An operating ratio in the mid-50s percentage range is still possible for Canadian Pacific (NYSE: CP) for as early as next year, even as the coronavirus pandemic continues to play out in North America, company executives said during Wednesday’s second-quarter earnings call.
Operating ratio, a company’s expenses as a percentage of its revenue, is a metric that some investors use to gauge the financial health of a company. A lower operating ratio can imply improved financial performance.
And for the second quarter, CP’s operating ratio was 57%, which CP Chief Financial Officer Nadeem Velani says is a milestone for the company considering that the railway’s revenue was down 9% year-over-year to nearly C$1.8 billion (US$1.3 billion) year-over-year.
CP’s carloads were also down 12% to 631,000 units as the pandemic wracked the Class I rail industry’s overall North American volumes.
“It creates a new environment and a new perspective on what you can deliver,” Velani said during the earnings call. In comparison, CP’s operating ratio in the second quarter of 2019 was 58.4%.
While Velani was hesitant to offer an exact time frame for when CP’s operating ratio could hit the mid-50s, he and others attributed CP’s second-quarter performance to company teams working together to reduce costs.
“It’s fair to say we’ve been on the offense, not on the defense during these challenging, turbulent times,” said CP President and CEO Keith Creel.
Prospects for the second half of 2020
Although CP didn’t provide revenue guidance for the remainder of the year, the railway anticipates several commodities seeing increased activity in the third and fourth quarters.
Grain shipments are expected to be busy for the remainder of the harvest year, according to John Brooks, CP’s chief marketing officer. Steel, aggregates and other construction inputs are also expected to gradually recover in the third quarter as industrial sectors reopen, while potash could see higher volumes after a record second quarter.
International intermodal volumes have also looked “strong and encouraging,” as steamship lines opt to pull back some of the canceled sailings that operators previously announced, executives said. But uncertainty about how North American consumers might respond amid the ongoing pandemic, plus a slower-to-recover market for industrial end market users of intermodal, is creating some overall uncertainty for the back half of 2020.
Meanwhile, CP is “bullish” on the longer-term prospects for the Port of St. John in New Brunswick, which CP calls a “crown jewel” among eastern Canadian ports because of its proximity to inland eastern markets.
CP has greater access to St. John after its acquisition of the Central Maine & Quebec (CMQ) Railway, another asset described as having great potential for the railway.
“To say that we’re bullish about that opportunity is an understatement,” Velani said, speaking about CMQ’s connection to other short lines in the Eastern U.S. and Canada.
Second-quarter financial results
Net income totaled C$635 million, or C$4.66 in diluted earnings per share, in the second quarter of 2020, compared with C$724 million, or C$5.17 in diluted earnings per share, in the second quarter of 2019.
As with its Class I counterparts, the coronavirus pandemic caused lower rail volumes and a drop in revenue compared to a year ago. Second-quarter revenue was nearly C$1.8 billion, compared with nearly C$2 billion for the same period in 2019.
But costs were also lower, with second-quarter operating expenses totaling C$1 billion versus C$1.16 billion in the second quarter of 2019. Among the cuts in operating costs was a 44% decline in fuel expenses to C$131 million.
Terminal dwell and train speed were relatively flat in the second quarter. Train speed was 22.4 mph, same as a year ago, while terminal dwell — the amount of time a train is at a terminal — ticked up to 6.5 hours compared with 6.4 hours a year ago.
But trains were heavier and longer in the second quarter compared to a year ago. Average train length grew 8% to 8,089 feet, while average train weight for nonlocal traffic rose 7% to 9,984 tons.