Canadian Pacific Kansas City Ltd (CP) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Canadian Pacific Railway second quarter results media conference call. These remarks may contain forward-looking information. Actual results may differ materially, the risks, uncertainties and other factors that could influence actual results are described in the company's annual report and annual information form.

I would now like to turn the meeting over to Mr. Robert Ritchie, President and Chief Executive Officer of Canadian Pacific Railway. Please go ahead Mr. Ritchie.

Thank you very much operator and good afternoon ladies and gentlemen.

Before I start, just let me introduce who I have with me. First we have Mike Waites, our Chief Financial Officer, Ed Dodge our Chief Operating Officer, and Fred Green, our Senior Vice President of Marketing and Sales.

So you've probably had a quick look at our results, and I have to say I'm please with the CPR's performance and not only in the quarter just ended, but also through the first half of the year.

Operating income for the quarter was up seven percent and excluding the non-recurring items from the previous year, the increase year to date is where I'd like to see it, in the double digits. opportunity to say it.

This is our consecutive quarter of improved operating income when you exclude those non-recurring items from the previous year's results.

We took our 1.6 percentage point off our operating ratio for the quarter and year to date the improvement is a very substantial 2.7 points and again excluding those 2001 non-recurring items.

of these results, we had considering that we went in to our second quarter with a continuous weakness . 20 percent below normal and with continued uncertainty in the economy.

We've demonstrated that we can manage our business very well through difficult periods and we continue to lower our cost base. discipline is intransient in every area of our business.

From the top lines we are hitting our growth targets for yield and we are attracting new businesses. All in all CPR's net income was 169 million for the second quarter, was up 35 percent over second quarter '01. Diluted earnings per share were up 34 percent to 1.06.

Taking out foreign exchange gains on long term debt, our EPS for the quarter was up 50 percent to 70 cents per share. Our team is delivering on its commitment to build real value for CPR's shareholder and delivering to this commitment in the face of on the top line on the revenue area.

Going forward we are well positioned in the marketplace with a diverse commodity mix of capacity for growth. We are sharply focused on improving customer service lowering our top line and most importantly running a safe operation. Year to date we have had our best safety performance on record for train operations.

Operator, I'll turn it back to you now and we'll take a queue for a question-and-answer period for myself and my colleagues at Canadian Pacific.

Thank you, Mr. Ritchie. We will now poll for questions today using our click queue polling feature. If you have a question please press one on your touch-tone telephone. If you're using a speakerphone, please lift your handset and then press one.

Should you wish to cancel your question, please press the number sign. Please press one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patients. Once again, if you have a question, please press one on your touch-tone telephone.

Our first question will come from of . Please go ahead.

Hello, Mr. Ritchie . . .

. . . .

Wondering if you continue to see reduction in operating expenses in the second half of the year?

Well we're going to continue to work away on the productivity, . We've got some particularly initiatives that we're pursuing to get train - continuing train growth and I'll turn that over to . But the comparables are going to get tougher as the - there's no doubt about that as we start to catch up to the reductions in fuel prices which started in the third quarter last year.

So - or end of the third and beginning of the fourth quarter. So, we'll be talking about the - we're still working away on productivity trains and productivity employees. And so I expect that there'll be some continuation there and, , I'll turn that over to you.

Yes, Rob. We have our sighting program in northern Ontario will be completed in September and on stream for the fourth quarter. So we expect to see some productivity improvements there not only on some reductions of train starts but also fuel savings in that area.

As Rob mentioned that we have some other productivity measures coming on stream on our car side. And while we've made great headway in the first half we expect to push that even further. But as Rob has mentioned we have vigorous cost disciplines in all aspects of our major operating processes and we're pushing those with the for ensuring that we give the service level that we've given -- told our customers about.

So, do you think you'd be able to say, equal the savings in the second half.

I'm reluctant to give guidance like that.

Right.

we'll continue to make progress and that's about as far as we'd like to go at this stage.

Thank you.

Thank you and our next question will come from James of the Canadian Press. Please go ahead.

Yeah, Rob, can you give us an update on the cost-cutting these days? Any extra jobs compared cut from compared to a year ago and where you're getting your savings from?

Well, James, you can see from the fact sheet we're down approximately 1100 employees from this time last year. We will continue to look at specific initiatives, but there is no across the board program contemplated at this time. We're really focusing on growing the top line as well as getting productivity improvement, so I'm satisfied with, you know, the 5 per cent approximately improvement in employee productivity in the first -- or in this quarter. So, I would say that it's, you know, that we'll continue, as Ed says, to grow the productivity on trains, grow the productivity in employees through specific initiatives, but with no great program in place that -- I believe that right now.

Okay

Thank you and our next question will come from of Bloomberg News. Please go ahead.

Hi, Rob, how are you?

Good and yourself?

Fine thanks. In terms of the grain shipments, obviously they -- another -- looks like another bad year shaping up, what do you think the prospects hold for the harvest? Another question is about the income -- would profit from operations be the exclusion of the currency -- the foreign currency exchange gains?

Why don't I just take a shot at the -- at the grain crop and turn it over to Fred to elaborate on it and then Mike will give you an update on where all that currency issue is?

Perfect.

On the grain crop, obviously, it's a mixed -- it's hard to get our hands around what's going on. It's not a good year on the Canadian Prairies. It seems to deteriorate the more North you go which is a flip side from what the situation was last year. So that's just a general, Fred, I'll turn it over to you.

All right, Reg, I can probably elaborate a little bit more. But, again, as Rob said, this is an item that nobody in the Wheat Board or Ag Canada can accurately predict so we're not going to attempt to accurately predict it.

Right.

We'd rather we just use the indicators that -- for you to use your own judgment as we attempt to and that is, as Rob says, the moisture content south of the TransCanada Highway is substantially greater this year than last year. However, you know, as the heat wave continues whether that will dry up and what it will do to crop production remains to be seen. So, from our perspective, we recognize that it's likely to be a somewhat difficult year next year based on the crop year, but we can't predict with certainty whether it'll be equal to last year, somewhat better or just slightly worse. We're not sure at this point.

Okay, thanks.

Reg, it's Mike , did I understand your question correctly to be explain the impact of the foreign exchange on the long-term debt?

Yeah, well, and how that related to the income that you reported.

Okay, so what we've reported then, Reg, is we've reported net income of 168.7 million dollars --

Right.

-- that includes the impact of this gain, this 57.9 million dollar gain and what that is we have, for many reasons, as a company a substantial amount of U.S. dollar denominated debt. What you saw in the quarter was a very large appreciation, a very significant appreciation in the Canadian dollar versus the U.S. dollar. So that U.S. debt in terms of Canadian dollars became less, and so there is a gain in Canadian dollar terms. And that gain - we are now required to recognize for financial accounting purposes, all of that impact in the reporting period; in the second quarter obviously, here.

Where as before you could - you could amortize it?

That's correct, and so what we've done to help the reader of the financial statements is we've isolated that impact as a line item, and we've said look, if you want to take that out because it is an unrealized gain, it will only be finally realized of course, when the - the debt matures...

...right...

...you take that out and so our net income number then excluding that, is $111.1 million; that compares to $96 million last second quarter, and again, I want to emphasize there are also some similar adjustments...

...yes, the 30 million or so...

...that's adjustments. So it's really an apples and apples comparison, but we try to do...

...right, and so if I wanted to say, here is what you made from your actual business, it would be 111 - 111 million versus 96 million?

That's correct. And the other thing here is the operating income - I think you should focus on that improvement as well. So if you take a look at the operating income, what you get is another measure of operationally our performance...

...yes...

...the 219 versus 206, so at 13 percent improvement. Those adjustments also pertain to all three.

Great. Thanks.

Thank you. And our next question will come from of the Calgary Herald. Please go ahead.

Hello. Some of the other railways have reported are indicating the second half of the year will be slower than the first half has been. I noticed if I'm reading this correctly, that you are expecting coal volumes to pick up in the second half. Is that right?

Well, let me turn it over to Ed for that one.

Sure.

, what we are suggesting is that the - the full marketplace is somewhat uncertain on a global basis, that is for example, the Japanese steel mills have just settled with some of the Canadian producers. And as such, there is a - a little bit of a backlog has built up in certain places. So, our success is obviously tied to the success of the selling their - selling their coal. I would not anticipate at this point in time that we would see a second half that is strong this year than last year. There is - there is enough of stockpile built up; it's going to be in the same range, maybe .

OK.

Thank you, and our next question is from of Reuters. Please go ahead.

Yes, sorry. My question was kind of similar to - to the last one, and that is I'm just wondering if Robert you might take a moment to discuss your outlook for the - for the second half economy? You mentioned that the end of the last quarter that you were looking at a small up tick in economic - in the economy and I was just wondering if you agreed with some of your competitors cautionary tones about - about prospects there.

Well we certainly - we are certainly caution - there because there is just so much uncertainty in a lot of the bulk areas. What we do know is that we are getting good - good results from our yield program. We are getting results from our initiatives program. We're seeing some strength in the economy - that's overall for the company as a whole; there is just so much uncertainty in coal and in grain in particular. It wouldn't be wise for us to give any guidance going forward - that it's going to be a strong or weak year. So we are just waiting to see what all those turn out. Then when we have better information we'll - we'll share it with you.

Thank you.

Thank you. And our next question will come from , . Please go...

Yes, great quarter gentlemen. I was wondering about your fuel expense. Are you planning to hedge in the coming quarters, your fuel expense now that it's - it's kind of lower?

The answer is yes. We've had a hedging program in place all year, and in fact it extends a number of years. So the next two quarters, we have approximately half of our fuel requirements hedged, and that hedge price is an average price of $23.50 per U.S. approximately.

OK. Thank you.

OK.

Thank you. Once again, if you have a question, please press one on your touchtone telephone. There will be a brief pause while the participants register for questions. Thank you for your patience.

Once again, if you have a question, please press one.

And our next question is a follow up question from of the . Please go ahead.

Hello, I was just wondering about what your outlook was for automotive demands?

Well we - the automotive industry continues to run quite strong. There is - in Q1 commentary that we know that we would have a General Motors facility plans to shut down in Q3 of this year. And from the looks of things, the market is strong enough that some of our other relationships that we will - will be able to cover that as we go forward. So we're quite satisfied that it's a strong market and we're holding our own in certain market places such that we can look forward to continued successful third and fourth quarter.

Thank you. Once again, if you have a question, please press one.

And our next question is from of . Please go ahead.

I thought that pressing one was never going to work.

I have a - I have a question that probably I would know the answer to if I'd had time read through all the material, but you say that for the first half of 2002, net income was 305 million, up from 145 million from the first - from the first half of last year. That's a 90 or 91 percent increase. Could you please explain that?

Sure, I'd like to...

...I'd like to ask a question about outlook, which I could pose later.

OK, let Mike take on the - the net income question.

OK , the reason why you are seeing such a large increase in the gain because we saw unusual items on non-recurring items to a very significant degree this quarter. I do need to emphasize there also were some of those also last quarter. Very briefly I will take you through them.

So we had two very large favorable developments this year. Number one, on a year to date basis, we've recognized a $54 million gain on the foreign exchange and U.S. that and it gained very quickly. What that means is, as the Canadian dollar strengthens, we book a gain because we have less debt to pay in Canadian dollars. So what we do is we isolate that and say well if we exclude that because it's an unrealized gain what would our number have been?

The other thing that we - the other item that we eliminated for the first half of this year was a $72 million one time favorable tax settlement and so what we say is we take the 305 million and properly record an income but we say if you're trying to understand the underlying costability of the company for comparative purposes it's more like $179 million.

We had some similar one time items in the first half of 2001. They were not as significant. We have details for you in the press release. But the comparable number then is $158 million for the first half of last year. So, in fact the increases are more intuitively consistent $21 million up 13 percent.

Excellent. OK. Thank you. Various others have asked the outlook question but Mr. yesterday who had a good year - a good corner in the first half as well was extremely - he was cautious to the point of pessimistic and he talked of a crisis of confidence in the economy and the societies as a whole affecting everybody in business. You don't seem to take it to that extent.

No, I don't. I don't disagree that we have issues that we have to deal with. I think western society is dealing with it. There is obviously a rage on the market and the indexes and so cost price - or stock prices are that. That's a crisis of confidence in that area specifically.

But we're still seeing as said strong underlying new growth in consumer spend, in automobiles. We're seeing it strong in lumber. We're seeing an improvement in which has got to mean that people are starting to look at commodities that will be used in that area.

So, I don't - my issue is having to do with the bulk mainly gray and inability to determine not only what the size of the Canadian crop is going to be but where that crop is going to be. So, we're reluctant to - we just can't get our hands around where we think Canadian Pacific is going to come out in the way of grain movement for the latter half of the year.

So, we don't think it would be very responsible to forecast it. Now, that is one small area of the economy in North America. But otherwise we're seeing a reasonable growth in other areas.

The where it's going to be means distance from your CP lines?

Well that - if there's a silver lining there on the Canadian grain area it is that the moisture this year is more in the southern part of the prairies.

Yes.

That's all I can tell. I can see that from ag Canada maps, et cetera, in that I don't know if it's going to continue. This is a very critical point. And they're having a huge heat wave out there now . . .

Yes.

And is there enough moisture to bring the crop through. So, offset where we are right now but if I had to be in the south - if I was a farmer I'd rather be in the southern part of the prairies than the normal part. If I was a rail runner, I am in the southern part and I'm happy to be there.

And it's really - your analysis is really on the basis of the sort of fundamental states of all the various commodities that you deal with and you're not that worried about the -- the overall psychology in North America and in the World?

I shouldn't say I'm not worried. I am concerned, you know, I believe it's still fundamentally strong.

Okay.

I do not believe that, you know, we've reached a tipping point where there's, you know, one piece of bad news at another and all of a sudden people say, oh, that's it. I'm not going to buy automobiles, I'm not going to build homes. Those are the major drivers that we see and so we still see that the commodities that are based around the consumer moving along. Another example, I would say, would be in a import, export and all form of the domestic so, those are strong. CP's got a good market share, a good story there based on our service, so I am not one to say that it's -- that it's going down.

Thank you.

Okay.

Thank you. Once again, if you have a question please press 1.

Well, operator, I think that we've had a good discussion. I want to thank the people for joining us. We appreciate their attention and helping us get the story out. We're in New York City today. We'll be at JP Morgan tomorrow where I believe the media's invited, on a listen only mode and we'll also have that on a web cast and recorded on our web site. So you're welcome to join. Thank you very much.

As I said, I think we had a cost driven quarter. The market in itself people did a good job in those areas where it was possible for them to gain market share and they came through in that area. The big uncertainty, as it has been for the first half of the year, is around the grain crop. So, thank you very much ladies and gentlemen and we'll talk to you next quarter. Bye bye.