Greetings;
Reflections and reconsiderations on NSC’s webcast.
Looking back on Norfolk Southern’s Q4/21 & 2022 Outlook webcast last week brings to mind the concept of transition….they produced another earnings “win” for themselves and the industry, growing annual EPS by 18% (versus Street expectations of about 15%) and bucking the Q4 rail industry trend by showing a 140bps improvement in the OR. They too predict a good 2022 led by a strong second half….But as always, the webcast was more meaningful than the numbers.
- We saw (well, heard) what may have been CEO Jim Squires’ last as NSC’s leader, with a review of the accomplishments over the past three years after the switch PSR (notably – and quite likely noted in Washington – the 530bps improvement in annual OR and the impressive records on shareholder distribution – “~$10B – and return – 110%). And the webcast emanated from their new HQ in Atlanta, a milestone in and of itself.
- We witnessed CEO-to be Alan Shaw’s first such webcast (and new CMO Ed Elkins as well), although it was too early to get a true sense of the different leadership styles to emerge
- One thing I hope for is greater transparency and there wasn’t much evidence of that (yet) in the Q&A and even in the numbers presented, which back in the day was an industry-leading credit to NSC:
-
-
- No safety numbers were provided for the quarter, strange given that the Harriman Award for annual safety levels was essentially retired because NSC simply won it every year
- No ROIC numbers, either (the industry is split on this but Kudos to the Canadians and to UNP)
- However, NSC did promise a Q2 Investor day so I hope all will be forgiven!
-
- Transitioning from OR to growth - Talking the talk, in line with the industry’s new (again) growth and technology focus – NSC unveiled, with some fanfare but not a lot of detail, its latest operating plan/iteration of PSR, “TOP/SPG”, or the familiar “Thoroughbred Operating Plan” layered with Service, Productivity & Growth. This, it seems, and we’ll know more in the spring, is their transition, or to use the accepted Creel parlance, their pivot (from margin to growth), and in fact, it was remarked upon, not always kindly by the old guard of the OR Cult, during and after the webcast that their near-term margin goals were….modest (50-100bps, which maybe comes just as/when ops improve, impacted by the mixing effect of returning IM to growth in the second half of the year). (Here’s where they should discuss ROIC on I-Day).
- NS also unveiled NSites, which it developed in-house, and was described as a/the “first in class industrial site search engine”. NSC was always a leader in Industrial Development, you will recall, so this is a positive….however,
- NS did….not….mention….at….all….Rail Pulse and I don’t like the (lack of) sound of that – coming after direct questions on the potential for increased focus on “customer-facing technology investments” (what I have termed “offense”-minded IT). Again, let’s see what happens at I-Day….Grade: Incomplete.
Operations showed more misses than hits, as expected. Yes, the crew start reduction matched the traffic (-4%). But velocity was down 17% and dwell down 24% - numbers that will almost surely put them at the bottom of the rail class (and they had no line closures unlike in BC). Therefore operating expense was up 2X the volume decline, impacted of course by diesel. And, fuel for the PSR-skeptics, and making for a sound-bite I am sure we’ll hear, as that occurred, train length and weight improved (got bigger) by 8% and 10%, respectively.
- Speaking of fuel, fuel efficiency improved by 3%, and that is clearly a positive.
- COO Cindy Sanborn stated that “service levels will be challenged in the first quarter” before early signs of improvement in the spring (timed to I-Day?) and she highlighted efforts to grow the T&E training/retaining/utilizing pipeline. Other kinds of skeptics are beginning to wonder if the so-called “Great Resignation” is being used as a blanket to cover a myriad of (other) sins – not at NSC – per se – but everywhere - some Ops experts refer to headcount versus other train metrics and see more Qs than As...
- The good news was the Capex increase- perhaps as much as 30% to $1.9B, from $1.47B which itself fell ~$130mm below Plan - to provide additional capacity (including 9 more siding extensions, one done, and more IM chassis
Marketing struggled with volume, hopes for an H2/22 turnaround. The 4% volume decline was, financially, more than compensated for by a 10% (adj) yield increase and an 11% revenue increase.
- Coal was the star – producing a 4% volume gain and a 21% jump in revenues. The big story was of course what coal was moving – export up 7%, met (steel) up 19% - utility was down 2%
- Most interestingly, CMO Elkins differed from his peers (CSX, UNP) by predicting an end to the export-driven money train, citing global production increases already reflected in futures markets – as their slide stated, “the secular decline continues”
- Merchandise perhaps the bigger star – a volume increase of 2% - and this is despite the 9% drop in auto (NSC places autos in this category); Elkins was most optimistic for the carload sector, noting the expected strength in industrial production (estimated at +4.8%, as followers of UNP well know)
- That leaves Intermodal – usually the true source of NS’ strength; here the solid 14% revenue jump belies the underlying story of the 7% unit decline. Domestic was down4% and international down 13% (so the international supply chain issues show up in the east too) - supply chain issues that remain unclear as to their resolution
Also:
- Those PSR skeptics and STB fans probably choked on the analyst question: “Are you not taking on as much freight as the demand (would be satisfied) in order to right-size the network from a labor standpoint?” Holy common-carrier obligation, Batman! This was the perfect time for a good ol’ NS non-answer, and they gave one….
- RJ Corman leased some NSC branch lines in Tennessee, Kentucky, and Virginia (also some CSX trackage rights for connections. Two thoughts:
-
- Congrats to RJC
- This is interesting because it goes against the tide that had been perceived of Class One rails buying back short lines (CP-CMQ), buying (CSX-PAR) outright, or taking back leases (BNSF-MRL). Yes, I know that CNI sold WC lines to Watco – just shows that there is life in the short line value creation story….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18