Fighting to save his job, Fred Green is portraying Canadian Pacific Railway Ltd. as a company that is on the comeback trail.
The CP chief executive officer said that the railway’s $142-million profit in the first quarter, unveiled Friday, underscores the improvements made over the past year, with the company delivering more cargo and fixing bottlenecks.
“We’re shattering operating records,” Mr. Green said during a conference call, after CP announced that its quarterly profit quadrupled, one month before a showdown with a New York activist investor.
The Calgary-based railway said its trains are travelling long distances efficiently, freight is spending less time in storage and locomotives are operating with better fuel mileage.
Mr. Green said CP’s latest turnaround strategy has its roots in a strategy he put in place in 2010, but severe winter storms and spring flooding last year masked the progress being made.
“We feel comfortable that people are seeing the underlying fundamentals,” he said. “Now that the last several quarters have shown improving performance, people are starting to realize the original plan, interrupted by two bad quarters of unique weather, is now right back on track.”
But CP’s results also left an opening for criticism from Bill Ackman, the CEO of Pershing Square Capital Management LP, who wants to install former Canadian National Railway Co. boss Hunter Harrison as CP’s top executive.
CP’s first-quarter operating ratio – a gauge of efficiency that measures costs as a percentage of revenue – fell to 80.1 per cent from 90.6 per cent. A lower number is better, but in this case it partly reflects the mild winter in parts of the country. And CP’s number is still higher than other railways will likely report.
Despite “one of the best winters in Canadian history” and the benefits of $4-million in land sales and a $12-million insurance gain, the railway’s operating ratio is still higher than it was in the same quarter in 2006, Mr. Ackman said.
CP had a first-quarter operating ratio of 79.6 per cent in 2006. Its annual ratio that year rang in at 75.4 per cent.
“It has been six years of billions of dollars of capital expenditures and these results are worse than they were six years ago when Fred Green was named CEO,” Mr. Ackman said. “This is why we believe it is time for a management change.”
CP is striving to reduce its operating ratio to the range of 70 per cent to 72 per cent for 2014.
But a CP spokesman said the railway already has a recovery strategy. “Pershing Square appears to be making an intentionally misleading comparison. It is well known to those familiar with our business that the first quarter is seasonally weak for CP. In addition, Pershing Square has not taken into account the significant impact of rising fuel prices over the last several years,” said a spokesman for Canada’s second-largest railway.
Mr. Ackman replied that there was nothing misleading about his statement, since it compares the first quarter with the same period from 2006 – just before Mr. Green became CEO. "True to form, CP seeks to blame this failure on increased fuel prices. As with the rest of Mr. Green’s excuses, this one rings hollow, " Mr. Ackman said, noting that CP’s competitors have improved their operating ratios despite higher fuel.
Pershing Square, CP’s largest shareholder, is touting its own turnaround plan to chop CP’s operating ratio to 65 per cent within four years of replacing Mr. Green.
CP shareholders will be voting on which competing director nominees to support at the railway’s annual meeting on May 17 in Calgary.
National Bank Financial Inc. analyst Cameron Doerksen said CP’s revenue, profit and operating ratio came in slightly stronger than he expected.
“The key date for CP is the May 17 proxy vote. In the meantime we believe that the current valuation on the stock fully reflects the optimism that the company can substantially improve its operating ratio, be it under the current management or under Hunter Harrison,” Mr. Doerksen said in a research note.
Pershing Square acquired a 14.2-per-cent stake in CP last fall for $1.4-billion. The hedge fund is proposing an alternative slate of seven directors, including Mr. Ackman.
Canadian Pacific (CP)
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