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CP Rail forecasts earnings growth despite drop in second-quarter profits

Canadian Pacific Railway Ltd. is forecasting adjusted earnings growth in 2020 despite a sharp drop in profits in the second quarter.

Canadian Pacific Railway Ltd. is forecasting adjusted earnings growth in 2020 despite a sharp drop in profits in the second quarter.

The Calgary-based railway beat expectations even though its net income fell 12 per cent to $635 million in the quarter ended June 30 due to "immense challenges" caused by the COVID-19 pandemic, said CEO Keith Creel.

A record operating ratio, which measures costs as a percentage of revenue, of 57 per cent helped the company beat analysts' earnings expectations.

That efficiency owed partly to layoffs that peaked at 1,200, though some employees are back on the line as automotive, metal and container shipments start to ramp back up.

Employees numbered nearly 12,000 at the end of June, 10 per cent fewer than a year earlier.

Creel said that revenue ton miles, which gauge revenue per volume of freight transported, will likely decline in 2020, in line with CP's lowered guidance from April.

"If we're going to be down mid-single-digits, you should expect the same on a headcount standpoint at the end of the year," he told analysts on a conference call Wednesday.

"We're not going to call anyone back we don't need, but we're working hard to increase and drive business at this railroad so we can get our employees back to work."

Grain, potash, fertilizer and forest product volumes rose this year, with grain up eight per cent year over year to 8.4 million tonnes, marking a third consecutive record quarter.

Auto, metals, container, oil and coal revenues decreased — auto by more than two-thirds and metals by more than one-third — as car plants, factories and retailers shut down for much of the three-month period.

CP Rail raised its financial guidance Wednesday to forecast adjusted diluted earnings-per-share growth this year. The railroad operator had lowered its guidance in April due to fallout from the coronavirus, saying a drop in crude oil and auto shipments would outweigh gains in grain traffic and result in flat adjusted earnings per share.

"Key is that the performance is entirely cost-driven as the company not only improved its operating ratio, it pushed it into record-level territory for Q2 — remarkable given the conditions," said RBC Dominion Securities analyst Walter Spracklin.

The company did not specify its expected growth in adjusted earnings per share, but noted the forecast "is relative to 2019's adjusted diluted EPS of $16.44."

CP reported revenues of $1.79 billion for the three months ended June 30, down 9.4 per cent from $1.98 billion in the prior year quarter.

Adjusted net income fell to $553 million or $4.07 per share compared with $602 million or $4.30 per share in the second quarter of 2019, beating analysts' predictions.

CP was expected to report $3.78 per share in adjusted earnings on $1.76 billion of revenues, according to financial markets data firm Refinitiv.

The company announced Tuesday it will raise its dividend by 15 per cent to 95 cents per share, up from 83 cents, and will restart its share buyback program.

This report by The Canadian Press was first published July 22, 2020.

Companies in this story: (TSX:CP)

Christopher Reynolds, The Canadian Press

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