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29 July 2004
CPR Second Quarter
2004 Results
CPR Reports Strong
Business Growth, Rise In Income
Diluted earnings per share up 23% (1)
Operating ratio improves 1.7 points to 78% (1)
Revenue surpasses $1 billion
Operating income rises 19% (1)
(1) Non-GAAP earnings measures. These measures exclude foreign exchange gains and
losses on long-term debt and a 2003 special charge. See explanation under
"Presentation of Non-GAAP Earnings" below.
Canadian Pacific Railway said strong growth in five of its seven business lines in the second quarter
of 2004 pushed revenue past the $1-billion mark. The revenue increase helped drive net
income up 146 percent to $84 million in the quarter ended 30 Jun 2004. This compares
with second-quarter 2003 net income of $34 million, which included a special charge for
job reductions, an asset write-down and network restructuring. Diluted earnings per
share (EPS) in second-quarter 2004 were up 141 percent to $0.53, from $0.22.
Excluding foreign exchange gains and losses on long-term debt and the 2003 special
charge, income increased 23 percent to $104 million in the second quarter of 2004, compared with $84
million in second-quarter 2003. On the same basis, diluted EPS were $0.65, compared
with $0.53.
Rob Ritchie, President and Chief Executive Officer of CPR, said: "I am pleased with our
performance this quarter. We handled significantly higher volumes of freight and still maintained a
fluid level of operations. There has been steady improvement in most of our productivity measures
and the overall results we expected to see are materializing."
CPR's operating income in the second quarter of 2004 increased 19 percent to $221 million, from
$186 million in last year's second quarter, excluding the special charge. Its operating ratio for
the three-month period was 78 percent, a 1.7 percentage-point improvement.
Total revenues in the second quarter of 2004 were $1,005 million, an increase of $91 million, or 10
percent, over $914 million in the same period of 2003.
Bulk commodities generated $55 million, or almost two-thirds of the increase, reflecting
continuing strong demand. Intermodal revenue increased a further $21 million, or 9 percent in the
second quarter of 2004, on top of a record second-quarter 2003. Revenues from industrial
products were up $13 million, or 14 percent, reflecting the North American economy's strength.
Operating expenses were $784 million in the second quarter of 2004, compared with $728 million the
same period last year, excluding the special charge.
Compensation and benefits expense increased $37 million, or 13 percent. More than half the increase
was due to a normal level of performance-based incentive compensation included in
second-quarter 2004 results, compared with the same period of 2003. There were also
higher temporary costs to train additional crews. Depreciation and amortization expense was up $12
million, or 13 percent, reflecting CPR's investment in additional assets. Purchased services expense
increased $10 million, or 7 percent. More than half the increase was due to outsourcing CPR's
computing infrastructure, partly offset by associated savings in other areas of expense.
Translation of U.S. dollar-denominated revenues and expenses into the stronger Canadian
dollar had only a minor impact on second-quarter 2004 earnings. Revenues and expenses
were reduced by approximately $22 million and $18 million, respectively, and there was virtually no
impact on net income excluding foreign exchange gains and losses on long-term debt and
the special charge.
Continued efficiencies from scheduled operations and a favourable hedge position largely offset the
effects of a sharp increase in fuel prices and fuel consumed to move significantly more freight. CPR
also adopted an improved fuel surcharge formula that ties surcharges more closely to current prices.
Progress continued on CPR's MaxStax initiative to increase efficiency and margins in the intermodal
business. CPR has completed about 80 percent of its program to convert its intermodal fleet to
high-capacity double-stack freight cars and is on track to achieve its goal
of a 16 percent productivity improvement on intermodal trains. CPR also continued its disciplined
approach to managing capacity, introducing an allocation system for import container traffic to
eliminate demand surges.
CPR began implementation of its restructuring initiative to improve the profitability of its
northeastern U.S. network. An agreement was reached with Norfolk Southern Railway to exchange
trackage rights, freight haulage and rail yard operations in key areas of the region. The agreement,
announced 30 Jun 2004, will also provide CPR with a new route between Detroit and Chicago
that will be the shortest, fastest lane between the two hubs.
First-half results
Net income was $107 million in the first six months of 2004, compared with $136 million in the same
period of 2003. The decline was due to a loss on foreign exchange on long-term debt in
the first half of 2004, compared with the first half of 2003 when CPR posted foreign exchange gains
on long-term debt, partly offset by the 2003 special charge. Diluted EPS were $0.67 in
the first half of 2004, compared with $0.86 in the year-earlier period.
Income, excluding the foreign exchange gains and losses on long-term debt and special
charge, was $141 million in the first half of 2004, compared with $121 million in the same period of
2003. On the same basis, diluted EPS were $0.89 in the first six months of 2004, compared with $0.76.
Operating income was up 11 percent to $337 million in the first half of 2004, compared with $304
million in first-half 2003, excluding the special charge. CPR's operating ratio improved
by almost a full percentage point to 82.2 percent.
In the first six months of 2004, total revenues were $1,891 million, an increase of $98 million, and
expenses, excluding the special charge, were $1,555 million, an increase of $66 million over the
same period of 2003.
The translation impact of the stronger Canadian dollar reduced first-half 2004 revenues
and expenses by approximately $81 million and $64 million, respectively. Excluding foreign exchange
gains and losses on long-term debt and the special charge, income was reduced by
approximately $4 million.
2004 Outlook
"We expect freight volumes to remain robust for the remainder of 2004. To help handle the
workload, we added 41 fuel-efficient, high-performance locomotives in the
second quarter, and will bring another 34 on line in the fourth quarter," Mr. Ritchie said.
"We will continue to pursue value pricing opportunities created by the favourable conditions
in our markets."
He said CPR still expects diluted EPS growth, excluding foreign exchange gains and losses on
long-term debt and other specified items, of between 5 percent and 10 percent in 2004
over restated and adjusted EPS of $2.07 in 2003, despite significantly higher fuel prices. This is
based on a near-normal grain crop in Canada and includes the impact of the change in tax
rates in the province of Ontario, oil prices averaging US$37 per barrel and an average exchange rate
of $1.34 per U.S. dollar (US$0.75).
Restatement Of Comparative Figures For 2003
Comparative figures for prior periods have been restated for retroactively applied accounting changes.
The changes relate to the implementation of new accounting rules under Canadian Generally Accepted
Accounting Principles (GAAP) for asset retirement obligations introduced in the first quarter of 2004
and for the expensing of stock options introduced in the fourth quarter of 2003. The combined impact
of the changes is an increase of $5 million in net income, or $0.04 in basic EPS previously reported
for the second quarter of 2003. Notes 2, 7 and 10 to the financial statements further describe the
impact of the accounting changes.
Foreign Exchange Gains And Losses On Long-Term Debt And Other Specified Items
In the second quarter of 2004, CPR had a foreign exchange loss on long-term debt of $20
million ($20 million after tax), compared with a gain of $98 million ($92 million after tax) in the
same period of 2003. There were no other specified items in the second quarter of 2004. However,
other specified items in the second quarter of 2003 totaled $215 million ($141 million after tax) for
a program to eliminate 820 job positions over the 2003-2005 period, a write-down to fair
value of under-performing assets, and the restructuring of CPR's northeastern U.S.
network.
In the first half of 2004, CPR had a foreign exchange loss on long-term debt of $33
million ($34 million after tax), compared with a gain of $169 million ($156 million after tax) in the
same period of 2003. There were no other specified items in the first half of 2004. Other specified
items in the first half of 2003 were comprised solely of the special charge totaling $215 million
($141 million after tax).
Presentation Of Non-GAAP Earnings
CPR presents non-GAAP earnings to provide a basis for evaluating underlying earnings
trends that can be compared with the prior period's results. Non-GAAP earnings exclude
foreign currency translation effects on long-term debt, which can be volatile and short
term, as well as other specified items, which are not among CPR's normal ongoing revenues and
operating expenses. The impact of volatile short-term rate fluctuations on
foreign-denominated debt is only realized when long-term debt matures or
is settled. In compliance with Revised CSA Staff Notice 52-306, other specified items
are no longer referred to as non-recurring items because it is not possible to conclude
that an item or items similar to one or more of those so designated will not occur within the next
two years. A reconciliation of income, excluding foreign exchange gains and losses on
long-term debt and other specified items, to net income as presented in the financial
statements is detailed in the attached Summary of Rail Data.
It should be noted that CPR's earnings, excluding foreign exchange gains and losses on
long-term debt and other specified items, as described in this news release, have no
standardized meanings and are not defined by Canadian generally accepted accounting principles and,
therefore, are unlikely to be comparable to similar measures presented by other companies.
Note On Forward-Looking Statements
This news release contains forward-looking information. Actual future results may differ
materially. The risks, uncertainties and other factors that could influence actual results are
described in CPR's annual report and annual information form, and may be updated in CPR's
consolidated interim financial statements and interim Management's Discussion and Analysis, which
are filed with securities regulators from time to time. However, CPR undertakes no obligation to
update publicly or otherwise revise any forward-looking information, whether as a result
of new information, future events, or otherwise. Financial results in this news release are reported
in Canadian dollars.
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