BUSINESS

Canadian Pacific Railway profits fall in second quarter on series of expenses

07/25/2012 07:46 EDT | Updated 09/24/2012 05:12 EDT
CALGARY - A nine-day strike and costs related to a change in CEO dragged on Canadian Pacific Railway Ltd.'s second-quarter results, but the company's new boss has an upbeat view of what's next for the storied railroad.

"It's been fun. I've enjoyed the first three or four weeks of getting back in the saddle," Hunter Harrison, who used to lead CP's biggest rival, said in an interview. "It's been delightful."

Net income fell to $103 million, or 60 cents per share, in the three months ended June 30 from $128 million, or 75 cents per share, a year earlier.

Earnings per share would have been 30 cents higher if not for the $38-million costs related to Hunter Harrison's appointment as CEO following a bitter proxy fight, advisory costs and a change Ontario's corporate income tax rate.

And a nine-day strike that started in May — and ultimately ended when Ottawa stepped in with back-to-work legislation — further reduced Canadian Pacific's (TSX:CP) earnings per share by 25 cents to 30 cents earnings per share.

"We've had a number of significant items that masked our true financial results. However with the noise aside, we have a solid performance to build on," said chief financial officer Kathryn McQuade.

"Our capital plan is on track and we are seeing real volume growth in strategic areas like energy and we continue to drive operating improvements into the network. This is a strong franchise with positive market opportunities and we are committed to providing quality service as we drive long-term value for our shareholders."

Activist hedge fund Pershing Square Capital Management bought a 14 per cent stake in Canadian Pacific last fall and then agitated for months to oust then-CEO Fred Green.

Pershing Square CEO Bill Ackman argued the railway was languishing under Green's leadership and major changes at the top were necessary to get the company up to speed with its peers.

Ackman said Harrison, who retired as CEO of rival railway Canadian National Railway Co. (TSX:CNR) in 2009, was the right man for the job and last month he was appointed to the job.

Harrison had said the railway could cut expenses as a percentage of revenues to the mid-60 range in four years — an operating ratio target CP's former management and board deemed unrealistic.

During the second quarter, CP's operating ratio was 82.5, an increase of 80 basis points.

"I feel even stronger today than I did two or three months ago about the numbers that I was throwing around," Harrison told a conference call.

"I think they're in for some surprises," he said of the skeptics.

Revenue increased to $1.37 billion from $1.27 billion during the quarter.

Harrison said he's seen some pleasant surprises since taking the reins of Canadian Pacific.

"There's some strength the organization had that I didn't even appreciate, I think from a technology standpoint they're way ahead of the competition," said Harrison.

He also said had been "too conservative" with respect to the railway's revenue growth prospects. If economic conditions remain steady, the railway shouldn't have trouble meeting its targets, he said.

"When I got here and looked, my confidence just became even stronger."

He said morale has been mixed at the railway following the rocky times it's experienced this year.

"I think there's some people out there that see me as the big bad wolf and think I'm gonna walk in here and not do things positive for the organization and they're not real pleased about that," he said.

"At the same time I've been pleasantly surprised as I've been out on the property shaking hands and meet railroaders that are very encouraged by the changes that the organization... is trying to make."

Harrison now has a condo in Calgary, where he's been spending most of his time since starting his new job. Once things settle down, he sees himself spending about a third of the time in Calgary and the rest on the road in Canada and the United States.

"And I'll work my family in somehow in those schedules," the Tennessee-born CEO told The Canadian Press.

Harrison doesn't expect to have any trouble honouring contractual obligations he signed with his former employer, CN, when he left. For its part, CN said it would closely monitor Harrison to make sure he doesn't spill confidential information to its competitor.

"I don't know what information I have that's confidential that hasn't been made public that I could divulge, even if I made a mistake," said Harrison.

"This is not Pepsi Cola and Coca Cola with some formula of how to make the fructose. This is railroading."

CP shares closed up more than five per cent to $78.97 on the Toronto Stock Exchange.