We get a lot of questions from our investors about Americans boycotting champagne, Perrier water and other French products,’ smiles Jeremy Lee, the first ever vice president for investor relations at CP Ships. ‘After all, that’s the kind of stuff our ships carry.’
Even though he can reassure them that the Franco-American spat is not desperately affecting demand for les bonnes choses in life, it is typical of the stormy political and economic waters that stirred when the company was spun-off in the five-way breakup of Canadian Pacific almost two years ago. It takes more than a bottle of champagne across the bow to bless a company that listed three weeks after September 11.
CP Ships was born over a century ago. At the time the company was chartering a sailing vessel to bring Chinese tea rather than French plonk for trans-shipment to the eastern seaboard on the new Canadian Pacific Railroad. In October 2001 its parent company deconglomerated and CP Ships was launched on a waiting world that was marred by the effects of global recession and the World Trade Center atrocity.
Not even hauling up CP’s red and white company flag from the locker of history could cover up the problem: the worst downturn in 20 years is not good news for a global container shipping line with a fleet of almost 90 vessels.
Setting sail
Jeremy Lee was well prepared. He had first set sail as a management trainee down the now-closed Manchester Ship Canal 25 years ago and his voyages took him through sales, marketing and regional management before he landed up with CP Ships in 1989.
He moved back to CP Ships headquarters in London to work on corporate planning with CEO Ray Miles for three years while the company was spreading and growing to its present global stature from its original transatlantic niche. Then he returned to Montreal where he spent several years in a commercial role working on business development and IT. Finally the opportunity came up to do investor relations. ‘Someone told me it was about relationships, and that sounded pretty interesting,’ says Lee.
He soon found it was not the easiest task in the world to get everyone else interested in CP Ships’ story. The company was the smallest and least known of the five businesses – including rail, hotels, energy and coal – under the CP umbrella. The spin-off of CP’s businesses was announced in February 2001 and they went ahead on October 1 despite the inauspicious timing. ‘They were absolutely convinced the spin-off would release a significant value to shareholders and they were right – it did,’ comments Lee. Shareholders who have held on to the various CP spin-offs have gained about 160 percent, Lee estimates – no mean return over a period when so many stocks have been plumbing the Mariana Trench.
In deep
Even at the best of times, a spin-off is not an easy process, but Lee was in deep in every sense even before the global economy hit an iceberg. ‘I went over to London in March 2001, after the announcement of the spin-off, and my first task was assisting in the preparation of a spin-off prospectus and developing an equity story with Morgan Stanley, our bankers,’ he recounts.
One immediate calculation was how many CP Ships shares each CP holder should receive, and the company decided that the most buoyant launch price would be C$10-$20. ‘We did not want to have a stock that was going to be significantly below $10,’ comments Lee. In the end, each CP share entitled its lucky holder to 0.25 of a CP Ships common share which gave the new company about 80 mn shares.
In addition, although management categorizes CP Ships as a ‘cyclical growth’ company, and it is in fact growing, they decided to pay a dividend. At roughly 16 cents a year, a 1.2 percent yield, it was a small dividend but it would grease the skids on launch. ‘There are always some investors who want dividends,’ Lee explains. ‘And many institutions think that if you haven’t got a better project for the cash, they would rather have an increased dividend so they can decide how to invest it themselves.’
Despite its London-based headquarters, CP Ships did not list there. Lee points out that most interested European fund managers would buy in Toronto or New York and, in any case, the shareholder center of gravity was in Canada and the US.
Choppy waters
There was an initial whirl of turnover, which CP Ships was anticipating. As the company listed on the TSE and NYSE, Lee knew former CP stockholders and large-cap funds were unlikely to keep the new small-cap shipping company. By now 75 percent of investors are north of the 49th parallel where the company remains in the TSX/S&P 60. ‘If we were on a US index, I think we would consider ourselves part of the S&P mid-cap transportation sector,’ Lee hazards. South of the border, however, the US shareholder base, which at the time of the spin-off was close to 45-50 percent, has shrunk to less than 20 percent.
To supplement the difficulties, while the company sees itself as a North American container company, it is pretty much the North American container company, so there were no comparable stocks. And that meant there were few analysts.
Relationships with the sell side remain very important because, as Lee says, ‘It actually educates the buy side about our industry, helping them to understand its dynamics’. There are still some areas where investors without guidance may find themselves all at sea. It is all very well to describe your company as ‘cyclical growth’, but Lee admits it is difficult to calculate the length of a cycle in the shipping industry.
The surge of US imports from Asia following the currency crisis drove the last upturn, from mid-1999 to mid-2001. It was then that carriers ordered a lot of new capacity which was launched in late 2001, just in time for the global recession exacerbated by 9/11. ‘Last year was the worst trough in the industry’s history and we’re only just beginning to move out of it,’ reports Lee. ‘Utilization is tight, so we are much more optimistic than we were six months ago.’
Operating in a global environment always requires some juggling. Although CP Ships’ financials are filed under Canadian Gaap, revenues are in US dollars, which was good news for Canadian shareholders until recently. Now 60 percent of the costs are in US dollars, ‘So we have exposure to a weakening dollar,’ explains Lee.On the other hand, hedging on the euro and Canadian dollar gave CP Ships an enviable lifeboat and a gain of $18 mn last year.
Navigating the buy side
The short history and the initial turnover from the spin-off have made it difficult to identify shareholders as short-term or long-term. However Lee estimates that 80 percent of shares are institutionally held and about 20 percent are in retail hands with company executives holding about 3 percent. Many of the individuals are Canadians who have inherited the stock from Canadian Pacific, which was Canada’s bluest of blue chips. One of the major targets over time is to increase US exposure, which Lee thinks would improve liquidity and stock price.
Even so, Lee is well aware of the shoals lying ahead of a small cap with no North American comparables and limited US research. ‘We actually have a large global bank covering us out of the US, and we have more based in Canada and one in Hong Kong, but our biggest challenge is reaching out to the US investor base. We realize that this isn’t a short-term program; it’s long-term – at least five years.’
Lee’s main focus is on buy-side institutions, but finding the appropriate targets is not an easy task. That’s true ‘whether it is Canadian money managed in the US, international equity funds, or domestic small-cap funds that hold an interest in other areas of the transportation business.’ To help with the difficult process, Lee has hired IR agency Christensen to help identify potential targets and to work on marketing to investors.
At the helm
Along with increasing US holdings, Lee wants to hold on to the existing retail base while giving small shareholders the opportunity to sell their shares through an odd-lot program implemented last November and recently extended until August. The company has also introduced direct dividend check deposits and will be considering a dividend reinvestment program, although the cost might outweigh the benefits. As Lee says, ‘We concluded shortly after the spin-off that projected limited demand for the [dividend reinvestment] program did not justify the administrative costs involved.’ Lee’s retail IR program has received support from CP Ships CEO Ray Miles and CFO Ian Webber. Both have been proactive in addressing retail brokers and visiting banks with a significant following of retail clients.
CP Ships’ corporate web site is to be relaunched later this year. ‘We think the navigation on the site is pretty good already, but we are making some improvements wherever we can,’ reports Lee. In addition, the company has begun online proxy voting, though it decided not to have the ballots going directly through the site. Instead, ‘We have a link to the transfer agent since we think it’s more appropriate to have the actual electronic voting taking place through its site rather than our own.’
The CP Ships crew believes in a personal and proactive approach to its investor relations function. As befits someone with such rich industrial experience, Lee reports directly to Ray Miles. He works closely with Liz Canna, vice president of corporate communications, and between them they ensure that both the core business media and trade press along with investors are kept well informed of any developments at CP Ships.
Making waves
Until the company gets much larger, it has to make a lot of IR noise to make a blip on the buy-side radar. So the CEO and CFO spend a week each quarter in various US cities doing what Lee calls ‘marketing’. They do the same in Canada, and Lee has begun to spend another week each quarter softening up US prospects.
Asked about his use of the term marketing, Lee maintains that IR is marketing. ‘At the end of the day, it’s about getting across in a realistic, systematic way the reality of our industry, our company, its financial performance, and what the drivers are, the upside and the downside.’ ‘At the heart of IR is making sure the market is efficient, so staying in touch with the business is a very important part of the job,’ he continues. ‘An IRO should be somebody with a very good grounding in the business already, not just somebody who’s got the technical IR or media expertise. IR is about finance, communications and marketing. I stop short of saying it’s sales; I still don’t really believe it’s sales.’
What the analysts say
Rossa O’Reilly, CIBC World Markets
‘CP Ships is in a difficult and highly competitive industry, and those two factors influence the content of the IR program. They don’t want to provide information that may compromise their market position so they need to trade that off against the need to communicate with investors. And they strike a pretty good trade-off, with a substantial amount of detailed, segmented information consistently on the same basis, and that’s really useful.
The other issue is the cycle, which influences the extent to which the company can provide information on profit prospects. It is very difficult to foresee what pricing conditions will be, so they have to be circumspect, but they do provide reasonable guidance. And then they are proactive in making presentations to groups and investors on a quarterly basis. So, overall, CP Ships does run a very communicative and effective IR program.’
David Newman, National Bank Financial
‘Jeremy Lee does a great job. He’s very proactive and really follows up with the clients. CP Ships is one of the best companies I deal with. They were a little light when they first came off the blocks but now they have the information and the PowerPoint presentations every quarter. And, more to the point, they get back to us immediately if there are any questions.
Jeremy in particular takes it upon himself to improve himself. Sometimes you deal with someone in IR who’s a marketing person or an envelope-stuffer with little or no operational or industry experience, but Jeremy has extensive knowledge of the industry and the company so he can add something extra.’
