Canadian Pacific profit jumps amid restructuring

The broad restructuring of Canadian Pacific Railway Ltd. is "ahead of schedule," says the company's new head, including efficiencies from improvements at rail yards to the paring down of its work force.

Although the full unveiling of CP's restructuring will not happen until early December, chief executive officer Hunter Harrison gave some hints about its progress Wednesday in a conference call while delivering the railroad's third-quarter earnings.

"We've gotten some breaks. We've been blessed. It looks like – I'm knocking on wood as I say this – we might have a decent winter, from what I read in the Farmer's Almanac," he said.

CP posted a net profit of $224-million in the quarter, up 20 per cent over the same period last year. On a diluted per-share basis, quarterly profit rose 18 per cent, year over year, to $1.30, beating the estimates of some analysts who had anticipated higher costs dragging down income.

Some sectors showed strong improvements, notably automotive shipments rising in revenue by 31 per cent compared with last year. Some bulk freight sectors, however, were moderate or worse. Sulphur and fertilizers were particularly weak, declining 19 per cent in revenue due to poor export demand. The outlook for the rest of the year was mixed, although the shipment of industrial products is expected to be strong in the fourth quarter.

However, it wasn't so much the current financial picture which engrossed industry watchers during Wednesday's call, but clues about the company CP will become after its restructuring.

"I haven't found any skeletons in the closet yet," Mr. Harrison said. He characterized the changes as not slashing areas of operations, but rather finding efficiencies throughout, such as streamlining rail yards.

Without specifying exactly how much of the workforce he plans to trim, Mr. Harrison noted that "the high rate of natural attrition will take care of most of that," as employees retire or leave the company.

Most of the changes under way lie in nitty-gritty operations. For example, faster, cross-continental intermodal container service, which now takes a day less and which was introduced last month, reduced the use of "about 40, 45 locomotives, if I remember correctly," Mr. Harrison said. It's an example of improved service leading to real cost savings, he added.

"Bottom line, the first order of business here: This is a cost takeout story, to get our costs in line. And it's good for all of us to do that," he said. CP's operating ratio (or expenses as a percentage of revenue) lowered to 74.1 per cent in the quarter, from 75.8 per cent a year ago. He sees the ratio getting to the stated goal in the mid-60 per cent range in three to four years.

Pensions remain the one sticking point, CP executives said Wednesday, as the company, like others, continues to be hurt by low interest rates and therefore lower investment returns. "The only place I can find any negative is the pension fund," Mr. Harrison said.

Although he has appointed three vice-presidents of operations recently to, as he said, decentralize that function somewhat, Mr. Harrison plans to continue to fill the role of chief operating officer for now.

"When you provide better services, you turn assets, you lower costs, you treat your people right, it's a good story," he said.