July 25, 2012 / 12:31 PM / 5 years ago

UPDATE 2-CP Rail profit hurt by strike, new CEO costs

* Quarterly profit drops 20 pct on strike, management costs

* CP pays C$38 mln in costs for new CEO Harrison

* CP says strike reduced EPS by 25-30 Canadian cents

July 25 (Reuters) - Canadian Pacific Railway Ltd, fresh from a proxy battle that ousted its chairman and chief executive, reported a 20 percent drop in quarterly earnings on Wednesday due to the impact of a strike and management transition costs.

CP, Canada’s second-biggest railroad operator, said second-quarter net income fell to C$103 million ($101 million), or 60 Canadian cents a share, from C$128 million, or 75 Canadian cents, a year earlier.

Freight revenue rose 8 percent to C$1.33 billion.

Without the “noise” from the strike and the management costs, CP “appeared to have performed well on a core operating basis” in the quarter, BMO Capital Markets analyst Fadi Chamoun said in a note to clients.

CP’s shares jumped C$1.81, or 2.3 percent, to C$76.87 on the Toronto Stock Exchange on Wednesday morning.

CP’s operating ratio, an important barometer of performance in the railroad industry, weakened to 82.5 percent from 81.7 percent in the year-earlier period.

The lower the number -- which measures operating costs as a percentage of revenue -- the more efficient the operation. By this measure, CP is the weakest performer of North America’s big railroads.

CP’s biggest shareholder, U.S. hedge fund Pershing Square Capital Management, made this underperformance central in its proxy battle with the railroad, which ended in CP’s CEO and chairman both quitting hours ahead of a shareholder vote in May.

Hunter Harrison, who was CEO of CP rival Canadian National Railway Co until 2009 and also Pershing’s candidate to turn around CP, was named CEO in June.

CP said it booked a C$38 million charge in the quarter due to the management changes and Harrison’s appointment.

That includes C$16 million of deferred retirement compensation for Harrison. CP also paid C$20 million to Pershing Square to reimburse them for amounts they paid Harrison to make up for losses he incurred in a lawsuit that CN launched against him.

CN said in January it was halting pension and other payments worth nearly US$40 million to Harrison, arguing that he was breaching non-compete and confidentiality obligations by involving himself with CP. CN has asked a court to rule if its action was lawful.

CP’s performance started to improve sharply in the first quarter of 2012 but operations were shut down in Canada for nine days in May before the Canadian government legislated striking locomotive engineers and other workers back to work.

CP said the strike is estimated to have wiped off 25-30 Canadian cents from its diluted earnings per share.

Canadian Labour Minister Lisa Raitt last week named an arbitrator in the dispute. The arbitrator will rule on a contract within 90 days.

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