July 25 (Bloomberg) -- Canadian Pacific Railway Ltd. surged after William Ackman’s choice as chief executive officer reiterated a plan to transform North America’s least-efficient major carrier into one of the region’s most profitable.
Operating ratio, a measure of expenses against revenue, will be cut to about 65 percent in four years, CEO Hunter Harrison said on a call after the railroad Canadian Pacific posted second-quarter profit that beat analysts’ estimates. The first-quarter average for peer railroads was 73.9 percent, data compiled by Bloomberg show.
Changes may include a reduction in terminals and a capacity cut of 20 percent to 25 percent in the locomotive fleet over four years, Harrison, the former head of competitor Canadian National Railway Co., said in a telephone interview today. Canadian Pacific’s second-quarter ratio was 82.5 percent.
“Terminals have historically with railroads been huge cost centers and they were developed when the mix of business was totally different than it is today,” Harrison said. He said the carrier has “far too many terminals,” without saying what he considered to be an appropriate total.
Canadian Pacific’s network includes 19 rail yards and 15 so-called intermodal terminals, which handle containers that can move by a combination of train, truck and ship, according to the railroad’s website.
Canadian Pacific rose 5.3 percent to C$78.97 at the close in Toronto. The shares had previously climbed 22 percent from Oct. 27, the day before Ackman disclosed a stake that made his Pershing Square Capital Management LP the largest investor.
Second-quarter profit, excluding costs such as the management change and a revised tax rate, was 90 cents a share, compared with the 85-cent average of estimates compiled by Bloomberg. A nine-day strike in May reduced earnings by about 25 cents to 30 cents a share, Canadian Pacific said.
The quarter’s operating ratio set a benchmark for Harrison, 67, as he pursues a turnaround like the one he led at larger competitor Canadian National. The bigger carrier reported a ratio of 66.2 percent in the first quarter, the lowest of North America’s large railroads.
“A lot of this is going to require change,” Harrison said in the interview. “And there are a lot of us that don’t like change. There’s going to be people that resist, that push back, that maybe leave the organization, so the challenge is to keep the team together as much as we possibly can.”
Harrison was appointed June 29, a little more than a month after Ackman won a proxy fight clearing the way for a new CEO.
Excluding proxy battle costs and the effect of the strike, the railroad posted “a quarter that was well above our expectations,” Walter Spracklin, an RBC Capital Markets analyst in Toronto, said in a telephone interview. “The core business is running much better than anticipated and that is what people are going to focus in on when they trade the stock today.”
Net income fell 24 percent to C$103 million ($101 million), or 60 cents a share, from C$128 million, or 75 cents, a year earlier, the company said in the statement. Revenue rose 8 percent to C$1.37 billion.
One of Harrison’s first tasks is union negotiations. The Teamsters Canada Rail Conference, which represents more than 4,000 engineers, conductors and rail-traffic controllers, went on strike in May after contract talks that began in October stalled over the company’s pension plan.
Canada passed legislation May 31 ordering the Teamsters back to work. The law sent all unresolved issues between Canadian Pacific and the union to binding arbitration, giving the two sides 90 days to settle on a new contract or face one drawn up by the arbitrator.
The strike led to volume gains for Canadian National, which boosted its full-year forecast today to 15 percent growth after posting higher second-quarter profit than analysts estimated.
Earnings were C$1.50 a share, excluding some items, compared with the average estimate of C$1.47 from 27 analysts surveyed by Bloomberg. Including an income tax expense of 6 cents a share, net income was C$631 million, or C$1.44 a share, compared with C$538 million, or C$1.18 a year earlier, the company said.
Canadian National’s carload volumes also benefited from economic growth, the company said. The shares fell 0.4 percent to C$86.83 today.
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