CN CEO resigns in surprise ouster
TRANSPORT Railway seeking new leader to ‘energize team’
Canadian National Rail
way Co. is searching for a new chief executive officer who will respond to operational challenges with “speed and determination” after the surprise resignation of Luc Jobin — a move that comes as the railroad grapples with surging demand.
CN announced Monday that Jobin would be leaving CN immediately, less than two years after he stepped into the role of president and chief executive.
The company has seen record volume growth put pressure on its capacity since late last year, leading to service disruptions and complaints from some customers.
“The board believes the company needs a leader who will energize the team, realize CN’s corporate vision and take the company forward with the speed and determination CN is known for,” CN’s board chairman Robert Pace said in a statement released Monday.
CN also acknowledged in the statement that it has faced operational and customer service challenges in recent months “led by high demand and i nsufficient network resiliency, coupled with severe winter weather conditions.”
“CN must accelerate execution of the innovation strategy articulated at our Investor Day last June,” Pace said. “The board is confident this remains the right course to restore and retain industry-leading metrics and bestin-class customer service.”
The board has appointed CN’s chief marketing officer Jean- Jacques Reust, a 22-year railroad veteran who Pace said “is well- known to customers and investors,” as interim CEO. The railway said an international search for a new leader is underway.
Jobin initially joined CN in 2009 after holding senior executive roles at Imasco, Imperial Tobacco, British American Tobacco and Power Corp. He replaced Claude Mongeau as CEO of the railway in July 2016.
National Bank analyst Cameron Doerksen said CN has made it clear that the decision to replace Jobin “is in large part related to the serious operational challenges CN has faced since the fall.”
“CN risks l osing customers and its well- earned reputation for best- in- class operational performance, so the Board clearly felt that a change in leadership was needed now,” Doerkson wrote in a note to clients.
Last month, U. S. oilfield services company Halliburton publicly blamed CN for frac sand delivery delays, and said the issues would negatively impact its upcoming quarterly results by 10 cents per share. At the same time, in the most recent quarter, CN’s operating ratio — a key industry metric that measures expenses as a percentage of revenues — increased 380 basis points from 2016 to 60.4 per cent, due in part to network congestion.
RBC Capital Markets analyst Walter Spracklin told clients that CN’s ongoing operating issues were “a result of too much growth, too quickly” after years of successful cost-cutting measures.
“Unfortunately, in 2017 that growth went into overdrive, leading to volume increases that were above what the company could manage. This in turn led to severe congestion and a deterioration in customer service,” Spracklin said.
“In the meantime, we expect the company’s profitability growth to be interrupted and we see both the company’s 2018 and longterm guidance as likely to come under review.”
Spracklin also said the volume declines this year are evidence of the customer service issues facing CN. The railroad saw volumes decline in seven of 10 segments in February when compared to 2017, with the sharpest drops seen in farm and food, grain, and forest products segments.
However, CN said that despite difficult winter conditions and “a very challenging start to the year” that it would not be changing its year- end guidance of delivering adjusted diluted earnings per share in the range of $5.25 and $5.40.
Edward Jones analyst Daniel Sherman said CN’s statement regarding Jobin stepping down indicates that the additional volumes and poor weather were causing a strain on the network that led to a decline in customer service.
“The key is, from the way the release was written, that some customers were really upset,” Sherman said. “This is, I think, a way of trying to placate customers.”
Doerksen said that while he is “not overly concerned” about the company’s ability to overcome the challenges it is currently facing, it is not clear who within CN could permanently replace Jobin as CEO. “As such, we would not be surprised if external candidates are given serious consideration for the job,” he wrote.
According to a November survey of North American railroad shippers conducted by Spracklin, railway service rankings have shifted dramatically, with Calgarybased rival Canadian Pacific Railway Ltd. jumping ahead of CN. In a note to clients about the survey, Spracklin said the shift is a reflection of CP’s “continued service momentum and near- term service challenges at CN.”
The survey also found that some shippers were considering changing rail carriers in 2018. Of the 23 per cent of respondents who said they intend to switch carriers, two- thirds said they intended to shift to CP.
“In near term, the service disruptions could lead to share shifts between the Canadian rails; however, we believe that long term, service should return to normal and shipper sentiment rebound as CN adjusts the network to absorb volume growth,” Spracklin wrote.