CN Rail to slash capital spending, resume stock buybacks as shareholder battle looms - The Globe and Mail

A CN Rail locomotive moves through a rail yard in Dartmouth, N.S., on March 29, 2018.

Andrew Vaughan/The Canadian Press

Canadian National Railway Co. says it will slash capital spending, resume share buybacks and boost profits as it faces a battle for control of the company from a large investor.

CN on Friday said it will launch a review of its business that includes examining “non-rail” operations and the “optimization of labour productivity” to increase operating income and possibly boost dividend payouts.

“The company’s focus will be on redefining railroading, driving profitable growth and making structural improvements for the next generation,” CN said in a statement.

CN’s announcement came less than a day after its second-largest investor, TCI Fund Management, called for the company hold a shareholder meeting at which TCI plans to oust the chairman, chief executive officer and two directors.

CN has 21 days to call the meeting, according to Canadian law.

U.K. billionaire Chris Hohn, who owns TCI, said CN is poorly run by people with little or no rail experience. Mr. Hohn said CN’s recently failed attempt to buy Kansas City Southern railway underlined CN’s “flawed decision making” and “a basic misunderstanding of the railroad industry and regulatory environment.”

Ben Walker, a partner in TCI, dismissed CN’s review announced on Friday as “reactive” and said it does not change the plans to wage a boardroom fight. The dissatisfaction with CN’s leadership precedes the failed KCS bid, he said, pointing to CN’s underperformance in recent years compared with its rivals.

“A lot of the things they’re doing should have been done already as part of a continuous improvement plan and efficiency optimization,” Mr. Walker said by phone.  “We’re hopeful that shareholders will vote for our slate of independent, high-quality nominees.”

TCI’s nominees include former CN and Union Pacific Railroad executive Jim Vena as CEO.

KCS agreed to a cheaper bid from rival Canadian Pacific Railway Ltd. and is awaiting regulatory approval.

CN executives on a conference call with analysts on Friday defended their own handling of the failed KCS bid, and said the company’s management and board were the best to lead the company.

“Our bid was positive for CN shareholders and CN customers,” Jean Jacques Ruest, CN’s chief executive officer, said.

Mr. Ruest said the non-rail businesses that could face sale or shutdown include the Great Lakes commodity ships, freight forwarding and trucking company TransX.

“There is no sacred cow at CN,” Mr. Ruest said on the call. “Do they fit in the long-term strategy? Do they also contribute to feeding the beast or bringing business to the railroad?”

CN said it will eliminate 650 management jobs and 400 unionized positions in train operations.

Walter Spracklin, a Royal Bank of Canada stock analyst, said CN’s “strategic refocus” was inevitable.

“It is clear to us that CN’s operating efficiency has deteriorated over the past several years, and the company has gone from industry leader, to industry laggard,” Mr. Spracklin said. “That said – as an early pioneer of [precision scheduled railroading], we believe the company has the potential to achieve … efficiency levels that are among the best in the industry.”

Among the steps CN announced on Friday are:

• Resuming share repurchases of $1.1-billion by January, 2022;
• Increasing shareholder returns, including share buybacks of $5-billion for 2022;
• Adding two new directors in 2022;
• Repeating the chairman will retire in March, 2022;
• Reducing capital expenses to 17 per cent of revenue;
• Improving the operating ratio to 57 per cent. The ratio compares sales with costs;
• Increasing train length and speed;
• Pursue “strategic alternatives” for non-rail businesses divisions.

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2021-09-17 12:12:22Z
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