Canadian Pacific Announces First-Quarter 2008 Results

CALGARY — Canadian Pacific Railway Limited announced its first-quarter results, and net income in the first quarter was $91 million, a decrease of 29 per cent from $129 million in 2007, and diluted earnings per share was $0.59, a decrease of $0.23 from $0.82 in the first quarter of 2007.

Diluted earnings per share, excluding the effects of foreign exchange gains and losses on long-term debt and other specified items, decreased $0.03 as there was a favourable change in provincial tax rates which partially offset the impacts of severe winter operating conditions and the increase in fuel costs. However, foreign exchange gains and losses and other specified items, discussed below, reduced earnings by a further $0.20.

Among the highlights:

–   Total revenues rose three per cent to $1.15 billion from $1.12 billion
–   Income before foreign exchange gains and losses on long-term debt and other specified items decreased five per cent to $116 million from $123 million
–   Adjusted diluted earnings per share decreased to $0.75 from $0.78
–   Operating ratio was 82.7 per cent compared with 79.5 per cent

“The first quarter brought many challenges as we continued to face remarkable year-over-year increases in both fuel prices and the Canadian dollar,” said Fred Green, President and CEO. “At the same time, we had a difficult winter with prolonged cold spells and record snowfall which affected the entire supply chain and resulted in very tough operating conditions throughout the central and eastern parts of our network. Although our busy western corridor remained fluid, the winter weather had a significant impact on our overall ability to move traffic efficiently.”

“The team will continue to focus on execution excellence and we intend to exploit all opportunities to improve efficiency including cost management, yield improvement and other strategic initiatives. Despite the tough first-quarter and continuing headwinds, our goal is still to deliver positive earnings growth in 2008.”

Freight revenues increased 10 per cent in the quarter, as global demand for bulk products remained solid, but the foreign exchange impact of a stronger Canadian dollar reduced this growth to three per cent. Grain, coal and sulphur and fertilizers all saw growth in the six to seven percent range. Industrial and consumer products increased 10 per cent over first-quarter 2007, built on a foundation of continued strength in Alberta. Intermodal revenues were also up four per cent. These gains were offset, in part, by decreases in forest products and automotive of 19 per cent and 12 per cent respectively, reflecting a weaker US economy.

Operating expenses in the quarter increased 13 per cent, but the positive foreign exchange impact of a stronger Canadian dollar reduced the increase to seven per cent. The majority of this increase was due to higher fuel costs and less efficient operations resulting from the challenging winter operating conditions.

“We faced a tough first quarter with substantial headwinds, and as we look to the balance of the year, we anticipate the continuing effects of a slowing North American economy on our business. Although demand remains strong for our bulk portfolio, we expect to see an impact on our intermodal business, and further deterioration of our merchandise business. We also expect high fuel prices, including the price of WTI and refining margins, will continue,” said Mike Lambert, CFO. “As a result, we are reducing our earnings guidance for 2008 and due to the ongoing economic uncertainty we are also widening the range of our guidance. We now expect that diluted earnings per share (before foreign exchange gains and losses on long-term debt and other specified items) will be in the range of $4.40 to $4.60, a change from $4.65 to $4.80.”

The 2008 estimate assumes an average currency exchange rate of the U.S. dollar at par with the Canadian dollar. Crude oil prices are expected to average US $98 per barrel, while crack spread is expected to increase an average of US $7 per barrel in 2008 compared with 2007 with an estimated all-in fuel price of US $3.35 per US gallon for the year. WTI is updated from US $87 per barrel.

CP expects to grow total revenue by four to six per cent in 2008, unchanged from previous assumptions as volume declines will be offset by fuel recovery. Total operating expenses are expected to increase by six to eight per cent, revised from the original assumption of three to five per cent due principally to higher fuel cost.

CP expects its tax rate to be in the 27 per cent to 29 per cent range, a change from the original outlook of 29 per cent to 31 per cent as a result of decreasing Canadian tax rates.

CP expects free cash to be approximately $200 million, adjusted downwards from the original outlook of in excess of $250 million in 2008, resulting from the expected decline in Operating Income.

The 2008 outlook includes the projected earnings of the Dakota Minnesota & Eastern Railroad (DM&E) on an equity accounting basis for the full year.

— PRNewswire-First Call