the GAAP, non-GAAP earnings we refer to as adjusted earnings. Our reported net income with a $100 million or $0.59 per share. When we take out FX on long term debt and other specified items, our adjusted earnings increased to $102 million or $0.60 per share.

On the quarter, the adjustments from GAAP to non-GAAP had no impact on our operating income. Turning now to slide seven. We sustained the cost efficiencies reported in previous quarters and our operating ratio improved to 82.4% an impressive improvement of 570 basis points over first quarter 2009. Expense per GTM excluding fuel and the impact of FX improved by 11%.

Cost management continues to be a priority as we bring resources back to meet demand level changes. The Canadian dollar was stronger this year versus last year and reduced EPS $0.03 to $0.04 in the quarter. We should expect to see a continued FX headwind as the Canadian dollar is expected to remain strong. Our rules some remains $0.01 strengthening of the Canadian dollar decreases EPS for the year by a penny. Looking at the top of slide seven, I will focus my comments on the percent experiences of FX adjusted performance.

Total revenue were up 14%, reflecting higher volumes, positive mix and fuel surcharge revenues. You’ll hear more detail about our revenues from Ray. Productivity gains kept our operating expense increase to only 6%, while supporting a workload increase of 15%. Operating income of $205 million was up 78%. Interest expense and other was down 1%. Income tax expense before FX on long term debt and other specified items increased principally on higher earnings with an effective tax rate of 26%. Adjusted earnings doubled on the quarter and diluted adjusted EPS was $0.60 up 88% from 2009.

All in a very solid first quarter, as the team did a good job in leveraging the uptick in volumes to drive productivity improvements. Now let's go through each of our line items starting with compensation and benefits on slide eight. Average expense employees for the quarter were within expectations at 13,800. This is 4% below first quarter ’09 even with the 15% increase in work load. Higher volumes were offset by crew efficiencies and reduced employee counts year-over-year saving $5 million the quarter. This compare will become more difficult as we start lapsing 2009 cost efficiencies later this year.

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