“The strong demand environment for North American goods and commodities, coupled with our own unique growth initiatives and the promising upcoming Canadian grain crop, gives me confidence that we will continue to see momentum build into the back half of 2022 and beyond,” Canadian Pacific (CP) President and CEO Keith Creel said during a second-quarter 2022 financial report. After a “challenging” first quarter, he noted the Class I railroad saw a sequential improvement in operating ratio—more than 1,000 basis points despite a fuel headwind—and in operating performance.
Among CP’s second-quarter 2022 highlights:
• Revenues came in at C$2.20 billion, up 7% from the same period in 2021 (C$2.05 billion). Bulk was up 40%, according to CP, which reported there was a “continued record performance in U.S. grain”; “improved crop conditions in Canadian grain,” with current expectations for an “average-sized crop and fourth-quarter harvest”; and “double-digit” Potash volume growth in second-half 2022. Merchandise was up 38%, and CP noted there was “continued strong demand in automotive as dealers replenish inventory levels.” Intermodal was up 22%, and CP said it expects “double-digit volume growth” in the back half of 2022. Revenue ton-miles (RTMs) were down 2% and freight revenue per RTM was up 10% from the prior-year period.
• The operating ratio increased by 50 basis points to 60.6% from 60.1% in second-quarter 2021, CP said; adjusted (non-GAAP), it rose by 440 basis points to 59.7% from 55.3% last year.
• Diluted EPS was $0.82, a 56% decrease from the same point in 2021, the railroad reported; core adjusted diluted EPS (non-GAAP), “excluding significant items and Kansas City Southern (KCS) purchase accounting,” was $0.95, an 8% decrease from last year.
• Net income was C$765 million, down 39% from second-quarter 2021’s $1.246 billion. Core adjusted income (non-GAAP) was C$882 million, up 28% from C$698 million last year.
Looking ahead, CP said it was “ready and resourced to move double-digit volume growth in the back half.” Additionally, the Surface Transportation Board’s review of its proposed merger with KCS—creating Canadian Pacific Kansas City (CPKC), the first single-line rail network linking the U.S., Mexico and Canada—was “on track” for a decision in first-quarter 2023, the railroad reported. It added that the KCS and KCSM concession exclusivity 10-year extension to 2037, announced earlier this month, “provides long-term certainty for [the] proposed CPKC merger.”
“Our proposed combination with KCS will connect customers to new markets, enhance competition in the U.S. rail network and drive economic growth across North America,” Creel said. “As we continue to progress toward this historic combination, our excitement about the opportunities ahead with the combined companies continues to grow.”
For more on CP second-quarter financial results, visit the investors’ section of its website.
COWEN INSIGHT: CP “MARCHING FORWARD”
“Similar to the other Class I’s that have reported this season, CP’s earnings came in above expectations as strong pricing offset volume challenges,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Management struck an optimistic note on back-half 2022 and 2023 volume growth as Canadian grain production recovers. We raise our price target to $83 and reiterate Outperform.
“CP’s 2Q adj. EPS of $0.95 CAD beat our estimate of $0.91 CAD and the consensus forecast of $0.92 CAD. Adj. OR deteriorated ~440bps and missed our estimate as fuel expenses (~up 70% y/y and adding 220 bps to OR) outpaced revenue growth. Operating income resultantly declined 3.5% y/y to ~$890MM.
“Similar to the other Class Is that have reported so far, pricing continued to be a driver of revenue growth in 2Q coming in above inflation at ~9% y/y. Management noted that contract renewals continued to lock in higher prices as shippers absorbed inflationary pressures, in line with what we have heard on other earnings calls in 2Q. We model y/y increases in yield albeit with sequential tapering to reflect normalization in markets.
“On the volume side, headwinds from challenges to Canadian grain (down 29% y/y) and coal (down 9% y/y) were only partially offset by strong intermodal volume (up 9% y/y), resulting in a decline in overall carload growth. Management appeared optimistic on volume recovery in 2H, guiding double-digit revenue ton-mile growth in the back half of this year. Canadian grain is expected to begin recovering in 4Q with current output expectations sitting above 70 million metric tons, which is slightly above historical averages. Potash volumes are expected to remain especially strong due to supply disruptions generated by the Russian war in Ukraine with Canadian suppliers stepping in. On the intermodal side, CP is positioned to capitalize on increasing congestion on the East Coast as it partners with the Port of St. John to more than double port capacity to 800,000 TEUs. The partnership is expected to yield incremental benefits to intermodal volumes beginning in 2023 with projections now appearing to exceed mangement’s expectations, and we model as such. Auto volumes are expected to improve as other Class I’s have also alluded to. In response to our question on the volume impact of Canadian government proposals to curtail fertilizer emissions, management expressed confidence in the company’s ability to capitalize on a switch from domestic to export flows.”