CP revenue up, but quarterly profit sinks as fuel costs rise

New CEO Creel pledges to patch up labor relations
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CALGARY, Alberta — Canadian Pacific’s first-quarter revenue rose slightly but net profit declined 20 percent thanks largely to increased fuel costs and foreign-exchange charges, the railway reported on Wednesday afternoon.

“Thanks to our hard-working employees, industry-leading operating model, and commitment to service, we produced solid results this quarter,” Keith Creel, CP’s president and CEO, said in a statement.

For the first quarter, freight volumes were in line with CP’s expectations, Creel said on the railway’s earnings call.

“We turned a corner in March and are now seeing positive volumes, which makes us cautiously optimistic that the demand environment is improving,” Creel said, noting that revenue ton-miles are up 6 percent for the second-quarter to date.

The railway’s operating ratio was 58.1 percent, down slightly from 58.9 percent a year ago. But CP’s adjusted operating ratio — which strips out a $51-million recovery of salary and benefits related to the early departure of former CEO E. Hunter Harrison — rose to 61.3 percent.

Six of CP’s nine traffic groups reported revenue gains for the quarter, led by metals, minerals and consumer (up 32 percent), potash (23 percent), and grain (9 percent). Fertilizers and sulphur revenue was down 25 percent, while automotive sank 14 percent, and energy, chemicals and plastics declined 11 percent.

Overall, carloads were up 2 percent for the quarter.

CP’s key operating metrics declined slightly in the quarter due to more severe winter weather this year. Terminal dwell increased 3 percent and average train speed declined 5 percent. Average train length and weight both increased, however.

In his first earnings call as CEO, Creel conceded that Harrison ruffled more feathers than necessary during his four-year transformation of the railway from an industry laggard into a leader.

Creel spoke about the railway’s leadership transition and the need to mend fences with employees.

“We’ve driven a tremendous amount of change over the last four years. Fixing the engine is the way I would put it,” Creel says.

“We restored our credibility in the marketplace, we restored our financial health. So we fixed the engine,” Creel says. “We’ve got great service, we’ve got low cost.”

But CP didn’t get everything right, Creel admits.

“At the same time, over the last four years some feathers have been ruffled,” Creel says.

So over the past two months he held a series of seven town hall meetings across the system with union employees. Creel says he wants to build a union-management relationship built on trust and respect.

Union leaders have been highly critical of CP management and its harsh interpretation of the railway’s discipline policy, which Creel has eased.

Craft employees are engaged and ready to move forward, Creel says.

“The pride is there. They’re looking forward to growth,” he says. Creel pledged that traffic and revenue growth would eventually translate into employment growth at the railway.

CP has shifted its attention from cost-cutting to growth. The aims are to grow traffic from existing customers, regain share lost to Canadian National, and divert business off the highway.

John Brooks, who was named chief marketing officer in February, says he’s spent many of his first weeks on the job concentrating on “repatriating” merchandise and automotive traffic that naturally belongs on CP in key lanes where it has shorter routes than CN.

With Harrison now at CSX Transportation, Creel was asked whether he saw opportunities to work with CSX on smoothing interchange in Chicago. Creel said he’d work with any railroad that could help it create operational synergies, although he noted that CSX is CP’s largest interchange partner in Chicago.

Looking ahead, CP expects its operating ratio to improve this year, Creel says. The railway will spend $1.25 billion on capital projects, a 6-percent increase. And it forecasts earnings per share growth in the high single-digit range.

CP reported a first-quarter net income of $431 million on revenue of $1.6 billion, down from net income of $540 million on revenue of $1.59 billion a year ago. Earnings per share fell 17 percent, to $2.93, but was flat, at $2.50 per share, on an adjusted basis. The results topped Wall Street expectations.

NEWSWIRETrains News Wire

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