DEFA14A: Norfolk Southern COO Outlines Strategy for Operational Improvement and Cost Reduction at UBS Fireside Chat

Norfolk Southern's COO, John Orr, detailed the company's strategy for improving operational efficiency, reducing costs, and enhancing service during a recent fireside chat at UBS Securities LLC.

Summary

• Norfolk Southern's COO, John Orr, participated in a fireside chat at UBS, discussing his background, approach to improving operations, and the company's strategic initiatives.
• Orr emphasized the importance of terminal performance and speed as key areas for improvement, aiming to elevate merchandise handling without compromising the intermodal franchise.
• He highlighted the implementation of PSR 2.0, focusing on collaboration and inclusivity to drive change and create value for shareholders and stakeholders.
• The company is redesigning its network, introducing new train designs, and creating a new playbook for terminal operations to improve fluidity and connections.
• Norfolk Southern is targeting an operating ratio (OR) of 64% to 65% in the second half of 2024, representing a significant improvement over the second half of 2023.
• Key elements for achieving this OR improvement include running on time, improving car yield, reducing waste and rework, and enhancing fuel efficiency.
• The company is focused on improving its corporate culture, fostering a willingness for change, and empowering employees to contribute to the company's success.
• Norfolk Southern is committed to its labor force and is not planning any furloughs, instead focusing on growing the business and managing workforce levels through attrition and strategic investments in training.

Sentiment

Score: 7

Explanation: The document expresses a positive outlook on Norfolk Southern's future, driven by strategic initiatives and operational improvements. While acknowledging past challenges, the overall tone is optimistic and confident in the company's ability to achieve its goals.

Positives

• Norfolk Southern is experiencing improvements across various metrics, including velocity, dwell, car miles per day, re-crews, and overtime.
• The company is focused on improving its corporate culture and empowering employees, leading to increased engagement and discretionary effort.
• Norfolk Southern is committed to its labor force and is not planning any furloughs, instead focusing on growing the business and managing workforce levels through attrition and strategic investments in training.
• The company is seeing positive feedback from customers who are recognizing the improved service and rewarding Norfolk Southern with new business.
• The company's leadership team is aligned on the vision for balancing safety, productivity, and growth to drive long-term shareholder value.

Negatives

• The network was underperforming prior to Orr's arrival, requiring significant changes and improvements.
• The company faces challenges in balancing cost reduction with maintaining service levels and employee morale.
• There is potential for disruption from external parties attempting to influence labor relations and disrupt the company's strategic initiatives.
• The company acknowledges that not everyone will be able to adapt to the changes being implemented, potentially leading to employee turnover.

Risks

• Failure to effectively implement the new operating plan and achieve the targeted improvements in operating ratio.
• Disruptions to the network due to external factors, such as weather events or infrastructure issues.
• Negative impacts on employee morale and productivity due to changes in work rules or potential workforce reductions.
• Increased competition from other transportation modes, such as trucking.
• Inability to attract and retain qualified employees in a tight labor market.
• Potential for further incidents like the East Palestine derailment to negatively impact the company's financial performance and reputation.

Future Outlook

Norfolk Southern expects to achieve an operating ratio of 64% to 65% in the second half of 2024 and a sub-60% operating ratio in the next 3-4 years by balancing safety, productivity, and growth.

Management Comments

• John Orr: 'Our numbers are showing that our service is improving, velocity is improving, and our dwell throughout our terminals are improving so much that our customers are writing us emails and saying thank you for the engagement.'
• John Orr: 'Everything is on the table. System redesign is in flight. Were starting to introduce new train designs as we speak, starting in the south, moving to the north.'
• John Orr: 'This is not about head count reduction. I have doubled down on my commitment to labor that this is not about furloughing, and thats not what were going to do.'
• Alan Shaw: 'For us, success is driving long-term shareholder value, and its doing it in a safe and responsible manner.'

Industry Context

The discussion references Precision Scheduled Railroading (PSR) and its evolution (PSR 2.0), a common theme in the rail industry focused on improving efficiency and reducing costs. The comments also touch on competition with other railroads and the importance of customer service in a competitive market.

Comparison to Industry Standards

• The document references Hunter Harrison and Keith Creel's implementation of PSR at CP in the early 2000s as a historical benchmark.
• The discussion compares Norfolk Southern's performance to its peers, highlighting the opportunity to close the gap in areas such as terminal performance and car handling.
• The document mentions the importance of fuel efficiency and the need to learn from the best practices in the industry.
• The document references the need to improve the company's operating ratio to be competitive with other railroads.

Stakeholder Impact

• Shareholders will benefit from improved financial performance and increased shareholder value.
• Employees will benefit from a more positive work environment, improved work-life balance, and opportunities for growth and development.
• Customers will benefit from improved service reliability and responsiveness.
• Regulators will benefit from Norfolk Southern's commitment to safety and responsible operations.

Next Steps

• Continue implementing the new operating plan and monitoring key performance metrics.
• Roll out the new service plan within the next 60 to 90 days.
• Continue evaluating yards and assets to maximize their value.
• Engage with customers, employees, and regulators to ensure alignment and support for the company's strategic initiatives.

Key Dates

Keywords

Norfolk Southern, John Orr, Operating Ratio, PSR 2.0, Terminal Performance, Network Redesign, Cost Reduction, Service Improvement, Intermodal, Merchandise, Locomotives, Fuel Efficiency, Labor Relations, Shareholder Value