Canadian Pacific sets operating ratio record despite pandemic

CEO says Precision Scheduled Railroading has been a key to weathering COVID-19 downturn
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A Canadian Pacific train passes through River Grove, Ill., in 2018. CP announced it set an operating ratio record for the second quarter despite the COVID-19 downturn.
TRAINS: David Lassen

CALGARY, Alberta — Canadian Pacific set a second-quarter operating ratio record despite pandemic-related traffic declines that reduced the railway’s revenue and earnings.

“We’ve consistently said that [Precision Scheduled Railroading] is an operating model that works both on the upside and on the downside. I’m sure that you would agree that today’s results are strong testament to that,” CEO Keith Creel told investors and analysts on the railway’s earnings call Wednesday morning.

CP’s operating income fell 7%, to $770 million, as revenue declined 9%, to $1.79 billion. Earnings per share, adjusted for the impact of one-time items, declined 5% to $4.07.

But the railway’s operating ratio was a second-quarter record of 57%, a 1.4-point improvement over last year’s mark, as it adjusted costs to declining volume and set company records for train length and weight.

Unlike most other companies during the pandemic, CP continued to release earnings guidance for the year. It now expects earnings per share to grow this year, rather than be flat. The railway stuck with its forecast of a mid-single digit decline in revenue ton-miles, and will maintain its $1.6 billion capital spending plan. CP has resumed its share repurchase program and boosted its dividend by 15%.

For the quarter, volume declined 12% on a carload basis, or by 10% when measured by revenue ton-miles, the preferred metric of the Canadian railways. CP’s volume grew for grain, potash, and fertilizers and sulphur. Every other business segment was down.

CP expects consumer-related volume — such as intermodal and automotive — to bounce back more quickly than carload volume related to the industrial economy, Chief Marketing Officer John Brooks says.

The railroad is seeing volume improvements in intermodal and automotive. From the low-volume point in May to the last week of June, reefer container volume surged 43% and container shipments of retail goods bounced back 50%, Brooks says.

CP has a bullish outlook for its bulk business for the second half of the year thanks to continued records in Canadian grain shipments and expected continued strong growth in potash exports to China.

There was a significant difference between CP’s energy, chemicals, and plastics traffic volume and revenue. Volume in the segment, which was hit hard by the collapse in energy prices, was down 35% on a revenue ton-mile basis. But revenue declined just 1% due to the take-or-pay contracts CP signed with Canadian oil producers. If crude doesn’t move, CP still gets paid.

“These contracts did exactly what we … designed them to do,” Brooks says. “They protected CP from the inherent volatility in crude by rail volumes.”

Brooks says the railroad would rather move the crude than collect damages. Crude volume fell about 70% year over year, to just 8,000 carloads in the second quarter. There has been a slight uptick in frac sand moving into the Bakken formation in North Dakota, however, and there’s a potential for more crude to move out of the shale play amid potential pipeline shutdowns.

CP’s key operating metrics generally improved during the quarter, with average train weight up 7% and train length up 8% as the railway moved its tonnage on fewer but longer trains. Average train speed was flat, and terminal dwell inched up 2%.

The average number of employees during the quarter dropped 10% compared to a year ago, with 1,200 train and engine crews furloughed. Some of them have been called back as volume has recovered.

“We’re working hard to increase and drive business to this railroad so we can get our employees back to work,” Creel says.

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