Norfolk Southern To Cut Jobs, Rail Lines
28 January 2016 - 7:02PM
Dow Jones News
(FROM THE WALL STREET JOURNAL 1/28/16)
By Laura Stevens and Betsy Morris
Norfolk Southern Corp. on Wednesday unveiled a five-year
restructuring plan that will eliminate 1,200 jobs in 2016, idle
track, close and combine operations and pare capital spending in an
effort aimed largely at fending off another hostile takeover
attempt by Canadian Pacific Railway Ltd.
Norfolk Southern Chief Executive James Squires told analysts in
his fourth-quarter earnings call that the plan would cut costs by
$130 million in 2016 and result in annual savings of more than $650
million by 2020.
The news was delivered along with the announcement of a near 30%
decline in fourth-quarter profit, to $361 million, or $1.20 a
share, down from $511 million, or $1.64 a share, and three cents
below analysts' expectations.
Dismal energy markets have depressed rail cargo over the past
year. Norfolk Southern was hurt by declining coal and fuel
surcharge revenue in the latest quarter, which together accounted
for 84% of revenue declines. While coal volumes are expected to
continue to fall in 2016 before stabilizing, the net effect of fuel
should be modestly positive for earnings this year if oil prices
stay about the same.
Norfolk Southern's strategic plan is designed to reassure and
bolster support among shareholders in the face of a possible proxy
fight with Canadian Pacific. It is also designed to play to the
eastern railroad's strengths, increasing its on-time performance to
service-sensitive customers such as those in the automotive and
consumer markets and continuing to woo business from trucking. It
also expects to capitalize on new business from an expanded Panama
Canal.
"We serve main population centers, and there's more of a market
for consumer goods where our tracks go," Mr. Squires said in an
interview.
Not all analysts were impressed. Norfolk Southern has three
times rejected a roughly $30 billion merger bid from Canadian
Pacific. Analysts wanted to know why he couldn't cut jobs and
reduce capital spending more aggressively. Noting that CP has
proposed to gain way more in operational efficiencies over the same
five-year period when compared with Norfolk Southern's plan, one
analyst asked: "What is it about your business that you feel CP
does not understand that makes shareholders better off with $650
million of improvement versus . . . a $1.2 billion improvement
plan?"
Mr. Squires answered that his plan was flexible and might get
more aggressive.
CP also wasn't impressed. Norfolk Southern's "ambitions to lower
costs, improve efficiency and generate shareholder value by 2020
fall well short of the targets envisioned in CP's proposed
combination with NS," a CP spokesman said. He added that a combined
railroad would result in "greater savings, greater efficiency and
stronger shareholder returns."
It has been expected that CP's chief executive, Hunter Harrison,
will launch a proxy fight to win Norfolk Southern. In his own
earnings call last week, he said he has talked to more than half of
Norfolk Southern's shareholders and "all indications" are they
support him. But he cautioned that shareholders don't hold all the
cards, noted growing challenges, and said he might have to rethink
his strategy. Since then, some analysts have speculated he might
abandon his campaign for Norfolk Southern.
While Mr. Squires declined to discuss CP's next move, he said he
talks to his shareholders all the time. "We've spoken to virtually
all of our major shareholders over the last several months in order
to get their feedback and their guidance," Mr. Squires said in the
interview. "And one thing we heard from them was 'we want more
details on your strategic plan.' That's what we gave them
today."
In the most recent quarter, Norfolk Southern's revenue dropped
12% to $2.52 billion.
(END) Dow Jones Newswires
January 28, 2016 02:47 ET (07:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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