CP Rail revenue sags due to bad winter, lower grain shipments and labour dispute

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Profits and revenue dropped at Canadian Pacific Railway Ltd. in the first quarter, as Canada’s second-largest railroad struggled through a harsh winter, a spring labour dispute and the ripple effects from last year’s drought that meant less grain to ship around the country.

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CP booked net income of $590 million on revenue of $1.8 billion in the quarter ended March 31, down $12 million or two per cent compared to last year’s profits, the company said in an earnings update on April 27. Revenue in the quarter fell six per cent compared to the previous year, including a 20 per cent drop in grain revenue.

The quarter proved even more challenging than we anticipated

CP Rail chief financial officer Nadeem Velani

“It was a tough quarter. I’m not here to make any excuses,” CEO Keith Creel told analysts on a conference call.

He said the company struggled in the quarter partly because of last year’s drought across the Prairies cut crop yields, leading to a 26-per-cent drop in the volume of grain moving across CP. The company expects the tighter Canadian grain supply will continue to pose a problem for the railroad into the third quarter.

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Creel also pointed to two-day shutdown on the CP network, as a result of a dispute with the union representing 3,000 locomotive engineers, conductors and train and yard workers.

The work stoppage ended up impacting the company’s adjusted operating ratio by 120 basis points, chief financial officer Nadeem Velani told analysts.

“We knew Q1 would be difficult given the weakness in Canadian grain,” Velani said, “but the quarter proved even more challenging than we anticipated.” ​​​

The report comes after a punishing winter season in Western Canada, where extreme cold and the Omicron wave of COVID-19 infections caused complications for railroads and cut into crew availability. RBC analyst Walter Spracklin reported that bad winter weather made it even harder to access railcars at ports in Western Canada, which had already been struggling due to last year’s floods that washed out tracks in B.C.

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“The good news is that car supply is rapidly improving, and recent investments made in Canadian ports are set to pay dividends,” Spracklin wrote to investors on April 8, following RBC’s annual port and rail tour.

But now the global supply chain is facing another wave of uncertainty, with pandemic-related shutdowns in China and war in Ukraine driving fears of further disruption to the flow of goods around the world.

CP is in the final stages of its plan to build the first rail network linking the U.S., Mexico and Canada. In December, CP’s US$31-billion acquisition of the Kansas City Southern (KCS) rail line closed into a voting trust. The company is now awaiting a decision from the U.S. Surface Transportation Board on whether it can take control of the KCS network.

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In March, the board asked the parties to explain an “inconsistency” in the traffic density numbers they provided with their merger application. Until that matter is cleared up, the board said it has suspended the “procedural schedule” of the review. But Creel said he still expects the board to make a decision by early next year at the latest.

CP reported earnings per share (EPS) of 63 cents, down 30 per cent from last year. Core adjusted diluted EPS — which excludes significant items and KCS purchase accounting — was 67 cents, down 26 per cent.

CP’s main competitor, CN, also reported a “tough start to the year” in a quarterly update this week.

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