CN is conducting a strategic review of its non-rail assets and is considering a potential shutdown of its freight forwarding business in the next several months as it seeks to pursue CA$700 million (US$548 million) in additional operating income in 2022.
“There’s no sacred cow at CN, and when we look at the future, every aspect of the business that we do, every piece of the operation that we do, needs to contribute to the ultimate goal that we have,” CN President and CEO JJ Ruest said early Friday in a call to investors outlining CN’s (NYSE: CNI) growth strategy.
CN’s non-rail assets include TransX, which is acquired in 2019, and the Great Lakes vessels and other assets that it acquired in 2003, as well as some transloading operations, CN executives said. If any assets are divested, CN would still maintain a relationship with the assets, according to Ruest.
The non-rail assets are a smaller piece of the $700 million pie that CN is seeking to generate next year, CN executives said.
CN’s plan unveiled Friday follows a failed attempt to acquire Kansas City Southern, with KCS finally opting earlier this week to merge with CN rival Canadian Pacific (NYSE: CP). Although KCS (NYSE: KSU) had previously opted to merge with CN, CN says the U.S. regulatory environment prevented the merger from going forward.
However, the opportunity provided CN to hear from customers and shareholders about what they wanted from CN, Ruest said. While customers want expanded offerings such as congestion-free gateways into North America via Prince Rupert and Halifax in Canada, shareholders want a renewed focus on streamlining operational costs.
As a result, CN is seeking to reach a target operating ratio of 57% in 2022, which CN says will address both customer and shareholder needs since too low an OR can sacrifice service, according to Ruest.
To reach the target OR and achieve an additional $700 million in operating income, CN will look at three drivers: labor costs, operational costs and pricing, executives said. In addition to conducting a strategic review of its non-rail assets, CN plans to improve metrics such as car velocity, train speed and train length. It will also seek to keep capital expenditures in 2022 within 17% of revenue.
The company also could reduce headcount by more than 600 in management and support positions, as well as shed union employees in engineering, mechanical and transportation. In addition, CN could reduce its purchasing and materials spending by closing underutilized buildings, among other actions.
CN says the plan described Friday builds upon a strategic plan laid out in January.
When asked about recent comments from shareholders about CN’s leadership and a wish to add four new board members, Ruest mentioned that the board chairman, Robert Pace, and another board member are retiring in April 2022 and CN’s board will decide then who will replace the two.
“I know a lot has been said lately about the wisdom of our bid and the quality of our team,” Ruest said, and a KCS-CN merger would have “absolutely” served CN’s interests.
“I’m also here to tell you that CN is going to lead the industry into a growing, profitable, customer-centric, customer service-centered model of railroading. … We at CN are focused on the future of railroading, not the past,” Ruest said.
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