CP Rail hauls record profit as shipments rise

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Canadian Pacific Railway Ltd. posted a record profit in the second quarter, as the Calgary-based railway hauled more grain, potash and coal.

In the first full quarter with Keith Creel in the top job, CP beat expectations with a 46-per-cent rise in profit as revenue increased by 13 per cent to $1.64-billion.

CP's profit rose to $480-million or $3.27 a share in the three months ending on June 30. Adjusted profit rose by 35 per cent to $2.77 a share. Analysts expected adjusted profit of $2.71 a share and revenue of $1.62-billion, according to Bloomberg.

For subscribers: Dividing the rails: How CN is winning market share from CP

"We're pretty proud of these results," said Mr. Creel, CP's chief executive officer, on a conference call with analysts after the earnings were released on Wednesday.

CP hauled higher volumes of grain (up 13 per cent), coal (10 per cent) and potash (30 per cent). The only segments that posted declines were forest products (down 0.9 per cent), and automotive (down 8 per cent). CP's operating ratio, which compares revenues against expenses, improved to 58.7 per cent.

John Brooks, CP's marketing chief, said the growth in revenues was stronger than he expected. "Much of the strength came from our bulk franchise [grain, coal and potash]," Mr. Brooks said on the conference call.

Despite the strong results, Mr. Creel said the company is not updating its full-year guidance for "high single-digit" profit growth. He cited uncertainty over the dollar's direction and possible land sales that could also alter the results in the second half.

In addition, hot, dry weather in parts of Alberta, Saskatchewan and the United States threaten to reduce the size of the fall harvest and reduce grain-shipping revenue. "I'm praying for rain, myself," Mr. Creel said.

Mr. Creel, CP's 49-year-old former operating chief, replaced his mentor Hunter Harrison in January when Mr. Harrison left for the CEO job at Florida's CSX Corp.

Since taking over, Mr. Creel has tried to improve employee relations, which suffered under Mr. Harrison's successful drive to turn around an underperforming railway. Mr. Creel held meetings with employees and union representatives ahead of contract talks with the Teamsters-represented train crews.

Mr. Creel inherited a company that Mr. Harrison transformed from an industry laggard into one of the most efficient. Mr. Harrison oversaw thousands of job cuts, hundreds of locomotives sidelined, and the implementation of scheduled railroading that improved customer service and improved efficiency.

With the cost base low, Mr. Creel's challenge now is to win new business and boost revenue.

CP operates on 24,000 kilometres of track in Canada and the United States with 12,000 employees.

CP's share price has risen by 7 per cent this year, compared with 15 per cent at rival Canadian National Railway Co. The broad S&P/TSX composite index is flat this year.

Freight volumes for all major North American railways rose by more than 6 per cent in the second quarter, according to the Association of American Railroads. All three main categories of freight – bulk, containers and merchandise – rose, with bulk leading the way at 13 per cent.

Industry volumes are expected to soften in the second half amid harvests threatened by regional droughts, higher automotive inventories and modest demand from factories and consumers, said Fadi Chamoun, an analyst at Bank of Montreal.

In the long term, CP and CN are well positioned to see big gains in their intermodal container businesses, said Cameron Doerksen of National Bank.

"In addition to share gains from trucks, the two railroads should benefit from port expansions in several Canadian container ports," Mr. Doerksen said in a research note, referring to Vancouver, Montreal and Prince Rupert.

"This new capacity will take some time to fill and the ports will need to compete for new business with other North American ports, but the incremental revenue could be meaningful."