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Norfolk Southern Lays Tracks For Cost Cuts, Service Improvements With 2021 Strategic Plan

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Norfolk Southern Lays Tracks For Cost Cuts, Service Improvements With 2021 Strategic Plan

Norfolk Southern Corp. (NYSE: NSC) is starting a three-year sprint to improved profitability through the precision scheduled railroading (PSR) business model that's been embraced by a growing number of Class 1 railroads.

The fourth-largest North American railroad by revenue, Norfolk Southern laid out the plans at an analyst day at its new headquarters in Atlanta. Chief Executive Officer Jim Squires said the new plan, called Thoroughbred Operating Plan 21, builds upon earlier work the railroad did that improved the ratio of operating expenses-to-revenue 740 basis points since 2015 to 65.4 percent last year.

The TOP 21 plan aims to reduce that operating ratio to below 60 by 2021.

"We decided to adopt precision scheduled railroading because it works," Squires told analysts. In doing so, Norfolk Southern becomes the last of the major railroads serving the Eastern U.S. to implement some iteration of the operating strategy credited to the late Hunter Harrison.

Canadian National Railway (NYSE: CNI) and CSX Corporation (NASDAQ: CSX) have used PSR, which has brought their operating ratios to 60.3 percent and 61.6 percent, respectively, last year. Canadian Pacific Railway, Ltd (NYSE: CP), another Harrison-led rail operator, saw a 61.3 operating ratio in 2018.

But the strategy remains controversial as it results in service cuts and lay-offs. Indeed, one element in Norfolk Southern's TOP 21 plan involves reducing non-union headcount by 500 by the end of this year and reducing annual average headcount by 3,000 by 2021.

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NS had 26,662 employees at the end of last year. It will also reduce the number of locomotives in its fleet by 500 by 2021. It had 4,197 owned and leased locomotives at the end of last year.

Along with increasing employee productivity, Norfolk Southern plans to use fewer, heavier trains, reduce delays and touchpoints for railcars, integrate the company's regional and national network, and drive down costs.

The plan also entails better pricing for services and better understanding the cost of service. Norfolk Southern Chief Financial Officer Cindy Earhart said those efforts should yield annual growth of 5 percent in revenue.

"We are focused on improving revenue quality and capturing the value of the service we provide to customers," Earhart said.

Bulk commodities and intermodal service are expected to be the main drivers of growth, Earhart said, adding that there's still a favorable pricing environment "in truck competitive markets"

The TOP 21 plan will result in service changes that may not be to every customer's liking, Squires said. But the changes will mean more accurate scheduling for loads, he added.

"A network that takes into account the needs of most customers will not be ideal for every customer," Squires said. "Our aim is to make service for those who do use our network is reliable and consistent as possible."

The push for service consistency comes after an increasing number of delays facing Norfolk Southern's intermodal railcars. The railroad saw 14 weeks last year where 100 or more intermodal railcars had delays of at least two days, according to weekly service reports submitted to the Surface Transportation Board. In 2017, it saw zero weeks with that number of intermodal railcar delays.

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Equity analysts say TOP 21's goals are ambitious but should yield shareholder value if they succeed. Susquehanna Financial Group analyst Bascome Majors said Norfolk Southern's plans are "anything but a layup and achieving them would represent a substantial leap forward in productivity" for Norfolk Southern.

Majors says the key will be how much Norfolk Southern employees embrace TOP 21, noting an external effort to impose precision scheduled railroading on the railroad through its failed merger with Canadian Pacific in 2015.

"Our sense is there is real organizational buy-in to Norfolk Southern's PSR transition from the board level down," Majors said. "We've seen similar leaps made at peers in recent years, and Jim Squires' team appears committed to delivering those results to their shareholders."

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