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A CP employee rides one of their locomotives - Date/Photographer unknown.
29 January 2013
CP Rail Earnings Hammered by Restructuring Charges
Toronto Ontario - Canadian Pacific Railway Ltd. reported a dramatic drop in its fourth quarter earnings Tuesday with several one-time
charges related to its ongoing restructuring dragging it down.
But the country's second-largest railway said it expects those efforts to improve its operations to take hold in 2013.
Hunter Harrison, CP chief executive, also said on a conference call the railway was "two to three weeks" away from naming a new chief operating
officer, who could also potentially become his successor.
CP reported net income $15-million, or 8 cents a share, for the fourth quarter, down dramatically from the $221-million, or $1.30 a share, it earned for the
same period last year. However, stripping several one-time items related to its restructuring, the company earned $1.28 a share in line with analysts'
expectations.
"Canadian Pacific is moving forward on our transformational journey to become the most efficient railroad in North America," Mr. Harrison said in a
statement. "This quarter, CP saw strong operating performance as we continued to implement significant changes to how we run the
railroad."
As a result, CP said it was expecting diluted earnings per share to improve "in excess of 40 percent" in 2013 compared to the $4.38, excluding
significant items, it earned in 2012. Those gains are expected to be made on the back of a "high single digit" revenue growth in the coming year, the
company said.
Walter Spracklin, RBC Capital Markets analyst, noted the forecast implies earnings of $6.08 a share in 2013, above the $5.77 a share expected by the Street,
and the variance is almost entirely due to a material reduction in the company's pension expense assumptions from the guidance it provided in
December.
CP lowered its pension expense forecast from $140-million to $150-million annually over the next four years to $50-million to $60-million in 2013 to 2015 and
$90-million to $110-million in 2015 to 2016.
The reduction results in a 38 cent a share improvement in 2013 EPS assumptions, Mr. Spracklin noted.
"We are at this point uncertain as to how much value the market will ascribe to the change in pension expense assumptions, which we note are set at the
discretion of management," he said in note to clients.
Outside of pensions, however, he said the revenue guidance was higher than he expected and may be the result of better revenue expectations from potash and
industrial products.
CP is in the midst of a dramatic restructuring of its operations led by Mr. Harrison, who was appointed CEO last summer after a lengthy proxy battle led by
Bill Ackman's Pershing Square Capital Management. In December, Mr. Harrison outlined his plan to restructure the railway, including slashing its staff by
nearly a quarter by 2016.
CP noted that the fourth quarter figures included several labour restructuring and asset impairment charges. Those items included a labour restructuring charge
of $53-million, or 22 cents a share, a $185-million, or 64 cents a share, write-down on the option it held to build into the Powder River Basin and other
assets, and an $80-million, or 34 cents a share, hit related to asset impairment on certain locomotives.
Revenue improved nearly 7 percent during the quarter to $1.5-billion on the back of 1 percent improvement in carloads and 4 percent increase in revenue ton
miles.
The company's operating ratio, an important gauge of the company's profitability measuring its operating costs as a percentage of revenue, was 96 percent
during the quarter.
The lower the number, the better, and after stripping out several "significant items" during the quarter, including those discussed and other
matters related to management transition, advisory fees, and tax rates, CP said it had an operating ratio of 74.8 percent for the quarter compared to 78.5
percent a year ago.
The railway said it was expecting an operating ratio "in the low 70s" for 2013.
Fadi Chamoun, BMO Capital Markets analyst, said he expected the outlook would be well-received by investors.
"CP Rail's march toward a mid-60 percent operating ratio by 2016 is well under way and 2013 should provide a meaningful down payment toward this
target," he said in a note. "That being said, we believe that valuation has captured the bulk of this upside."
Scott Deveau.
Vancouver Island
British Columbia
Canada
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