The word on Norfolk Southern and precision railroading is: wait 'til February

Photo: Shutterstock

Photo: Shutterstock

 

The specifics plan for Norfolk Southern's (NYSE: NSC) adoption of precision railroading principles is going to have to wait until February.

That message was delivered numerous times by the company's management Wednesday in its call with analysts to discuss its third quarter earnings . However, that did not mean that nothing was said.  The management of the company, in reporting strong earnings and a relatively small improvement in operating ratio, talked about what might be thought as a pre-precision railroading practice, with a process called “clean sheets” at the heart of it.

But the specifics of just how much of precision railroading’s principles will be adopted by the company will need to wait until a mid-February investors’ day meeting in February.

“We will continue to push for the best possible results at Norfolk Southern,” CEO Jim Squires said at one point on the call.” “We are confident of our prospects and will give you details of our new plan in February.” He said something similar to that many times on the call when asked about how much adoption of precision railroading would be undertaken by NS.

But though the analysts on the call were clearly eager for details, they weren’t getting too many of them. Instead, as Squires said, “Yes, we will be implementing precision railroading principles where they benefit customers and shareholders.”

Squires made reference to comments made on the call by COO Michael Wheeler, saying that the investors had heard Wheeler talk about precision railroading principles. But in the key review of what Wheeler said, he did not actually use the term precision railroading; still, it is clear that a system based on its principles was at the heart of what Norfolk Southern is studying.

The clean sheeting is already going on.  Wheeler said it is a “deep dive into the local service yards.” “We expect to bring our service design folks, our customer service folks and our marketing folks in,” he said of the process. The clean sheeting involved looking at all the local service schedules in operation in that facility, Wheeler said, “and then we make sure they are synced up as good as they can be with the main track network.” That involves talking to customers about “how to get in and out of their facilities quicker.”

“It’s really intensive work that we do,” Wheeler said. At the end of it, he added, “we come out with a better more efficient operating plan.”

Wheeler said the work that has been done already was a boost to Norfolk Southern’s third quarter earnings, which showed an improvement in operating ratio to 65.4 from 66.6 in the third quarter of 2017. Still, it is not in the sub-60 level that is being reported by fully adopted precision railroading railroads, like CSX, Norfolk Southern’s biggest competitor in the eastern U.S. CSX (NYSE: CSX) reported an OR of 58.7% for the quarter.

In a note to investors after the call, Deutsche Bank analysts led by Amit Mehorotra was positive about what he heard. “Importantly, we got the sense from the call that the targets will be ambitious, and we estimate will likely translate to something in the neighborhood to 60% OR in the 2020 or 2021 time frame,” the team wrote. “As we have noted many times before...this type of profit improvement would translate to EPS that is well above 2020 consensus.”

One of the key provisions or goals of precision railroading is a smaller workforce. Squires gave a general answer when asked by an analyst on the call if Norfolk Southern would be “more aggressive on headcount reduction.”

“Labor productivity being a key component of overall productivity, we will be focusing on that element as we grow our new operating plan,” he said. “We expect to achieve greater labor productivity and asset productivity,” he added, citing a better use of locomotives as an example.

Norfolk Southern reported 27,453 employees at the end of the quarter, up from 27,088 a year ago.

In another part of the call’s Q&A, Squires said that the February reveal of the Norfolk Southern operating plan would put some “pretty aggressive, ambitious goals out there for the OR and overall financial improvement.”

Total intermodal revenues were $746 million, a jump of 20%. It’s the second consecutive quarter with a 20%+ increase in that sector. An analyst asked whether that was mostly just a function of a tight truck market and what might occur to the intermodal division if that marked eased.

Chief marketing officer Allan Shaw said Norfolk Southern’s intermodal division has grown revenue for eight consecutive quarters, “and that includes a very loose truck market at the end of 2016 as well as what we’re experiencing right now.”

And Shaw said what they’re hearing now is bullish. “We’re encouraged by what we’re hearing from our channel partners on the outlook for next year,” Shaw said. “We still expect truck rates to go up and we expect intermodal loadings to go up,” he said. “If there is a gap between intermodal pricing and truck pricing, we’re going to lean into it and price into it.”

Among some of the key numbers in the quarterly earnings release:

--For the third quarter and the nine-month period, Norfolk Southern reported record OR, income from operations, net income and earnings per share. But to show how analysts are so focused on what NS is going to do regarding adoption of precision railroading principles, none of the analysts during the Q&A prefaced their question with the usual “Congratulations on a fine quarter” that would normally expect to be heard after such a strong financial performance.

--Average locomotive trains speed was 22.7, up from 21.5. Terminal dwell was down to 24.3 hours from 25.1 hours.

--Norfolk Southern recorded 94.6 gross ton miles, up from 96.5 in the third quarter of 2017. Small declines were reported for merchandise and intermodal, while coal reported a small increase. Merchandise revenue ton miles were 29.1, intermodal as 10.2 and coal was 10.3

--Asked about the possibility of Norfolk Southern moving its headquarters to Atlanta, Squires repeated the gist of what he told employees in a recent video: that there are benefits to such consolidation, the company is looking at consolidating in Atlanta but there remains many steps to be taken before it is finalized. 

—The initial reaction was positive among investors. At just before 1 p.m., Norfolk Southern’s stock was up about 2% on a day when overall market benchmarks were lower.

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