(The following story by Brent Jang appeared on the Globe and Mail website on July 23.)
TORONTO — Surrendering hope for an economic revival this year, and slashing its profit forecast, Canadian Pacific Railway Ltd. is embarking on an efficiency drive that includes better scheduling and less-congested rail yards.
As rival Canadian National Railway Co. has done in devising rigorous standards to speed deliveries, CPR’s goal is to focus on key operating and financial areas, such as increasing average train speed and reducing the amount of “dwell time” that freight is left at terminals.
Yesterday, CPR chief executive officer Fred Green said the aggressive moves are strategically crucial, coming on the heels of the railway’s decision to chop its 2008 profit forecast by about 9 per cent.
“We’re being realistic. You can’t have a U.S. economy softening big time, a Canadian economy in the east starting to soften because of weakness in forest products and autos, and not have some collateral damage,” Mr. Green said in an interview.
For the third time this year, the railway reduced its 2008 guidance for diluted earnings per share.
It blamed surging fuel costs, a slumping North American economy and flooding in the U.S. Midwest. The new EPS estimate is in the range of $4 to $4.20, compared with the previous outlook of $4.40 to $4.60.
“We’ve gone through a bump in the road, largely caused by fuel, and we’re not terribly happy about it, but this is still a great franchise,” Mr. Green said after CPR announced a 40-per-cent drop in second-quarter profit to $155-million.
The Calgary-based railway posted a record profit last year of $946-million. Analysts say it could still get close to that level in 2008 and Mr. Green said CPR is keen to improve.
He has asked CPR senior vice-president of operations Brock Winter to oversee the efficiency campaign at the railway.
Transportation consultant Greg Gormick speculated yesterday that CPR would try to reach more co-operation pacts to share tracks with rivals such as Montreal-based CN and Norfolk Southern Corp. of Norfolk, Va.
Mr. Green confirmed that CPR is interested in co-operating with other freight carriers to help clear bottlenecks, although he declined to single out any railway.
CPR’s second-quarter operating ratio – a key indicator of productivity that measures operating costs as a percentage of revenue – worsened to 79.4 per cent. Like a player’s golf score, a lower number is better, and CPR trailed CN’s industry-leading operating ratio of 66.3 per cent for the three months ended June 30.
RBC Dominion Securities Inc. analyst Walter Spracklin was impressed by CPR’s second-quarter strength in shipments of coal and industrial and consumer goods, but he was disappointed by sliding shipments of grain, forest products and autos.
A notable growth prospect is CPR’s Dakota Minnesota & Eastern Railroad Corp. unit, currently held in an independent voting trust. CPR expects to hear by Sept. 30 from the U.S. Surface Transportation Board whether it will approve the railway’s $1.5-billion (U.S.) purchase of DM&E. If approved, CPR would examine whether to embark on an ambitious track expansion into the Power River coal basin in Wyoming.
But investors fretted yesterday about the lower second-quarter profit and reduced EPS forecast rather than concentrating on long-term growth, as CPR shares fell 3.6 per cent on the Toronto Stock Exchange.
“I don’t have much of a quarter-to-quarter orientation, to be candid with you, but I certainly do have the drive to deliver EPS growth and value creation for shareholders over the medium and long term,” Mr. Green said.