CP CEO urges rail mergers
Without them, we’ll ‘face North American gridlock,’ Harrison says
The collapse of Canadian Pacific Railway Ltd.’s bid for Norfolk Southern Corp. has done nothing to dissuade the company’s outspoken CEO that railway consolidation must and will happen.
In the meantime, however, CP shareholders will benefit from the cash that has been freed up by the failed merger attempt, with the company announcing Wednesday that it will buy back up to 6.91 million shares, or about five per cent of its public float, while boosting its quarterly dividend by 43 per cent.
CP’s US$27-billion offer for Virginia-based Norfolk Southern fell apart after several stakeholders, including politicians, unions, shippers and the U.S. army and Department of Justice, voiced opposition.
CEO Hunter Harrison acknowledged his approach might have been “a little aggressive” but said it’s naïve to think congestion problems can be solved without mergers.
“We’re getting ourselves further into a trap,” Harrison said. “If and when this economy bounces back and we go back to, say, 2007 volume levels on the rails, we’re going to face North American gridlock.”
He said the industry doesn’t seem to fully understand the risks.
“With due respect to everyone involved, there needs to be more knowledgeable railroaders that understand these issues clearly, and they’re pretty complex issues.”
Harrison won’t be there to guide them, however. He reiterated twice Wednesday — on the company’s earnings call and at its annual meeting in Toronto — that he intends to retire when his contract expires in mid-2017.
“I would predict post-Harrison (consolidation) is going to happen,” he told analysts on the firstquarter earnings call.
Harrison retired once before, after seven years as CEO of Canadian National Railway Co., but was tapped by activist investor Bill Ackman to lead CP.
“I failed retirement once, and I can’t fail again, but I’m excited to watch from the sidelines what this group produces,” Harrison said.
That doesn’t mean he’ll leave the industry entirely. Harrison, who is in his early 70s, said he plans to return to Connecticut and focus on training horses for show jumping.
“Look, if there’s anything I can do in an advisory capacity in the industry, it’s the industry I spent 50 years in and I happen to love, but there’s no plans for me to do anything but go take my horses and win the Olympics,” he said.
CP reported a record first-quarter operating ratio — a key measure of efficiency for railroads, for which a lower number is better — of 58.9 per cent, down 430 basis points.
Adjusted earnings rose to $2.50 per share, beating the average analyst estimate of $2.42, while revenue fell four per cent, to $1.59 billion. Net income rose 69 per cent, to $540 million.
“Q1 results reaffirmed our view that amid a weak volume environment, management can deliver on solid cost reductions while focusing on service improvements,” RBC analyst Walter Spracklin wrote in a note to clients.
“We continue to favour CP on the back of solid efficiency gains and — despite weak demand — lower top-line risk relative to U.S. peers.”
Bond-rating service Moody’s, however, raised concerns about the company’s debt levels, lowering CP’s Baa1 outlook to negative from stable.
“The negative outlook reflects the company’s high leverage, which was 3.3x at year-end 2015 and our expectation that it will only decline moderately below 3x in 2016,” Jamie Koutsoukis, Moody’s vicepresident, said in a statement.
“The company’s announced share repurchase program ... over the next 12 months is aggressive for the Baa1 rating and does not allow for the level of deleveraging we had previously expected.”