Railway veteran Hunter Harrison's efforts to make Canadian Pacific Railway Ltd. more efficient are bearing fruit, but at a cost to the company.
The railway reported hefty restructuring charges in fourth-quarter and yearly earnings Tuesday, dragging down profit, although CP anticipates the strong medicine the company swallowed last year will lead to solid growth and greater efficiency this year.
Not including restructuring charges – such as additional labour payouts as the company eliminated a slew of positions, particularly management jobs – the railway reported a profit of $1.28 a share in the fourth quarter of 2012, largely meeting forecasts. This was up from $1.11 in the same period the previous year.
Shipping crude oil by rail is a particularly strong growth area for the company. "This is a rapid-growing, fast-paced market," said Jane O'Hagan, CP's chief marketing officer, noting that the railway anticipates shipping 70,000 or more carloads of crude annually. The benefit of rail is the flexibility that pipelines can't provide, as the oil market and shipping needs change quickly, she added.
Adding in the one-time restructuring costs, however, shows a less positive picture.
Labour restructuring charges came to $53-million, knocking earnings per share by 22 cents in 2012, the company said. The decision not to build an extension into American coal country in the Powder River Basin of Montana and Wyoming cost the railway $185-million, while the disposal of a fleet of locomotives added $80-million in costs.
With these one-time charges, CP made a profit of $15-million in the quarter, or 8 cents a diluted share. This was far below the $221-million, or $1.30 per diluted share, in the fourth quarter of 2011. Profit for 2012 with these charges was $484-million, or $2.79 per diluted share, compared with $570-million, or $3.34 a share, for the full year of 2011.
CP management was nevertheless upbeat. "The plan's working," said Mr. Harrison, CP's president and chief executive officer.
In a conference call, he updated analysts on a laundry list of promised changes, including moving CP's downtown Calgary headquarters to a less expensive site away from the city centre.
"We'll be moving into our new headquarters at the end of the fourth quarter. Our labour issues are generally behind us. We've recently signed four new collective bargaining agreements. So those issues are out of the way," he added.
Meanwhile, he noted the search for a chief operating officer is "going well."
The company expects to have 2,300 fewer employees by the end of the current quarter. The goal is to eliminate 4,500 positions by 2016.
Without the restructuring charges, the efficiencies have helped to improve CP's operating ratio to 74.8 per cent in the fourth quarter, from 2011's ratio of 78.5 per cent, the company reported.
Of particular interest to company watchers Tuesday was CP's lower pension forecast. The company's defined-benefit pension liability was lowered to the $50-million to $60-million range in 2013 and 2014. This is lower than the previously expected range of $140-million to $150-million.
Walter Spracklin at RBC Dominion Securities noted that CP has obviously managed to get concessions from its employees, "either through reducing the benefits paid, achieving savings through voluntary retirement with reduced benefit or the like."
The company noted that the implementation of a cap on its pension payouts will help in 2013 and 2014, although the reduced head count is also expected to ease future pension liabilities.
"The employees and the leadership in this organization have embraced change better than any organization I've been associated with in my close to 50 years [in the industry]. And I think that's extremely important, because the change is not over," Mr. Harrison said.