July 22, 2008 / 12:24 PM / 10 years ago

CP cuts guidance as fuel, floods hit profits

VANCOUVER, British Columbia (Reuters) - Canadian Pacific Railway Ltd (CP.TO) cut its earnings guidance for the third time this year, as fuel bills and U.S. flooding caused it to report a nearly 40 percent drop in its second-quarter profit on Tuesday.

The railway trimmed its expected earnings for 2008 by 40 Canadian cents per diluted share to a range of C$4.00 and C$4.20, and said the U.S. economy appeared unlikely to improve in the second half of this year while fuel costs would likely remain high.

Chief Executive Fred Green said the company, which also cut its earnings guidance slightly in February and after the end of the first quarter, could not get a “into a routine (of) hoping the economy will pick up, and building a business case around that.”

“What we’re doing is saying is we accept (the economy) for what it looks like out the door. If it gets better great news but we have to plan for the possibility that it will (continue) or possibility deteriorate,” Green said.

Company executives said about 30 Canadian cents of the guidance cut was due to higher fuel costs, and even with the weak economy it expected its own shipping volumes to increase in the fourth quarter with wheat and other bulk commodities.

Canadian Pacific earned C$154.9 million, or C$1.00 a share, on revenue of C$1.22 billion during the second quarter through June 30. That compares with a profit of C$256.7 million, or C$1.64 a share, on revenue of C$1.215 billion a year earlier.

Analysts, on average, had expected earnings of 99 Canadian cents a share, on revenue of C$1.25 billion, according to Reuters Estimates.

Analysts, in notes after the quarterly results were released, expressed concern that revenues were weaker than expected.

Canadian Pacific’s shares were off C$2.17 at C$64.46 on the Toronto Stock Exchange.

    The company’s operating expenses increased 7 percent in the quarter, due largely to higher diesel costs, leaving it with an operating ratio of 79.4 per cent compared with 74.7 per cent a year earlier.

    Without the higher fuel costs and flooding problems, the operating ratio - an industry measure of efficiency - would have remained flat, the company.

    The flooding blocked Canadian Pacific’s line from Minneapolis to Chicago for 20 days during the quarter, forcing it to re-route or cancel the 20 trains that use it on a daily basis.

    Green has also appointed a senior executive to speed up its efforts to introduce technological, train operation and maintenance changes that the railway believes will increase efficiency, although he declined to elaborate on what those measures would be.

    The company defended its increase in staffing costs during the quarter, saying that it took six months for operating crew to be properly trained so it needed to hire people now to have them ready to handle an expected increase in bulk commodity volumes in the fourth quarter and next year.

    Reporting by Allan Dowd and Jennifer Kwan; Editing by Bernadette Baum

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