No Surprises in Norfolk Southern Earnings as COO Orr Makes Debut

There were no surprises in the first-quarter earnings report, as the Class 1 railroad had issued a preliminary report earlier in the month. The final numbers, showing a significant drop in earnings related to the East Palestine, Ohio, derailment in February 2023, were in line with those preliminary figures. The East Palestine derailment saw 38 cars leave the tracks, some of them containing toxic chemicals. The subsequent fire led to an evacuation affecting thousands.  

But the conference call that followed the release Wednesday gave analysts the opportunity to hear John Orr, newly hired chief operating officer. Norfolk Southern lured Orr from Canadian Pacific Kansas City CP last month for financial ($25 million) and operational considerations (changes in the structure of the CPKC-NS joint venture governing the Meridian Speedway between Louisiana and Mississippi).

It also gave analysts a chance to ask questions about the ongoing effort by activist investor Ancora to put in place a new CEO and COO at Norfolk Southern as well as eight new members of the board of directors. That fight is scheduled to presumably come to a head on May 9, the date of the Norfolk Southern annual meeting.

But whether the company had told analysts they wouldn't be addressing the fight on the call or the analysts simply chose not to ask, the Ancora battle of the proxy vote did not come up from the analysts. It was raised by Norfolk Southern executives only in passing once during the call, when CEO Alan Shaw talked about Orr's plans to more efficiently implement precision railroading (PSR) at Norfolk Southern.

"We're going to implement and we have been implementing PSR in a responsible and sustainable manner" Shaw said on the call. "[Orr] knows how to do it without tearing it down to the studs, as the activist COO has said he would have to do." Norfolk Southern first moved to PSR in 2019.

The two sides in the proxy battle have not been quiet. Both Ancora and Norfolk Southern have filed multiple documents in the proxy battle, which are available under the Securities and Exchange Commission filings section of the Norfolk Southern website. Shaw has been interviewed by several equity analysts about his plans for the company, and some of the presentations have been available to the public, such as one interview recently granted to Wolfe Research.

With that issue largely off the table on the earnings call, the gathering instead served more as Orr's coming-out party in a public forum.

Part of the reason for that is that the earnings figures came in where they had been predicted in the early April preliminary earnings.

Bottom-line operations were heavily impacted by a $600 million agreement to end the class-action lawsuit stemming from the Norfolk Southern derailment in East Palestine. That brought income from railway operations down to $213 million from $904 million in the first quarter of 2023, resulted in diluted earnings per share of 23 cents versus $2.49 a year ago, and sent the company's operating ratio up to 92.9% from 69.9% in Q1 2023.

Norfolk Southern's OR in the fourth quarter of 2023 was 73.7%. In the third quarter of 2023, it was 63.5%.

OR at Eastern rival CSX CSX was 64.1%. Norfolk Southern has frequently lagged the CSX OR, a fact that Ancora has raised repeatedly in its proxy battle.

Setting up an OR target

Shaw wasted no time in his earnings call remarks addressing that issue and Norfolk Southern's goals. "We have safely built the foundation to drive substantial gains in productivity, and we've committed to a [400-basis-point] OR improvement in the second half of this year" he said. "We will close that margin gap with peers. We will deliver a sub-60% operating ratio in the next three to four years, and we will do it at a safe, sustainable manner that recognizes our current operating environment and brings key constituents, including our shareholders, customers, employees and regulators, along with us on our mission."

Orr addressed his first month on the job and what he had encountered, as well as Norfolk Southern's goals. "It is imperative that we close the profitability gap with our peers" he said. "We are now delivering encouraging trends in productivity."

Operational gains

Although the bottom-line numbers at Norfolk Southern were impacted by the one-time East Palestine charge, so they reveal little about performance, the earnings contained operational data that did show signs of improvement. For example, dwell time was 23.9 hours in the first quarter, down from 26.3 hours a year ago, and so far in the second quarter has averaged 22.5 hours. Train speed increased to 21.3 mph from 20.4 in the first quarter of 2023 and has averaged 21.7 mph so far in April. Car miles per day was 102 in 2024's first quarter; a year ago it was 98, and it is trending toward 106 in the current quarter.

Orr was asked by an analyst about some of the operations he had found at Norfolk Southern since he joined that had surprised him positively.

Orr addressed continued fallout from East Palestine — "the scope and scale of the commitment that NS has made to that community, I've never experienced anything like that" — but added that he had concluded that the railroad's yards were a problem.

"I think yards, especially in a merchandise environment, are where cars and customers kind of coincide" he said. "So, how we handle them, how we accelerate or drag is really important to evaluate. And so I was pleasantly surprised at the richness of the terminals, but also quickly realized as I got under the hood that was where a lot of the underperformance was happening."

Orr described the network as having "solid architecture" with issues of "execution." "We've got lots of work to do" he said.

The end result of the changes Orr is planning as COO "will show in the form of yard operating plans, disciplined operations in terminals, disciplined and progressive ways of moving the train service into the commercial needs of today" he said.

Another issue that came up briefly on the call and touches on the Ancora proxy fight was over the Meridian Speedway. Ancora has criticized the changes in the CPKC-NS joint venture on the Meridian Speedway that was part of the concessions Norfolk Southern needed to make to bring Orr over as COO.

"The agreement related to the Meridian Speedway is by no means a consequential concession, and it does not impact Mexico" Shaw said in response to a question about criticism that Norfolk Southern's operations south of the border could be weakened by the deal. "We said it impacts the Dallas business, which is largely defined by an abundant truck capacity."

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