Canadian Pacific puts faith in PSR and employees

A photograph of a train crossing a bridge.

Canadian Pacific (NYSE: CP) executives are confident that precision scheduled railroading (PSR), an operating model that seeks to streamline operations, will help them make it through an unprecedented and unpredictable second quarter.

“We’re not panicked. We’re not distracted. We’re prepared and we’re engaged and we’re agile,” said CP CEO and President Keith Creel during CP’s first-quarter 2020 earnings call on April 21. 

Because of the COVID-19 pandemic that is gripping North America and the world, CP expects its revenue per ton mile (RTM) to be in the mid-single digits for 2020. In comparison, RTM in the first quarter was C$5.10, which was a 6% increase from C$4.79 in the first quarter of 2019. A Canadian dollar equals US$0.70.

As rail traffic slows, CP will be using additional track time to do maintenance so that the rail network will be ready when rail demand rebounds, according to CP Chief Marketing Officer John Brooks.

CP expects to spend C$1.6 billion in capital expenditures for 2020. 

“We’re taking proactive action to preserve costs” as we await for rail volumes to rebound later in the year, Brooks said. 

Despite the uncertainty of what lies ahead in the second quarter and for the remainder of the year, CP hit a number of records in the first quarter, according CP Chief Financial Officer Nadeem Velani. CP’s total revenue of C$2 billion-plus in the first quarter was a record; an operating ratio of 59.2% was also a first-quarter record, he said. Operating ratio, which is a company’s operating expenses as a percentage of its revenue, can be an indicator of a company’s financial health. CP’s operating ratio in the first quarter of 2019 was 69.3%. 

CP also moved record grain volumes in the first quarter, according to Velani, which included “best-ever” totals for January and March. CP moved more than 6.35 million metric tonnes of Canadian grain and grain products in the first quarter, beating a previous record set in 2016 by 300,000 metric tonnes, CP said on April 20. 

CP executives noted that the railway and the rail industry overall could see a tough second quarter, followed by a potential increase in rail volumes and rail demand in the third and fourth quarters. Rail volumes might not normalize until the first quarter of 2021.

But CP also has a “unique business mix,” with 40% of the mix being driven by dry bulk volumes such as coal, grain, ore and fertilizer, which provides CP with flexibility to adjust and control costs via PSR.

“We’re going to play to our strengths with our franchise. We’re going to play to our strengths with our business mix,” Creel said. 

“Negative” factors in CP’s forecast for the second quarter include volume declines for the industrial sector and non-essential intermodal, as well as crude-by-rail, which could ramp down to as low as 40,000-50,000 loads for 2020, according to Brooks. In comparison, CP hauled over 36,000 loads of crude oil by rail in the first quarter of this year.

While CP has had to furlough employees in light of falling rail volumes, the railway has worked with the unions to ensure that furloughed workers can and will want to return to work within 72 hours when rail demand rebounds, according to Creel.

“It’s a give and take situation…but we feel compelled to adjust [headcount] in lock-step with demand,” Creel said. 

Canadian Pacific

2020 Value 2019 Value Y/Y Gross Change Y/Y % Change
Freight revenue (millions, in Canadian dollars) $2,000.0 $1,726.0 $274.0 15.9%
Carloads, incl intermodal (000s) 691 636 55 8.7%
Revenue per carload $2,896 $2,716 $180 6.6%
Intermodal shipments 268 246 22 9.0%
Intermodal revenue per carload $1,509 $1,542 -$33 -2.1%
Gross ton miles (millions) 71,309.0 64,854.0 6,455 10.0%
Revenue per ton mile $5.10 $4.79 $0 6.5%
Employee counts (average) 12,486 12,844 -358 -2.8%
Train velocity (mph) 21.6 21.1 1 2.4%
Dwell time (hours) 6.2 7.9 -2 -21.5%
OR% 59.2% 69.3% -10.1% -14.6%
EPS $2.98 $3.09 -$0.11 -3.6%

CP announced yesterday that first-quarter 2020 net income totaled C$409 million, or C$2.98/diluted earnings per share, compared with C$434 million, C$3.09/diluted earnings per share, for the first quarter of 2019. 

The dip in first-quarter net profits was due in part to higher income tax expenses year-over-year: C$185 million versus C$139 million. But the company also said total revenues were C$2.04 billion in the first quarter, a 15.6% increase from C$1.77 billion for the same period in 2019, while operating expenses were C$1.21 billion versus C$1.22 billion.