01—Abstract
Summary
Summary of the 8-K filed April 23, 2019. Cited figures are marked; the original filing is the authoritative source.
Canadian Pacific (CP) reported first-quarter 2019 results on April 23, 2019, with total revenues up 6% to C$1.77 billiona (from C$1.66 billion) and net income rising 25% to C$434 million.
Reported diluted EPS was C$3.09b, up 28%, but this figure is flattered by a non-cash C$45 million foreign exchange gain on U.S. dollar-denominated debt and lease liabilities (worth about 30 cents per share). Adjusted diluted EPS, which strips out that FX item, was C$2.79, up only 3% from C$2.70, and the operating ratio deteriorated 180 basis points to 69.3% from 67.5%. Management attributed the weak underlying performance largely to a severe winter in February and March, which hurt operations and volumes, though CP's commentary emphasized a strong recovery afterward.
Operating income was essentially flat at C$543 millionc, and purchased services and other expense jumped 30% to C$357 million. Freight revenue rose 6% overall, but FX-adjusted growth was only 3%, with strong gains in energy, chemicals and plastics (up 18% FX-adjusted) offsetting declines in metals, minerals and consumer products (down 9%) and fertilizers and sulphur (down 8%). Total RTMs fell 1%, and carloads declined 2%.
Cash from operations rose to C$413 milliond, and free cash reached C$193 million, versus C$164 million a year earlier. CP repurchased C$185 million of stock and paid C$91 million in dividends. CP reaffirmed its 2019 guidance of mid-single-digit RTM growth and double-digit adjusted diluted EPS growth from a 2018 base of C$14.51, with about C$1.6 billion in planned capital spending.
Investors should weigh the reaffirmed targets against the weak underlying Q1 trends. Achieving double-digit growth now requires a sharp rebound in the remaining quarters, since adjusted EPS grew only 3% in Q1. The filing also highlights ongoing Lac-Mégantic litigation, with a liability trial scheduled for September 2020.
02—Key points
Key Highlights
- Total revenues rose 6% to C$1.77 billion, but FX-adjusted freight revenue growth was only 3%.
- Reported diluted EPS of C$3.09 (+28%) includes a non-cash FX gain worth about C$0.30; adjusted diluted EPS was C$2.79, up just 3%.
- Operating ratio worsened 180 basis points to 69.3% from 67.5%, and operating income was roughly flat at C$543 million.
- Purchased services and other expense rose 30% to C$357 million, a major cost headwind.
- Free cash increased to C$193 million from C$164 million, and cash from operations rose to C$413 million.
- 2019 guidance was reaffirmed: mid-single-digit RTM growth, double-digit adjusted diluted EPS growth from C$14.51, and about C$1.6 billion in capital spending.
- Lac-Mégantic litigation continues, with a liability trial set to begin in mid-September 2020.
03—Questions
Frequently Asked Questions
Why did reported EPS rise 28% when adjusted EPS only rose 3%?
Reported diluted EPS of C$3.09 includes a non-cash C$45 million gain from translating U.S. dollar-denominated debt and lease liabilities into Canadian dollars, worth about C$0.30 per share. Excluding that item, adjusted diluted EPS was C$2.79, up 3% from C$2.70, which better reflects underlying operating performance.
How did the harsh winter affect CP's first-quarter results?
Management said February and March were among the most challenging winter conditions of CEO Keith Creel's career. The weather disrupted operations and pressured volumes and costs, and total RTMs fell 1% year over year. The company said it recovered strongly under its precision scheduled railroading model, but the quarter's operating ratio still deteriorated 180 basis points.
Is CP still on track to meet its 2019 guidance?
CP reaffirmed guidance for mid-single-digit RTM growth and double-digit adjusted diluted EPS growth from a 2018 base of C$14.51. Because Q1 adjusted EPS grew only 3%, meeting the double-digit target would require significantly stronger growth over the remaining three quarters, and the filing does not provide a specific quarterly breakdown.
What drove the revenue growth and where were the weak spots?
Freight revenue rose 6% reported, or 3% FX-adjusted. Energy, chemicals and plastics was the standout, up 18% FX-adjusted. Metals, minerals and consumer products fell 9% FX-adjusted, and fertilizers and sulphur fell 8%. Carloads declined 2% overall, while revenue per carload rose 9%.
How is CP returning capital to shareholders?
In Q1 2019, CP paid C$91 million in dividends, declaring C$0.65 per share, up from C$0.5625 a year earlier. It also repurchased about 0.7 million shares for C$185 million, and it has bought back a total of 2.89 million shares for C$753 million under its current normal course issuer bid, which runs until October 2019.
04—Continue