Canadian Pacific Kansas City Ltd (CP) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CP Rail Third 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. Rob Ritchie, President and Chief Executive Officer of Canadian Pacific Railway. Please go ahead, Mr. Ritchie.

Thank you, Operator, and good afternoon to everyone on the line. Before I start, let me introduce who I have here with me. We've got Mike Waites, our CFO; Ed Dodge, our Chief Operating Officer; Fred Green, who's our Senior VP of Marketing and Sales; Paul Bell from Investor Relations, and Tyra Henschel, who you all know from Public Affairs.

You've had a few minutes to look over our results. I want to start by pointing out that when we closed our first quarter, we also closed our first years of the spin-off of CP Limited. I'm proud of what our employees have done and have achieved since October 3, 2001. We produced another solid quarter in a year-to-date performance that's very strong in a tough climate.

Our spin-off occurred, obviously, in a turbulent time, less than three weeks after 9/11 in the United States and during the economic uncertainty that followed. Obviously, also, the prairie droughts cut severely into grain production in this country over the last two harvests. So any one of those events could have become an excuse for sliding off our game, but I'm pleased to say that we didn't do that.

We delivered quarter after quarter from the spin-off's original goal, which was to unlock value into the CPR. Taking out unusual items, you're going to see that our net income for the third quarter 2002 is up 10 percent, diluted earnings per share in the quarter in the same basis were $0.68, an increase of 10 percent. We overcame a sizable decline in two of our largest commodity markets, grain and coal, by growing our revenue in other commodities. We can't control the weather, so if you take out the drought-induced decline in grain revenue, you'll see that CPR grew revenues by 5 percent in the commodities, where our scheduled service and innovative products helped to drive our performance.

Going forward, some wildcards remain in the grain sector, including the 2002 yield in quantity, as well as the timing of those shipments of grain. Metallurgical coal remains a challenge due to weaker-than-expected export sales by one of our major customers, and has obviously got some new challenges on your – on their plate as of this morning. But we have a diverse commodity mix and network capacity. We expect to use these advantages to generate continued growth in our business. So assuming that the economy remains reasonably stable, we still expect to achieve our target earnings growth of 3 to 5 percent for the year, year 2002.

So before I turn it over to questions, just one very important result that I'd like to comment on, and that's our safety performance. When it comes to train accidents, CPR is a gold medallist in the North American rail industry. I'm proud of that accomplishment because it takes a lot of hard work and commitment by our employees, and they never can let up. And this year, we continued to lead the pack, and I'm also pleased to say that we've received verification as a Responsible Care partner of the Canadian Chemical Producers' Association, which is another important indication of the safety culture which pervades our Company.

So, Operator, I will now turn it over to questions to you, and I’m presuming that right off the bat we have [Peter Fitzpatrick] from the National Post. So, Peter, first question to you.

We will now poll the telephone lines for questions. If you have a question, please press one on your telephone keypad. If you are using a speakerphone, please lift the handset and then press one. If at any time you wish to cancel your question, please press the number sign. Please press one at this time if you do have a question. There will be a brief pause while the participants register for questions. Thank you for your patience.

And our first question is from [Peter Fitzpatrick] of Financial Post. Please go ahead.

Oh, hi, good afternoon.

How're you doing, Peter?

Hi. Just curious, your operating ratio was up a bit, and I'm wondering what's behind that. And, also, is that a bit of a concern because you obviously want to go the other direction?

Right. Well, normally, it would be a concern, but if you look through the numbers, you're going to see that, you know, our materials were up $10 million, which was a major change. And what that is really is a tough compare with the third quarter of '01, where we were – had a – because of timing last year, we had a better performance in our materials comp than we normally have. So materials are running on a run rate that's perfectly satisfactory as far as we're concerned. So we believe that they – the Company is exiting the quarter in pretty good shape.

And just a second question if I can. I'm just curious about – well, today's announcement you kind of alluded to it and -- do you see any impact or --?

We've got a good – Fording's a good coal company, as are – is Luscar. We have good – the – good relationships with them. We've got a long-term contract with Fording, so we don't believe that there's going to be any medium – short or medium-term problem on this.

Okay, great. Thanks.

Thank you. Our next question will come from Jeff Jones of Reuter. Please go ahead.

I had a question regarding what, if anything, would be your intentions regarding BC Rail should the government there decide to privatize it?

Well, if they decide to privatize it, Jeff, we've said that we have some interest in that area. We want to get better -- our market share in British Columbia, but we haven't really received anything firm, so we're not putting off a lot of resources into that right at the moment. So we're going to – we're taking a wait-and-see look on that.

Bob, just as a follow-up –

Yup.

-- has there been any word at all, like has there been sort of a call-around, say, by the BC authorities to say, "Okay, what's your level of interest should, you know --? Does it look like – does it look like the resources are being put together for a – for a sale of that asset?

I can't really say, you know, that there hasn't been any call-around. We've just – we've talked to a few of the shippers, and their people are wondering where the [Premier]'s going to go, and I would say it's his call and right now he's playing those cards pretty close to his vest.

Thank you.

Thank you. Our next question is from [Reg Curran] of Bloomberg News. Please go ahead.

Hi, Rob.

Hi. How're you doing?

Not bad. I'm just wondering on the – I’m trying to square the 108 with the table, 108 million in the third quarter versus the figure that you provided in the table. What – can you tell me how I can get there?

Why don't I let Mike try to square numbers. He's a lot better at it than I am.

Okay.

Okay, Reg, if you take a look at the income statement, you can see that the reported net income is $65.3 million.

Yeah.

The 108.3 -- I think you're looking at the summary of rail data – and you can see that if you go below the 108.3, we had $46.9 million of foreign exchange losses on U.S. dollar-denominated debt. So what happened on the third quarter is you saw a weakening of – the Canadian dollar came down to about a buck 59 versus a buck 51, a buck 52 at the end of the second quarter --

Okay.

-- and so that U.S. dollar-denominated debt translates to a lot more Canadian dollars. Now, what we've done each quarter, I think, as you know, is we've said, look, that's an extremely volatile impact on our income statement. It has become more so because of the change in the Canadian accounting standard –

Um-hmm.

-- that requires us to recognize that all in the period. And maybe I'll just conclude the comment by saying that on a year-to-date basis, we, in fact, have a small foreign exchange gain, so you can't see a lot of volatility in the quarters, but year-to-date, we're up about seven million bucks.

Okay, and that's – and that's a result of your hedges?

No. That's the net impact. Earlier on, if you go back to the beginning of the year, hence the year-to-date number, you saw a Canadian dollar that didn't change that dramatically, just a little bit. And so, therefore, there's not a big impact on the P&L. There were some limited losses relating to foreign exchange, but the big issue was the difference in the exchange rate on the U.S. dollar-denominated debt.

Okay. Now, in terms of your – the income tax figure that I noticed in the – for the third quarter, it seems dramatically higher than a year ago.

Okay, and I think what you're looking at there again is the effective tax rate on the recorded number, the 65.3?

Yeah.

Yeah, and the reason why that is is because, as I just talked about, this $46.9 million, we've, again, isolated that on the summary of rail data. That's a foreign exchange loss, as I'd mentioned. CPR has very significant capital tax losses in Canada –

Um-hmm.

-- and, therefore, we don't take a tax offset on that loss, so you're seeing a number -- I think your calculation probably shows low 40s, but if you exclude that and go back to the 108.3 number and take an effective tax rate, it's more in line with what you would expect.

Okay, great. And, Rob, just on the operational side of things, with the grain crop having been in distress the past two years – I know you can't predict the weather, although a lot of farmers think you do – what does this mean going ahead into 2003? Because there's not going to be a lot of – a lot of overhang, right?

Right. Well, if you look at – I'll let Ed deal with that in a little more detail, Reg, but if you look, the railroad's still pretty busy out there, you know. Excluding grain, our sales are up 5 percent, and so we have, you know, a lot of intermodal business and industrial business. So Ed's been – and his team – have been pretty busy minimizing the impact that the grain has had and maximizing the benefit the other revenues had.

So, Ed, why don't you just say what your short-term plans are?

Yeah, when we – you know, we've been fortunate that we've been able to grow, you know, the other parts of our business quite significantly in the face of a reduced grain crop in Canada. We have said that, you know, the crop in the U.S. or the – sort of the southern third of our – of our grain property has been about average, maybe a little below average, so it's been a good provider of grain revenue.

When we look at next year, as you say, you know, it's really hard to predict. We've had two bad years in a row, and we're hoping that we'll see a more normal Canadian crop next year. But in spite of that grain, we're optimistic that we'll see some coal shipments come back and that the growth that we've experienced in the other parts of our business, in which we've said that we thought that we would see some of this growth in other parts of our business, is actually materializing. And so as a result, our railroad has been very busy in the last month and a half, and sometimes setting some good performance records with amount to the – with respect to the amount of activity that we've had. So, you know, it's been a sort of a significant mix change, but we've been able to adjust our service to capitalize on it.

Ed, I'll make this my last question. It's sort of double-barrel. The U.S. West Coast situation – what did that end up doing for your operations?

And, secondly, any of your sort of economically sensitive businesses that you notice either slow down or pick up? When there is something going on in the economy, what are you – what are you getting from those customers who are most economically sensitive?

Sure, why don't I have [Reg Curran] – or not [Reg Curran] but –

Well, I'll answer if you want!

Why – you, too, Reg. Why don't I have Fred Green answer you, Reg.

Okay.

Okay?

Now, Reg, on the – on the business that you referred to with regard to kind of general merchandise and consumer goods, it's been a – it's been a very busy period for us over the last month and a half or two months. So at this point in time, we haven't – we haven't seen any kind of slowdown at all. If anything, it's picked up a little bit. You can tell. Work your way through the breadth of the whole portfolio, including the pulp and paper business, and that's a little bit soft. But the balance of the commodities have been pretty strong.

With regard to your specific question about the West Coast, there's – you know, there's clearly been a busy time off the west coast of Canada, but it's equally busy off the east coast of Canada. And from an operational perspective, I think the whole industry, and particularly our organization, has responded very well to that, and our service levels have been very high.

Okay, great. Thanks, gentlemen.

Thanks, Reg.

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

Okay, well, that's a – short and sweet, gentlemen. So that's it. There will be a, as you know, an analysts' call tomorrow. Hang on. We think have another question.

We do have a question from [Jeff Linneau] of Report on Business Television. Please go ahead.

Okay.

I apologize for dragging this out a little bit more. We were slow to get on the call, Mr. Ritchie. I apologize. If I could get you to reiterate the past quarter, the challenges and moving forward into this current quarter, what is on the horizon and where have you come from as the greatest [bunch]?

Right. Well, what we were commenting on, Jeff, is just that we're – you know, given that – the turbulence that took place after the terrorist attack and the economic uncertainty of the prairie drought, etcetera, that the railway has performed quite well and we've come off into another quarter that, I think, shows that the – the spin-off that took place a year ago was a good decision.

Going forward, obviously, the grain harvest is coming in. We still don't have the details on the quantity and quality yet, although we do know overall the crop in Canada is poorer than expected – or poorer than it's been in a long time. And – however, we don't – will not know where that crop is in its quality until another – a month or so, I guess, [Fred]. So going forward, we're looking forward to continuing to hold the line, to improve the earnings, and we're still looking at an earnings improvement of about 3 to 5 percent for the end of the year.

Thank you.

Okay. Operator, I believe there's one more question, a follow-up from [Peter Fitzpatrick].

Thank you. Please go ahead, Mr. Fitzpatrick.

Oh, hi. Sorry, just a quick one. I'm just curious about the employee level. Is there any thought to any changes there, any layoffs coming or anything like that?

Peter, we're – this is a question that comes up. You can see that we're continuing to adjust the employee level on the short and the long term as we adjust to the workload that we have and the capabilities we have to operate productively. Our productivity has improved substantially. You can see that in the GTMs and RTMs per employee, and you can see that our numbers are down. But we have not made any whole-scale program announcement in – on reductions in employees, and – but I -- as we – I continue to remind our employees we can never say never. However, we don't have anything in the works right now.

Okay, great. Thanks.

Okay.

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

Okay, ladies and gentlemen, I think that's it then. And we thank you very much, and we will talk to you at year-end, which is one quarter from now. Thanks very much. Bye bye.

The conference call has now ended. Please disconnect your lines at this time. Thank you for your participation, and have a nice day.