4 December 2012

Canadian Pacific Outlines New Vision for the Future

New York New York USA - Railway on track to achieve mid-60s OR for 2016.
 
Canadian Pacific President and CEO E. Hunter Harrison today outlined CP's go-forward plan for change that will greatly improve service, increase the railway's efficiency, lower cost, and grow the business.
 
"Momentum is building at Canadian Pacific and the organization is driving to a culture of intense focus on operations. Service will be what drives this organization, by providing a premium, reliable product offering through a lower cost operation," Harrison said. "We have initiated a rapid change agenda and have made tremendous progress in my first 160 days, and we are only getting started."

Progress Already Underway
 
Harrison provided various examples of steps taken over the past five months highlighting CP's evolution to a more competitive railway, including the following:
 
New executive leadership team now in place including a new Senior Operations lead team with a mandate for centralized planning and decentralized execution, to eliminate bureaucracy and have service decisions made faster and closer to the customer;
 
Revamped intermodal and merchandise train service resulting in faster transit times for customers, example of new intermodal services connecting Vancouver to Chicago or Toronto;
 
Closure of hump-switching yards in Toronto, Winnipeg, Calgary, and Chicago producing significant cost savings and more efficient operating practices;
 
Closure of intermodal terminals in Milwaukee, Obico (Toronto), and Schiller Park (Chicago), reducing footprint and operating expenses while also facilitating efficient operating practices and reduced end-to-end transit times;
 
Improved train service and network velocity resulting in the need for 195 fewer locomotives and 3,200 fewer leased rail cars, current stored, year-to-date lease returned and declared surplus locomotive units total 460.
 
Harrison continued, "We are hearing feedback from customers that they are seeing and liking the results. The reduced number of assets and the decentralized decision making within the organization will allow us to appropriately size to any changes in market conditions. I have always maintained that by focusing on the best possible service, along with appropriate cost containment, the operating ratio will take care of itself. CP is no different, we already see the service and related bottom line benefits of our early actions. It's an exciting time to be a part of this great franchise."

The Plan for Change Going Forward
 
"We now have a leadership team that understands the urgency of making change and improving the culture of this organization" Harrison said. "CP has many talented railroaders who want to win. Together we are squarely focused on improved service and becoming the low cost carrier. This will allow us to continue to grow with our customers."
 
Moving forward, Harrison outlined various plans CP will execute to continue to improve service reliability, increase the railway's efficiency, and grow the business. Key highlights include:
 
Reduce roughly 4,500 employee and/or contractor positions by 2016, through job reductions, natural attrition, and fewer contractors. We have already made progress on this front and expect 1,700 positions to be eliminated by year end;
 
New longer sidings program will improve asset utilization and increase train length and velocity. The plan will allow CP to move the same or increased volumes with fewer trains, and is expected to save over 14,500, or 4 percent, crew starts;
 
Explore options to maximize full value of existing and anticipated surplus real estate holdings;
 
Relocate CP's current corporate headquarters in downtown Calgary to new office space at CP-owned Ogden Yard by 2014;
 
Review options for the Delaware & Hudson (D&H) in the U.S. Northeast, while maintaining options for continued growth in the energy business;
 
Announced earlier, CP is seeking expressions of interest on the 660-mile portion of the former Dakota, Minnesota & Eastern (DM&E), west of Tracy, Minnesota.
 
"I am excited about what we've achieved to date, but we have only just started this journey to being a more competitive railway. We will continue to drive our service offering while focusing on taking unproductive costs out of the business. We see a strong earnings profile and solid free cash flow picture emerging." Harrison added. "Canadian Pacific is a great franchise with strong growth upside and we are more confident than ever that we will drive shareholder value long into the future."

Financial expectations on CP's journey to 2016 include:
 
Compound annual revenue growth of 4-7 percent off the 2012 base;
 
A full-year operating ratio in the mid-sixties for 2016;
 
Cash flow before dividends (*see Non-GAAP Measures below) of $900 million, $1,400 million in 2016;
 
Annual capital spending in the range of $1.0-$1.1 billion over the period.
 
Key Assumptions
 
Average fuel cost per gallon of $3.45 U.S. per U.S. gallon;
 
Defined benefit pension expense of $140-$150 million through 2016;
 
Defined benefit pension contributions between $100-$125 million through 2015 increasing to $200-$300 million in 2016;
 
A tax rate of 25-27 percent;
 
CP becomes fully cash taxable during the four-year period;
 
Canadian to U.S. exchange rate at par.
 
Fourth Quarter 2012
 
As previously noted on 3 Dec 2012, CP anticipates taking a fourth quarter estimated pre-tax non-cash charge of approximately $180 million ($107 million after tax) on its option to build into the Powder River Basin. CP also anticipates taking a charge related to labour and other restructuring activities, the amount of which is under review.
 
Review the complete slide presentation at www.cpr.ca.
 
View the animated classification yard operational changes.
 
Author unknown.