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Canadian Pacific Railway posted record fourth-quarter and annual profit. (Darryl Dyck/The Canadian Press)
Canadian Pacific Railway posted record fourth-quarter and annual profit. (Darryl Dyck/The Canadian Press)

How CP engineered a smart turnaround Add to ...

Hunter Harrison’s first full year in charge of Canadian Pacific Railway Ltd. brought a record annual profit, and the aggressive CEO has set a goal of boosting earnings by 30 per cent in 2014.

The man hired by activist investor Bill Ackman to cut costs and increase freight shipments said Wednesday there’s more room to do both of those things. CP estimates revenue will grow 6 to 7 per cent this year, to about $6.5-billion, a projection that Mr. Harrison called “conservative.”

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Mr. Harrison came out of retirement in mid-2012 with a mandate to transform the underperforming company, which was burdened with higher-than-average costs and a stock that had moved sideways for a decade.

Since taking over, he has cut staff by 4,550 and pulled 400 locomotives and 11,000 rail cars off the tracks. The company’s $800-million pension deficit has been eliminated and its operating ratio, which measures the operating costs as a proportion of revenue, has fallen to 69.9 per cent from 77 per cent, excluding unusual items. The stock has more than doubled in the past two years.

On a conference call, Mr. Harrison alluded to the “culture shock” and “steep learning curve” experienced by the work force of nearly 15,000 people.

Many of CP’s executives are hand-picked by Mr. Harrison, including chief operating officer Keith Creel, whom Mr. Harrison said will take over when he leaves, probably in 2016. “I think we have assembled a team of railroaders that is second to none in the world,” Mr. Harrison said.

For the year, CP’s profit rose to $875-million, or $4.96 a share, from $484-million or $2.79 a year earlier. Total revenue rose 8 per cent to $6.1-billion.

The Calgary-based railway said net profit in the three months ending Dec. 31 rose to $82-million, or 47 cents a share, from $15-million, or 8 cents a year earlier. Revenue in the quarter rose 7 per cent to $1.6-billion.

CP shipped more grain, coal, fertilizer and industrial goods in 2013, but its intermodal business, which ships goods in containers that can be transferred to trucks, saw revenue fall 3 per cent after losing business to rival Canadian National Railway Co.

“I think it boils down to price,” chief marketing officer Jane O’Hagan said of the lost contracts. “Some people are focused on the value and some are focused on the cost.”

CP moved 25,000 carloads of crude oil in the fourth quarter and 90,000 for the full year, a 68-per-cent increase over 2012. By 2015, CP is aiming to more than double this figure to as much as 210,000 carloads, said Ms. O’Hagan, who hinted that some western Canadian energy producers on CP’s network were eyeing new crude-by-rail terminals.

The company does not report revenue by product, but crude accounts for 4 per cent of its total carloads.

The final few weeks of the fourth quarter were marked by extreme cold that slowed trains and backed up rail traffic in parts of North America. Railway labour and fuel costs rise in winter, and railways run shorter trains, which can reduce overall shipping volumes.

CP and CN also came under criticism from the western Canadian grain industry, which complained about poor service moving its record crop to ports for export. Moving the crop is expected to boost revenue well into the next harvest season.

Given CP’s improved profitability and cash flow, BMO Nesbitt Burns analyst Fadi Chamoun said he expects higher shareholder distributions to come, likely in the form of share repurchases.

National Bank Financial analyst Cameron Doerksen said he believes CP’s board will consider raising the dividend or buying shares this year.

CP took a $435-million charge in the fourth quarter over future costs related to the sale of its Dakota, Minnesota & Eastern railway in the United States, which reduced diluted earnings per share by $1.45.

Follow on Twitter: @ericatkins2

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