(The following article by Brent Jang was posted on the Globe and Mail website on April 30.)
CALGARY — Canadian Pacific Railway Ltd. is off to a strong start, setting the tone for what could be a stellar year that capitalizes on recent track expansions in Western Canada.
The Calgary-based railway has its corporate strategy mapped out, like a sports team does when it writes a playbook, so the key is proper execution, said Fred Green, CPR’s incoming chief executive officer.
“We are a second-half ball club. It’s the nature of our franchise,” said Mr. Green, noting CPR has traditionally fared well in the final six months of the year with grain and fertilizer deliveries.
CPR expects to do increasingly brisk business as the year progresses, helped by shipments such as grain from the fall harvest across the West. The company is enjoying sizzling demand for its services, part of the rail industry boom fuelled by the Asian trade bonanza, red-hot commodity prices and the robust North American economy.
“It’s a wonderful thing,” said Mr. Green, 49, who will take over CPR’s throttle at Friday’s annual meeting in Calgary. He replaces Robert Ritchie, 61, who is retiring after 11 years as CEO of the country’s second-largest railway.
In an interview in his downtown Calgary office, next to CPR’s tracks, Mr. Green talked about the company’s strategy dubbed “Execution Excellence,” which spurs employees to strive for high marks in productivity categories such as locomotive speed and time spent getting trains ready in rail yards, also known as “terminal dwell time.”
CPR’s average train speeds rose 17 per cent to 40.7 kilometres an hour in the first quarter from the year-earlier period. Terminal dwell time fell 32 per cent to 21.3 hours.
Analysts are expecting Mr. Green, who joined CPR in 1978 after graduating in commerce from Montreal’s Concordia University, to continue the railway’s drive for increased productivity.
“Fred has a strong marketing and operational background, and that’s a killer combination in the railway business,” said Orion Securities Inc. analyst Ted Larkin.
CPR shares fell 42 cents to $59.43 on Friday on the Toronto Stock Exchange.
Mr. Larkin has a 52-week price target of $65.25 on CPR. He noted that the railway has been able to withstand rising diesel prices by placing fuel surcharges on its customers and signing hedging contracts to lock in some of its fuel needs at fixed prices.
So far this year, CPR has burst out of the gates, with its first-quarter profit surging 38 per cent to a record $111-million.
Mr. Green said he’s pleased with recent efficiency gains, aided by a $160-million expansion in Western Canada that’s contributing to “fluidity” — industry lingo for smooth rail operations that are mostly free of traffic jams. While praising the past year’s improvements, the incoming CEO believes that there is plenty of room to do even better.
CPR’s goals this year include boosting revenue by between 5 and 8 per cent, and racking up share profit of between $3.60 and $3.85, up from last year’s $3.39. Despite some weakness in coal and potash shipments, the railway is counting on transporting more grain, consumer goods and industrial products.
One important barometer of a railway’s health is the operating ratio — a key indicator of productivity that measures operating costs as a percentage of revenue. A lower number is better, and in the latest quarter, CPR’s operating ratio fell to 79.4 per cent from 82.4 per cent.
Industry analysts often compare CPR’s operating ratio with the performance of the country’s largest railway, Montreal-based Canadian National Railway Co., which posted a sector-leading operating ratio of 63.8 per cent last year.
The analysts also point out that CPR faces higher costs because many of its tracks are located on terrain that’s steeper than CN’s routes. Nevertheless, Mr. Green wants CPR to maintain the push to post an operating ratio approaching 75 per cent on average this year.
CPR is close to completing the task of cutting 400 office jobs, or 15 per cent of white-collar positions at its Calgary headquarters and North American branches. At the end of March, CPR had 15,394 employees in total, down from 15,691 a year earlier.
Analyst Walter Spracklin at RBC Dominion Securities Inc., said he’s impressed by CPR’s various productivity gains. He has a 52-week price target of $67 on CPR stock.