Why did EPS grow faster than operating performance in Q4 2020?

Q4 diluted EPS rose 23% to C$5.95, but operating income rose only 4%. Much of the gap came from non-operating items: a C$29 million deferred tax recovery from a North Dakota tax filing election (about 22 cents per share) and a C$103 million FX gain on U.S.-dollar debt and lease liabilities (about 67 cents per share). Adjusted diluted EPS, which excludes the FX and tax items, rose a more modest 6% to C$5.06.

What drove the revenue decline in 2020, and where did volumes recover?

Full-year revenue fell 1% to C$7.71 billion. Energy, chemicals and plastics revenue was flat, while coal fell 17%, metals and minerals fell 16%, and automotive fell 8%. Grain grew 9%, fertilizers and sulphur rose 16%, and potash rose 7%. Q4 RTMs grew 2% year over year, with grain up 18% and potash up 25%, although energy, chemicals and plastics was down 27%.

What does the 2021 guidance imply for investors?

CP expects high single-digit RTM growth, double-digit adjusted diluted EPS growth from the C$17.67 base, capital expenditures of about C$1.55 billion, and an effective tax rate of approximately 24.6%. Other components of net periodic benefit recovery are expected to rise by about C$40 million. The guidance assumes continued volume recovery from COVID-19 disruption, and the company warns that FX movements and tax changes can significantly affect reported EPS.

How is CP's balance sheet and capital allocation positioned?

Long-term debt including current maturities rose to C$9.77 billion from C$8.76 billion, and the adjusted net debt to adjusted EBITDA ratio was 2.5x, up slightly from 2.4x. Full-year share repurchases were C$1.5 billion, with a weighted-average price of C$371.74 per share, and dividends declared rose to C$3.56 per share from C$3.14. The adjusted dividend payout ratio was about 20%, leaving room for continued buybacks and dividend growth.

What was the significance of the Detroit River Tunnel acquisition?

CP completed the purchase of OMERS Infrastructure's 83.5% interest in the Detroit River Tunnel Partnership for C$398 million net of cash acquired, bringing its ownership to full control. The tunnel is a 1.6-mile rail link between Windsor, Ontario, and Detroit, Michigan. The deal produced a C$68 million pre-tax remeasurement gain on CP's previously held 16.5% stake and C$90 million of goodwill, mainly tied to the contract CP has for tunnel use. The purchase price allocation is preliminary.

CP 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed January 27, 2021. Cited figures are marked; the original filing is the authoritative source.

Canadian Pacific Railway (CP) reported record fourth-quarter and full-year 2020 results on January 27, 2021, furnished under Item 2.02 of Form 8-K.

Q4 2020 revenues fell 3% to C$2.01 billion^a, but operating ratio improved 310 basis points to a record-low 53.9%, diluted EPS rose 23% to C$5.95, and adjusted diluted EPS rose 6% to a record C$5.06. For full-year 2020, revenues declined 1% to C$7.71 billion, the operating ratio improved 280 basis points to a record-low 57.1%, and diluted EPS rose 3% to a record C$17.97. Adjusted diluted EPS rose 7.5% to a record C$17.67.

Safety also improved, with FRA-reportable personal injuries and train accident frequency reaching record lows. The headline EPS growth was flattered by non-operating items. Q4 included a C$29 million^b deferred tax recovery tied to a North Dakota tax filing election, worth about 22 cents per share, and a C$103 million FX gain on U.S.-dollar debt and lease liabilities.

Operating income rose 6% for the year, and free cash flow was C$1.16 billion^c, down from C$1.36 billion in 2019, reflecting the C$398 million Detroit River Tunnel Partnership acquisition and lower operating cash flow. Full-year share repurchases totaled C$1.5 billion, and the company declared dividends of C$3.56 per share, up from C$3.14. For 2021, management guided to high single-digit RTM growth, double-digit adjusted diluted EPS growth from the C$17.67 base, capital expenditures of about C$1.55 billion, and an effective tax rate of roughly 24.6%.

Investors should note that volume recovery through 2020 was uneven: energy, chemicals and plastics and coal volumes fell sharply, while grain and potash grew. The guidance depends on sustained volume recovery after COVID-19 disruption.

02—Key points

Key Highlights

Record-low full-year 2020 operating ratio of 57.1%, improved 280 bps year over year, and record-low Q4 operating ratio of 53.9%.
Full-year 2020 diluted EPS of C$17.97 (+3%) and adjusted diluted EPS of C$17.67 (+7.5%), both records.
Q4 2020 revenue fell 3% to C$2.01 billion, while Q4 diluted EPS rose 23% to C$5.95, aided by a C$29M tax recovery and a C$103M FX gain on debt.
2021 guidance: double-digit adjusted diluted EPS growth, high single-digit RTM growth, and C$1.55 billion in capital expenditures.
Completed the C$398M acquisition of OMERS' 83.5% stake in the Detroit River Tunnel Partnership on December 22, 2020, giving CP full ownership of the Windsor–Detroit rail tunnel link.
Full-year free cash fell to C$1.16 billion from C$1.36 billion, while C$1.5 billion was spent on share repurchases and dividends per share rose to C$3.56.
Record safety performance: FRA personal injury rate fell 22% to 1.11 and train accident frequency fell 9% to 0.96.

03—Questions

Frequently Asked Questions

Why did EPS grow faster than operating performance in Q4 2020?
Q4 diluted EPS rose 23% to C$5.95, but operating income rose only 4%. Much of the gap came from non-operating items: a C$29 million deferred tax recovery from a North Dakota tax filing election (about 22 cents per share) and a C$103 million FX gain on U.S.-dollar debt and lease liabilities (about 67 cents per share). Adjusted diluted EPS, which excludes the FX and tax items, rose a more modest 6% to C$5.06.
What drove the revenue decline in 2020, and where did volumes recover?
Full-year revenue fell 1% to C$7.71 billion. Energy, chemicals and plastics revenue was flat, while coal fell 17%, metals and minerals fell 16%, and automotive fell 8%. Grain grew 9%, fertilizers and sulphur rose 16%, and potash rose 7%. Q4 RTMs grew 2% year over year, with grain up 18% and potash up 25%, although energy, chemicals and plastics was down 27%.
What does the 2021 guidance imply for investors?
CP expects high single-digit RTM growth, double-digit adjusted diluted EPS growth from the C$17.67 base, capital expenditures of about C$1.55 billion, and an effective tax rate of approximately 24.6%. Other components of net periodic benefit recovery are expected to rise by about C$40 million. The guidance assumes continued volume recovery from COVID-19 disruption, and the company warns that FX movements and tax changes can significantly affect reported EPS.
How is CP's balance sheet and capital allocation positioned?
Long-term debt including current maturities rose to C$9.77 billion from C$8.76 billion, and the adjusted net debt to adjusted EBITDA ratio was 2.5x, up slightly from 2.4x. Full-year share repurchases were C$1.5 billion, with a weighted-average price of C$371.74 per share, and dividends declared rose to C$3.56 per share from C$3.14. The adjusted dividend payout ratio was about 20%, leaving room for continued buybacks and dividend growth.
What was the significance of the Detroit River Tunnel acquisition?
CP completed the purchase of OMERS Infrastructure's 83.5% interest in the Detroit River Tunnel Partnership for C$398 million net of cash acquired, bringing its ownership to full control. The tunnel is a 1.6-mile rail link between Windsor, Ontario, and Detroit, Michigan. The deal produced a C$68 million pre-tax remeasurement gain on CP's previously held 16.5% stake and C$90 million of goodwill, mainly tied to the contract CP has for tunnel use. The purchase price allocation is preliminary.

04—Continue

← View all 8-K filings