Canadian Pacific expects a tough second half

CALGARY — Canadian Pacific Railway Ltd. is bracing for a decline in the remainder of 2010 after second-quarter revenue rose 20 per cent, with nearly nearly every business segment contributing to the improvement.

CALGARY — Canadian Pacific Railway Ltd. is bracing for a decline in the remainder of 2010 after second-quarter revenue rose 20 per cent, with nearly nearly every business segment contributing to the improvement.

“We continued to see significant volatility in weekly demand. This makes for a challenging operating environment,” CEO Fred Green said during a conference call Wednesday after the Calgary-based company issued its second-quarter rsults.

“We’re adjusting our resources in line with volume and sustaining our productivity improvements.”

The Calgary-based railway brought in $1.2 billion in revenue during the quarter, up about $200 million from a year before, as carload volumes grew by 20 per cent.

Grain transport was the only one of seven business segments at Canadian Pacific to show any drop in revenue, and the decline was a relatively small $10 million.

The railway’s revenue from coal, automotive and intermodal freight all showed marked improvements. The sulphur and fertilizers segment was up 94 per cent.

Canadian Pacific (TSX:CP) says a combination of growth and cost-containment helped improve its second-quarter profit.

Net income was $166.6 million or 98 cents per share — up 23 per cent from the same time last year, when the North American economy was in recession.

Adjusted diluted earnings per share nearly doubled, rising to $156.2 million or 92 cents per share — beating analyst estimates by nine cents per share.

“The second quarter was a good quarter, with volumes recovering and the continued discipline around cost management,” chief financial officer Kathryn McQuade told analysts.

The railway improved its operating ratio by 430 basis points to 77.8 per cent despite the late June flooding.

She said the railway is driving productivity improvements by using heavier and longer trains to accommodate additional volume at lower incremental costs.

“We are building momentum to deliver improved bottom line results,” she added.

The heavy flooding in southern Alberta and Saskatchewan that washed out CP’s main line for 11 days is estimated to cost the railway about $20 million, or 12 cents per share, McQuade added.

Delayed loadings reduced its second quarter revenues by $23 million, but about half of that is expected to be recovered during the third quarter.

Canadian Pacific had $9 million in additional expenses from using its secondary main line and detouring traffic to other railroads to keep traffic moving.

Rebuilding the damaged track is expected to cost $15 million.

Wet weather is expected to reduce the acreage of seeded grain to 15 per cent below traditional levels, although final yields are difficult to determine.

“We expect Canadian grain, which represents approximately 60 per cent of our grain volume, to be weaker than 2009 from harvest forward,” added Jane O’Hagan, chief marketing officer and vice-president marketing and sales.

The Port of Montreal labour dispute that lasted about six days is not expected to have a material impact on the railway’s results.

Benoit Poirier of Desjardins Securities said Canadian Pacific’s solid second-quarter results will be overshadowed by other railroads’ stellar performance.

But Tasneem Azim of UBS said the railway would have done even better had it not been for the floods.

“In other words, a solid beat whichever way you look at it,” he wrote in a research note.

On the Toronto Stock Exchange, CP’s shares gained 63 cents at $60.45 in afternoon trading.