10-QPeriod: Q3 FY2020

CANADIAN PACIFIC KANSAS CITY LTD/CN Quarterly Report for Q3 Ended Sep 30, 2020

Filed October 20, 2020For Securities:CP

Summary

Canadian Pacific Kansas City Ltd. (CP) reported its third quarter and year-to-date results for the period ending September 29, 2020. For the third quarter, CP experienced a slight decrease in net income to $598 million, down 3% from the prior year, with diluted earnings per share (EPS) at $4.41, a 1% decrease. This was primarily driven by lower operating income, impacted by decreased volumes due to COVID-19, and higher stock-based compensation expenses. However, operational efficiencies were noted, with an increase in average train weight and length. For the first nine months of 2020, net income decreased by 8% to $1,642 million, and diluted EPS fell to $12.04. Despite the overall decline in net income, the company saw an increase in operating income by 7% to $2,383 million, reflecting successful cost management, improved asset utilization, and benefits from lower fuel prices. The company also updated its full-year 2020 outlook, expecting mid-single-digit adjusted diluted EPS growth and maintaining its capital expenditure guidance, demonstrating confidence in its operational resilience.

Key Highlights

  • 1Total revenues for Q3 2020 decreased by 6% to $1,863 million compared to Q3 2019, largely due to lower volumes impacted by COVID-19.
  • 2Net income for Q3 2020 was $598 million, a 3% decrease from $618 million in Q3 2019.
  • 3Diluted EPS for Q3 2020 was $4.41, a 1% decrease from $4.46 in Q3 2019.
  • 4Operating income for the nine months ended September 30, 2020 increased by 7% to $2,383 million compared to the same period in 2019.
  • 5The company updated its 2020 outlook, expecting at least mid-single-digit Adjusted diluted EPS growth year over year.
  • 6CP acquired full ownership of the Detroit River Tunnel Partnership for approximately US$312 million, a transaction expected to close by year-end 2020.
  • 7Significant operational improvements were noted, with average train weight increasing by 7% and average train length by 9% in Q3 2020 compared to the prior year.

Frequently Asked Questions

The primary driver for the decrease in net income in the third quarter of 2020 was lower operating income, which was impacted by decreased volumes due to the effects of COVID-19 and higher stock-based compensation expenses. This was partially offset by foreign exchange translation gains on debt and lease liabilities, which contrasted with losses in the prior year.

The COVID-19 pandemic resulted in lower volumes across several business lines, including Energy, chemicals and plastics, and Metals, minerals and consumer products, leading to a 6% decrease in total revenues for the third quarter of 2020 compared to the prior year. The company implemented various measures to ensure service continuity and employee safety.

CP updated its outlook for 2020, expecting to deliver at least mid-single-digit Adjusted diluted EPS growth year over year. The company also expects volume, as measured in revenue ton-miles (RTMs), to be down low-single digits and continues to expect capital expenditures of $1.6 billion.

On October 15, 2020, CP entered into an agreement to acquire full ownership of the Detroit River Tunnel Partnership for approximately US$312 million, subject to customary closing adjustments and regulatory approvals. This acquisition is expected to reduce operating costs and further integrate CP's eastern network.