News / Norfolk Southern uses earnings call to derail activist investor claims

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Financial results barely registered in Norfolk Southern’s (NS) earnings this week – the Class I carrier merely confirmed that the results were identical to preliminary figures published on 9 April.

With these out of the way, and a quarterly dividend of $1.35 per share on its common stock announced on Tuesday, NS management used the earnings call to make its case in the battle for control of the company with activist investor Ancora Holdings, which is seeking to replace seven members of the NS board of directors, including CEO Alan Shaw, with candidates from its own ranks.

In recent weeks the two sides have been sniping at each other via public statements and letters to investors, dismissing each other’s claims and counter-claims. The issue will be subject to a shareholder vote on 9 May.

In the face of an aggressive push from Ancora for precision scheduled railroading (PSR) – widely associated with “shareholder value” and blamed for service deterioration and massive layoffs – labour unions have voiced support for the existing management.

Reservations have also been articulated by executives at the Federal Railroad Administration and the Surface Transportation Board, who expressed concerns that Ancora’s strategy could undermine improvements in safety and service that NS has made after the fiery derailment of a train in Ohio early last year.

Recently Joe Hinrichs, chief of CSX, also voiced reservations about an all-out PSR strategy. Speaking at the Georgia International Trade Conference, he emphasised the importance of service quality and labour.

However, it is NS shareholders who most need to be convinced, and management has decided that it must play the PSR card to win their support, probably rattled by news that some institutional investors favour Ancora’s plans. A strong signal was the recent recruitment of industry veteran John Orr as COO, who managed PSR in his previous roles at Canadian National and CPKC and is expected to drive operational changes based on the concept.

In a clear swipe at Ancora, Mr Shaw declared: “Our strategy is designed to mirror the great success stories of the Canadian railroads, who have recognised that PSR is about more than tearing a railroad down to its studs and slashing costs regardless of the fall-out.”

The earnings call was a platform for management to tout recent progress and outline its strategy to deliver an adjusted operating ratio below 60% in 3-4 years, with an interim target of a 5-6 point reduction in the second half of this year.

Since coming on board a month ago, Mr Orr has overseen the removal of 200 locomotives from service, reduced the number of crew starts and unnecessary car handlings, and improved terminal dwell and car velocity, both by 8%.

In the earnings call, where he was given ample room to explain his measures, Mr Orr remarked that the carrier’s problems are largely related to its terminals.

He intends to step up blocking merchandise cars at origin, restructure the train and terminal operating plan and reduce excess costs. Over the coming six months the plan calls for the storage of 300 more locomotives, improving car velocity by 17% and dwell by 20%, while merchandise carload handlings should go down 10%. This should produce $250m in productivity savings and better profit margins.

Mr Shaw described the plan as “a transformational journey to a safer, more profitable railroad poised for growth, with strong execution from an experienced leadership team”.

Originally, management had envisaged a flat labour scenario for this year, but now it sees potential for a 2% reduction in labour through attrition as a result of productivity improvements. This provided another springboard for an attack on Ancora’s cost-cutting plans. The activist investor has indicated it aims to cut $800m in costs this year. According to management, this would require laying off 2,900 employees.

The coming days are likely to see further barbs traded between NS management and Ancora as they try to muster support among investors.

NS stock dropped 3.6% in the wake of the earnings call, but this may not reflect market sentiment over management’s plans. CSX shares sank 3.02%, and Canadian National shares fell 5.05%.