Squires lays out NS profitability plan

Move aimed at blunting CP's expected run for shareholder support
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Norfolk Southern CEO James Squires
Norfolk Southern
James Squires is out to convince investors that a Norfolk Southern-Canadian Pacific merger is not in their best interests. The NS CEO spelled out his railroad’s plan to improve operations, control costs, and increase revenue in a conference call early Friday morning.

Squires’ move anticipates that Canadian Pacific CEO E. Hunter Harrison will make good on his word to take his combination plans directly to NS shareholders. It was an offer the NS board of directors unanimously rejected.

NS says it will strengthen its financial performance, push its operating ratio below 70 in 2016 and below 65 by 2020 while driving double-digit earnings per share growth during the next five years. The railroad’s operating ratio during the third quarter was 69.7 percent.

“We are confident in our ability to deliver superior shareholder value through continued execution of our strategy,” Squires said during the railroad’s conference call.

The NS plan has far more potential than CP’s merger proposal, Squires says, adding that he and his team “are strong and laser focused on identifying additional growth and cost savings opportunities.”

The plan is already producing results, Squires says, citing NS service that is approaching all-time best levels over the past month. NS service metrics declined for much of 2013 and 2014 and were slow to improve after harsh winter weather earlier this year — even as the railroad carried less traffic.

But now average train speed is up to 25 mph and terminal dwell is down to 21.8 hours. “A faster railroad is a less expensive and more profitable railroad,” Squires says.

NS will build on operational improvements and cost-cutting moves it has made this year. Squires noted that NS has already taken several steps to make the railroad more efficient, including restructuring its unprofitable Triple Crown RoadRailer operations, closing its offices in Roanoke, Va., furloughing employees and redundant routes in hard-hit coal country, and reducing management employment.

NS will continue to evaluate the closure of additional yards and terminals. It may close or mothball up to 1,000 miles of lower-density routes in order to concentrate traffic on higher-volume lines, which will reduce maintenance and operating costs.

The railroad also aims to improve the efficiency and availability of its locomotive fleet. NS will continue its rebuilding program, which conserves capital, as well as take delivery of 50 new locomotives in 2016. The younger locomotive fleet will reduce maintenance expenses, while a beefed-up maintenance program will improve reliability and limit the time locomotives spend in shops.

On the financial side, keys to the NS plan include improving pricing; diversifying its traffic base by growing its service-sensitive automotive, consumer-related, and intermodal traffic; and pursuing small merger and acquisition opportunities to fill holes in its network.

The railroad faces significant economic headwinds from low commodity prices and a strong U.S. dollar, more domestic intermodal competition due to increased capacity in the trucking industry, and weakness in international intermodal because of slowing imports.

Squires says the longer-term outlook favors stabilization of commodity volumes, including coal; tighter trucking capacity and improved domestic intermodal service; and sustained growth in international intermodal business through East Coast ports.

And bright spots that will drive growth include anticipated increases in automotive, ethanol, chemicals, plastics and housing and construction traffic, Squires says.

Will the NS plan be enough to satisfy investors? NS stock, which had surged amid merger speculation, was down 1.3 percent at noon Eastern time today. CP shares, meanwhile, were down nearly 4 percent on news of NS’s rejection of its merger proposal.
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