The Word On Norfolk Southern: Wait Until February

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

That message was delivered numerous times by the companyduring its third quarter analyst call on Wednesday. Management 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 the company.

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 United States, CSX Corporation CSX, reported an OR of 58.7 percent 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 percent 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.

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 percent. When 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."

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