Business Context and Reporting Period
This Form 6-K filing by Canadian National Railway Company (CN) is dated March 5, 2018. The report primarily addresses a significant change in executive leadership and reaffirms the company's fiscal year 2018 financial guidance. CN operates a rail network of approximately 20,000 route-miles spanning Canada and mid-America, employing approximately 24,000 railroaders.
Key Financial Metrics and Guidance
- Adjusted Diluted EPS Guidance: Reiterated for fiscal year 2018 in the range of C$5.25 to C$5.40.
- Capital Program: A record investment of C$3.2 billion is planned for 2018, with C$1.6 billion targeted specifically for track infrastructure maintenance.
- Revenue Drivers (Assumptions): Management assumes total Revenue Ton-Miles (RTMs) will increase 3% to 5% versus 2017, with continued pricing above inflation.
- Macroeconomic Assumptions: North American industrial production growth of 2-3%; U.S. housing starts of 1.25 million units; U.S. motor vehicle sales of 17 million units; Canadian dollar at approximately US$0.80; Crude oil (WTI) at US$60-US$70 per barrel.
The filing does not provide specific historical revenue, profit, cash flow, or debt figures for the current or prior periods; it focuses on forward-looking guidance and operational context.
Material Changes and Operational Context
Executive Leadership Change: CEO Luc Jobin is leaving CN effective immediately. The Board has appointed Jean-Jacques Ruest as Interim President and CEO. Mr. Ruest has been with the company for 22 years, most recently serving as Executive Vice-President and Chief Marketing Officer.
Operational Challenges: The Board cited immediate operational and customer service challenges faced since Fall 2017. These issues were attributed to high demand, insufficient network resiliency, and severe winter weather conditions.
Outlook, Risks, and Management Commentary
Management remains confident in future prospects despite a challenging start to the year. The Board emphasized the need for speed and innovation to retain leadership in a competitive marketplace and to accelerate the execution of the innovation strategy articulated at the June 2018 Investor Day.
Key Risks and Contingencies:
- Severe weather, natural events (droughts, fires, floods), and climate change.
- General economic conditions, industry competition, and inflation.
- Currency and interest rate fluctuations, and changes in fuel prices.
- Labor negotiations, regulatory developments, and cybersecurity risks.
- Trade restrictions and transportation of hazardous materials.
Non-GAAP Measures: The company notes that its adjusted EPS outlook excludes certain income and expense items that are difficult to predict. Consequently, CN does not provide a corresponding GAAP measure or reconciliation for its adjusted EPS outlook.
Investor Verification Checklist
- Verify the timeline and criteria for the international search for a permanent CEO replacement.
- Monitor operational metrics to assess the effectiveness of the interim leadership in addressing network resiliency and customer service challenges.
- Track the execution of the C$3.2 billion capital program, specifically the allocation toward track infrastructure maintenance.
- Review subsequent quarterly reports to compare actual RTM growth and pricing against the 3-5% RTM increase and "above inflation" pricing assumptions.
- Assess the impact of the assumed Canadian dollar exchange rate (US$0.80) and oil prices (US$60-US$70) on actual financial results.