CP Rail story

Railway still on track for success, says CEO

Hunter Harrison says his four-year plan to turn Canadian Pacific Railway Ltd. around is 10 months to a year ahead of schedule, and he is looking to put a tough second quarter behind him en route to a record annual profit in 2013.

The second-quarter result delivered by the outspoken CEO Wednesday fell short of expectations after derailments and massive floods in Alberta hampered operations.

But Harrison said those troubles are in the past and he now looks forward to delivering the Calgarybased company’s best quarter-overquarter improvement since he took over the helm last summer.

“If you can sort through all the noise here in this quarter, I think you can certainly see it sets a pretty solid foundation for a second half that will go far beyond what we have seen before,” Harrison said on a conference call Wednesday.

CP was able to recover quickly from its troubles and managed to deliver an all-time record for quarterly operating ratio — a measure of its operating costs as a percentage of revenue — at 71.9 per cent. That was a 7.5 percentage point improvement year-over-year, excluding the impact of a $42-million charge during the same period in 2012 related to the proxy battle at CP and appointment of Harrison.

While the railway said it is expecting a “muted” fall peak this year as intermodal shipments come under pressure alongside certain commodities, management said CP plans to begin charging a premium for the improved service it aims to provide. The company said it also identified $100 million in additional cost savings and other service improvements through recent so-called whiteboard exercises that attempt to rethink how the company does business.

There is no doubt CP overcame significant hurdles between April and July, including 40 washouts over four days in Calgary and southern Alberta due to floods. It also experienced a significant number of high-profile derailments, including a near disaster when a train carrying petroleum products nearly spilled into the Bow River in Calgary just as the city was starting to recover from the floods there.

Keith Creel, CP president and chief operating officer, said the derailments were not a result of the restructuring efforts underway at the railway — nor the expected 4,000 layoffs at the railway by year-end — as some have argued.

“Contrary to what some have suggested, or like to assume, the root cause of track derailments are not the result of, or even remotely connected to, cutting back on assets, be they manpower or the capital we invest,” Creel said.

He said the workforce that maintains and inspects the tracks were not part of the cuts, blaming the bulk of the derailments on imperfections created in the wheels, or shelling of the wheels, by improperly applied brakes that broke in cold weather. Creel said CP had 12 catastrophic wheel failures during the quarter as a result of this, compared to just two incidents last year.

But Creel noted CP was able to recover quickly from the derailments and floods, in part, because it was able to reorganize its trains in way that they could head directly to their destinations when the lines reopened rather than make multiple stops.

Nevertheless, the company re- ported a second-quarter result that fell short of expectations Wednesday, largely due to the impact of the floods and derailments.

CP reported a second-quarter net income of $252-million, or $1.43 a diluted share, which was up sizeably from the 60 cents a share it earned for the same period last year but was well below the $1.50 a share expected by analysts.

The company said the network interruptions during the quarter affected revenue growth by approximately $25-million, or two per cent. But it still reported a nine per cent increase in revenue during the quarter to $1.5-billion.

Despite the tough quarter, Harrison said the company was still on track to deliver high-single digit revenue growth this year, a low 70s operating ratio, and diluted earnings per share growth of more than 40 per cent in 2013 compared to 2012.

Fadi Chamoun, BMO Capital Markets analyst, noted that CP’s train-accident related expenses during the second quarter were roughly $35 million compared to a more normalized rate of $15 million.

But without the impact of the floods and accidents during the quarter, CP’s operating ratio would have been 70 per cent, he added.