01—Abstract
Summary
Summary of the 6-K filed July 27, 2005. Cited figures are marked; the original filing is the authoritative source.
Canadian Pacific Railway (CP) reported strong second-quarter 2005 results, furnished on Form 6-K on July 26, 2005.
Net income rose to C$123.2 milliona from C$83.7 million, and diluted EPS increased 45% to C$0.77. Excluding foreign exchange losses on long-term debt, diluted EPS rose 34% to C$0.87. Revenue grew 10% to C$1,105.9 million, and the operating ratio improved 2.5 points to 75.5%.
Growth was driven by revenue per carload up 14% (quality revenue strategy), with coal up 48%, intermodal up 10%, and grain up 7%. Operating expenses grew less than 2% excluding a 35% jump in fuel expense, of which more than three-quarters was recovered via fuel surcharges, hedging, and efficiency measures. For the first half of 2005, net income reached C$203.9 millionb (diluted EPS C$1.27, up 90%), and the operating ratio improved 3.4 points to 78.8%.
The company reaffirmed 2005 guidance calling for revenue growth of 12% to 14% and diluted EPS excluding FX on long-term debt and specified items of C$3.15c to C$3.25, assuming oil at US$55/barrel and an exchange rate of C$1.23 per US$. A C$160 million capacity expansion between the Prairies and Vancouver is on schedule for Q4 2005 completion.
Investors should note that the non-GAAP earnings measures exclude FX translation effects on long-term debt, which are volatile, and that the company's EPS outlook is sensitive to oil prices and the Canadian dollar. Also noted: the company is executing a normal course issuer bid for up to 2.5 million shares, with 432,000 repurchased in Q2 at an average of C$43.58d.
02—Key points
Key Highlights
- Q2 2005 net income up 47% to C$123.2 million; diluted EPS up 45% to C$0.77 (C$0.87 excluding FX losses on long-term debt, up 34%)
- Operating ratio improved 2.5 points to 75.5% in Q2 and 3.4 points to 78.8% year-to-date
- Revenue rose 10% to C$1,105.9 million in Q2; revenue per carload up 14% under the 'quality revenue' strategy
- Fuel expense jumped 35% in Q2, with more than three-quarters of the increase recovered through fuel surcharges, hedging and efficiency measures
- 2005 guidance reaffirmed: revenue growth of 12%–14% and diluted EPS (ex-FX and specified items) of C$3.15–C$3.25, assuming US$55/bbl oil and C$1.23/US$
- C$160 million capacity expansion (four additional trains daily, 400+ freight cars) on schedule for Q4 2005 completion
- Ongoing share buyback: up to 2.5 million shares under a normal course issuer bid, with 432,000 repurchased in Q2 at an average of C$43.58
03—Questions
Frequently Asked Questions
How did CP's earnings perform in the second quarter of 2005?
Net income increased to C$123.2 million from C$83.7 million, and diluted EPS rose 45% to C$0.77 from C$0.53. Excluding foreign exchange losses on long-term debt, diluted EPS was C$0.87, up 34%. The results were supported by revenue growth of 10% and a 2.5-point improvement in the operating ratio to 75.5%.
What is driving revenue growth and what are the main risks to margins?
Revenue growth was driven by higher yield per carload (up 14%) and volume gains in coal (up 48%), intermodal (up 10%) and grain (up 7%). The main margin risk is fuel: fuel expense rose 35% in Q2, and while most of the increase was recovered through surcharges and hedging, earnings remain sensitive to oil prices and the Canadian dollar.
What is CP's 2005 earnings and revenue outlook?
CP expects 2005 revenue growth of 12% to 14% and diluted EPS, excluding FX on long-term debt and specified items, of C$3.15 to C$3.25. This assumes oil averaging US$55 per barrel and an exchange rate of C$1.23 per US$ for the full year.
Why do the reported and adjusted earnings figures differ?
CP's non-GAAP earnings exclude foreign exchange translation effects on U.S.-dollar-denominated long-term debt, which can be volatile and only realized when the debt matures or is settled. In Q2 2005 these losses were C$17 million (C$17 million after tax). These non-GAAP measures are not defined under Canadian GAAP and may not be comparable to other companies' figures.
Is CP returning capital to shareholders?
Yes. CP is paying quarterly dividends (C$21.0 million paid in Q2 2005) and is executing a normal course issuer bid to repurchase up to 2.5 million shares, about 1.6% of shares outstanding, between June 6, 2005 and June 5, 2006. In Q2 it bought back 432,000 shares at an average price of C$43.58.
04—Continue