NORTH American Class 1 Canadian National (CN) has released its new strategic and financial value creation plan, “Full Speed Ahead - Redefining Railroading,” after its counteroffer to acquire fellow Class 1 Kansas City Southern (KCS) was unsuccessful.
KCS entered into a waiver letter agreement with CN under which CN agreed to waive a five-business-day-match period and KCS agreed to terminate the CN merger. KCS subsequently re-entered into a merger agreement with Canadian Pacific (CP). Despite the recently terminated transaction, CN says its bid for KCS reaffirmed CN as “the premier North American railroad” and secured CN an incremental $US 700m in break-up fees.
CN says the new strategic plan will allow it to continue delivering high-quality service to customers while generating profitable growth and enhanced returns to shareholders. The plan builds on CN’s January 2021 strategic plan to lead on safety, customer value, operational excellence, sustainability and social inclusion, while also delivering industry-leading shareholder returns.
“CN’s ambition is to build the premier railway of the 21st century by methodically investing in technologies to deliver high-quality service to customers, improve safety and sustainability, create capacity and reduce costs and delays,” says CN president and CEO, Mr JJ Ruest. “Just as CN pioneered the industry’s focus on efficiency to increase reliability, we are now well-positioned to lead the industry through its next transformation by investing in the success of our customers, workforce and communities while delivering enhanced financial results.”
CN operates a 31,000km network connecting Canada’s eastern and western coasts with the United States. For 2022 CN expects to grow earnings per share (EPS) by approximately 20% and improve its operating ratio to 57%. Additionally, CN is reviewing its capital structure and financial leverage with a view to increasing total shareholder distributions.
CN has conducted an extensive review of all revenue and cost levers and has targeted $C 700m ($US 545.4m) of operating income improvements to drive future growth. To achieve these improvements in 2022, CN intends to use a balanced approach that includes a strategic review of non-rail businesses and an optimisation of labour productivity. This includes:
- resuming share repurchases: CN will recommence share repurchases under the plan previously approved by CN’s board of directors in January and expects to complete the remaining $C 1.1bn of share repurchases by the end of January 2022
- increasing shareholder returns: CN is reviewing its capital structure and financial leverage with a view to increase total shareholder distributions, including share repurchases in the range of $C 5bn for 2022
- reducing capital expenditures: CN expects to reduce capex to 17% of revenue in 2022 as a result of the current good condition of its network and the company’s continued commitment to safety and customer service, with this rate expected to remain in place until 2024 unless there are significant market shifts
- producing compelling financial returns: CN is committed to driving top-quartile total shareholder return (TSR), leading the industry in organic revenue growth driven by CN’s intermodal business and showing continuous improvement on its operating margin
- lowering its operating ratio: CN is targeting an operating ratio of 57% for 2022 by prioritising rail operations, including car velocity, train speed and train length, and committing to pursuing strategic alternatives for adjacent non-rail businesses that are not best-in-class; and rationalising its cost structure by streamlining management, especially support functions, to improve labour productivity by accelerating the speed and quality of decision making.
As part of its strategic and financial plan, CN is reaffirming its 2021 financial outlook targets of double-digit adjusted diluted EPS growth versus 2020 adjusted diluted EPS of $C 5.31, capital investments of approximately $C 3bn and free cash flow in the range of $C 3bn to $C 3.3bn.
The railway also vows to continue to reduce its impact on the environment while strengthening its corporate governance:
- setting a science-based target of 43% carbon emission intensity reduction by 2030 based on 2019 levels
- becoming the North American rail industry leader in fuel efficiency, consuming approximately 15% less locomotive fuel per gross tonne-km
- introducing an annual advisory vote on CN’s climate change action plan
- aligning executive compensation with environmental, social and corporate governance (ESG) objectives, including safety and fuel efficiency
- reducing the mandatory retirement age and confirmed term limits for the board of directors
- adding two new directors in 2021, along with a March announcement that CN’s chair of the board of directors, Mr Robert Pace, will not be seeking re-election when his term expires in 2022, and
- setting a target of at least 50% of non-management directors coming from diverse groups, including gender parity, by the end of 2022.
“We spent the last several years making strategic and important customer-centric investments in our network, technology, sustainability and people,” Pace says. “These investments have allowed us to deliver high-quality service to our customers and position us well to drive more sustainable returns to shareholders over the long-term. I am confident that CN’s senior management, a team of world-class railroaders who are focused on redefining the rail industry, have the skills and determination to lead the company into this exciting next phase.”