CPKC lowers earnings expectations due to 'economic headwinds,' port workers strike

The Canadian Press

Canadian Pacific Kansas City Ltd. has lowered its financial forecast for the year, citing the cost of weaker consumer demand and the B.C. port workers strike.

“No doubt a challenging quarter as we dealt with a softer demand environment," CEO Keith Creel told analysts on a conference call Wednesday.

“Certainly not the outcome we had planned, but it’s the prudent thing to do at this point.”

Creel highlighted "economic headwinds" and the 13-day job action in July that shut down the country's largest port. Both factors prompted the railway to predict flat to slightly positive adjusted diluted earnings this year versus last.

The revision marks a more pessimistic outlook than the one offered three months earlier, when the Calgary-based company projected adjusted diluted earnings would grow by mid-single digits in 2023.

It comes as consumers continue to reroute their spending toward services over products in a reversal of pandemic trends, with pressure from inflation and rising interest rates as an additional drag.

Meanwhile, the two-week strike — plus a brief wildcat job action — halted operations at most ports along the West Coast. In the first week alone, it depressed the number of containers hauled by Canadian railways to barely half the level reached during the same period in 2022, according to the American Railroad Association.

Creel also cited hurdles relating to Canadian Pacific's purchase of Kansas City Southern in April. The US$31-billion deal — the continent's first big rail merger in more than two decades — created the only railway stretching from Canada through to the U.S. and Mexico.

“In an industry with a history of merger-related service challenges ... we certainly have not been perfect," Creel said, noting integration of all 20,000 employees has proven tougher than expected.

Nonetheless, he stressed opportunities for "synergies," as well as big progress on performance metrics at the company's Mexican operation, where network speed has shot up by nearly a third since July 30.

Chief financial officer Nadeem Velani added that come January, "we're going to have double-digit EPS (earnings per share) growth in our sights."

Net income fell 12 per cent year over year last quarter. Revenues slumped four per cent as demand for container shipping, crude oil and forest products dropped, the latter due to a slowing housing market. A rebounding auto sector partly repaired the fiscal dent, with the industry's pandemic supply chain snarls in the rear-view mirror.

Operating expenses dipped slightly despite wage inflation and stricter work/rest rules for employees.

"Overall, inflation has been a challenge and it's been a headwind," Velani said.

Potash revenue also plummeted 22 per cent — despite heightened global demand — due to a major mechanical failure in April at the Canpotex bulk terminal in Portland, Ore. The operation is not expected to come back online until 2024, as CPKC works to divert fertilizer to other ports.

“Without the Portland terminal ... it’s been horribly challenging," said chief marketing officer John Brooks.

He said volume declines at the B.C. ports of Vancouver and Prince Rupert in July, which failed to recover in August and September, may well persist in the medium term.

"I just had my team visiting all the steamship carriers over in Asia and also in Europe, and they didn't paint a very bright picture," he said, adding that container arrivals in Canada and bound for the U.S. number far fewer than in previous years.

In the quarter ended Sept. 30, CPKC reported that revenues fell four per cent to $3.34 billion in its third quarter from the combined $3.39 billion that Canadian Pacific and Kansas City Southern yielded a year earlier.

CPKC said net income fell to $780 million from $891 million in the same period the year before.

Diluted earnings fell to 84 cents per share from 96 cents per share, below analyst expectations of more than 90 cents per share, according to financial data firm Refinitiv.

This report by The Canadian Press was first published Oct. 25, 2023.