Reynolds Hutchins, Associate Editor | Jul 20, 2016 3:56PM EDT
Canadian Pacific Railway’s financials took a hit in the second quarter, rounding out a rough first half of 2016, thanks in part to declining intermodal business, a stronger Canadian dollar and devastating wildfires in the Alberta province.
“The second quarter, I think we all recognize has been quite challenging. In fact, this whole first of the year has been quite challenging,” CP CEO E. Hunter Harrison told analysts and investors on a second-quarter earnings conference call Wednesday morning.
Net earnings for the quarter ended June 30 fell 16 percent year-over-year to $251 million, the Calgary-based railroad reported Wednesday. Revenue for the quarter was also down double digits, falling some 12 percent to $1.11 billion.
The railway characterized itself as another victim of the incredibly soft freight economy — what has been called by some a “freight recession.” The only other Class I railroads to report their second-quarter financials this earnings season — CSX Transportation and Kansas City Southern Railway — have also posted declines in their intermodal business and corresponding declines in revenue.
CP’s domestic intermodal business was flat in the second quarter. Related revenue was down 15 percent to $135 million.
The railway’s international business, meanwhile, fell some 13 percent year-over-year. Related revenue was down 16 percent to $105 million.
Freight volumes across the board were down in the second quarter with the exception of CP’s grain business.
“Grain is king,” multiple executives said on Wednesday’s call.
CP President and COO Keith Creel, recently tapped to succeed a retiring Harrison, said he was doing everything within his power to retain and build business, but the market simply has not been cooperative.
“The market sets the rates,” Creel told them. “I’m not going to go out and slice and cut and give leverage away.”
“My volumes are what they are,” he said.
Creel said the railroad also simply faced too many uncontrollable factors in the second quarter, including a historically strong Canadian loonie wreaking havoc with international trade and “unanticipated” wildfires in the country’s Alberta province roiling service in the area.
“The quarter was much worse than we anticipated,” Creel said. “Not a pretty picture.”
Creel added, however, that he was confident looking ahead at the second half of the year because of “the foundation we’ve laid for our future success.”
“This is one of the best operating performance quarters I’ve ever experienced,” Creel said.
“The thing that’s exciting to me is, I’ve been doing this a long time, it’s not my first rodeo and I’ve never seen, I don’t think, an operating group that reacted as quick as this operating group led by Keith,” Harrison said.
Still, operating income at the railroad decreased in the second quarter 15 percent year-over-year to $422 million. And the railway’s operating ratio increased 110 basis points to 62 percent.
Though those numbers, though, may be better than the alternative in such a soft economy.
Much of the conversation on Wednesday’s call focused on the company’s future under Creel’s leadership.
Harrison is set to retire in June 2017 and while he has been offered a position on CP’s board, the details of his new role within the company have yet to be ironed out. Until that time, Harrison will be serving as an advisor of sorts, aiding Creel in the transition.
“I think the board said look we’ve got an opportunity to have two pretty good railroaders during a transition period and that’s not the worst thing in the world,” Harrison said. “Look, I don’t know how much I’ll be called on. I think that’s to be determined. I’m a hired hand. As Keith and the board sort out what they would like me to do or work on, that’s where I’ll spend my time and energy.”
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