Canadian Pacific number 1126 shifts some double-stack container cars about - Date/Photographer unknown.

29 December 2011

Canadian Pacific Revamps Operations to Boost Earnings

Calgary Alberta - Canadian Pacific Railway Ltd. had a rough ride this past year, beset by weather and customer service woes during the first six months, while this fall an activist hedge-fund manager bought enough of the company to become its biggest shareholder.
 
"We had a very challenging start to the year," CP's executive vice-president of operations, Mike Franczak, concedes.
 
A harsh winter dumped heavy snow and caused avalanches to block lines, severe spring flooding on the Prairies shut sections of track, while the service inconsistency and delays led to unhappy customers and a drop in profits in the first half of the year.
 
This fall, Bill Ackman and his Pershing Square Capital announced it spent more than $1 billion to snap up about 12 percent of the Calgary-based railway, calling the shares undervalued.
 
He has since boosted his holding to more than 14 percent, leading to some uncertainty about what he wants, and what that could mean for Canadian Pacific.
 
Ackman has only said he isn't pushing for a sale, but hasn't elaborated on any strategy. CP calls Ackman's interest a private shareholder matter.
 
But the country's second-largest carrier has already started to address the hits to its bottom line, while moving forward on plans to reduce its operating ratio percentage, a key productivity measure determined by costs as a percentage of revenue, from the low 80s to the low 70s.
 
It has revamped how it serves grain customers, after product sat in elevators last spring, recently signed a new service agreement with grain handler Viterra, implemented a beefed-up winter plan that includes contingency staff, locomotives and more snowplows, and added two veteran railway men to its board of directors.
 
Fadi Chamoun, an analyst with BMO Capital Markets, said in a note to clients that putting Tony Ingram and Ed Harris on the board reinforces confidence in how the plan to lower the operating ratio will be executed.
 
Analysts have been reacting favourably to some of the moves, believing the carrier will be able to reduce its operating ratio and increase its earnings potential. David Tyerman of Canaccord Genuity says CP's most important work next year will be the progress in reducing that operating ratio, competitor CN's is about 20 percentage points lower. Much of the work being done to bring down that ratio will take place over the next two years, he said, in addition to what was accomplished this past year.
 
"From an operating stand-point, the things CP has started the ball rolling on are the things that will determine the success of the company in 2012 and beyond," Tyerman says, pointing to not just operating ratio, but improving its supply chain and sales. "All that stuff's already underway."
 
Franczak lists off the railway's additional staff, new infrastructure that includes the ability to run longer trains, and upgrades to the main north line between Winnipeg and Edmonton as factors that will help going forward.
 
"When I start to look at the combination of infrastructure, resourcing, some of the major changes we've made in business process, we're seeing huge improvements in network velocity, dwell, miles per car day, service metrics in terms of train performance, service performance, and so forth," he says, pointing to network speed that is up 11 percent over last year, yard dwell dropping 18 percent, and active cars on line down 13 percent while moving more business. "We've come a long way in a few months."
 
CP will also be building on its oil-on-rail business, which exceeded expectations over the past year. CP says the number of carloads being shipped from the North Dakota Bakken oil-fields increased to 13,000 from 500 over the past two years, and it anticipates that could climb to 70,000 down the road, with projected revenue of $140 million. This year alone, its car-loads were up 50 percent by fall over what was expected in June.
 
In early December, the rail-way said it was expanding its ability to move crude from the Saskatchewan portion of the Bakken, and CP chief marketing officer Jane O'Hagan says it has already started to move some carloads of crude from Alberta into the U.S.
 
"We'll look at ways to continue to expand that," she adds.
 
There are a number of challenges CP will grapple with in the coming year, Tyerman points out.
 
With the contract to transport Canpotex's potash up for renewal in June, Tyerman said most industry watchers expect Canadian National to pick up some of the business.
 
"The real question will be how much and what is pricing like," he said. "If it's 50-50, it's a significant issue and a harder hit on the (operating ratio) targets." But he added that it could allow CP to be less aggressive on the pricing.
 
Tyerman said CP's intermodal volumes have also been down.
 
"If they can bring that volume back, it will help," he said. "If they've lost a portion of that business and it's just gone, it's going to be a bit of a challenge for the (operating ratio) story going forward."
 
"Volume is very important in this story. Intermodal is huge volumes."
 
O'Hagan said the carrier is winning back confidence.
 
"We are seeing those key customers returning volume to us," she said. "One the of key areas, was on the grain side, and we're seeing the same in intermodal. We feel excited about the year ahead. We've taken at CP a really aggressive approach to meet demand in all of our key lines of business and continue to position this organization for long-term growth."
 
Kim Guttormson.