Analysts Pepper Squires with Questions About Why NS Can’t be Like CSX

Despite setting performance records in the second quarter, Norfolk Southern CEO James Squires found himself having to defend his railroad after some Wall Street analysts wondered why NS has not closed a widening operating ratio gap with CSX.

James Squires

The analysts asked why NS isn’t moving as fast as CSX in cutting costs and boosting profitability.

Squires expressed optimism that NS would meet its 2020 sub-65 operating ratio goal ahead of schedule, although he would not say when that would occur.

NS set a record 64.6 percent operating ratio during the quarter, but it was 6 points higher than the CSX operating ratio of 58.6 percent, also a record.

The NS operating ratio was last among publicly traded North American Class 1 railroads.

In response to question by an analysts as to why NS has a different return profile than CSX, Squires said NS recognizes that boosting profitability is important, and consistent improvement in the operating ratio is part of its plan that balances growth and productivity gains.

“We’re going to continue to push on operating ratio,” Squires said. “When we get to the current goal of sub-65 we certainly won’t stop there.”

When pressed if NS has more of a growth focus than CSX, Squires responded: “I will say this. This is a terrific environment in which to grow. And we have been executing on growth by sending that growth to the bottom line.”

Squires pointed to the railroad’s improvements in operating income and noted that the railroad business is cyclical. “You better jump on that growth opportunity when you have it,” Squires said.

At the same time, NS saw an increase in traffic of 6 percent during the second quarter of 2018 compared with the 2 percent gain posted by CSX, which was the lowest among the publicly traded Class 1 railroads.

In response to another analyst, Squires said he watches the performances of other railroads and adopts their best practices.

He raised doubt about whether NS should do what CSX did last year in making disruptive operational changes to quickly reduce structural costs and then pursue more profitable growth.

In response to another question as to whether NS has a better network than CSX, Squires said he likes the NS network a lot.

“I think we have an outstanding network with a lot of potential for both efficiency and growth. I’ll take our network any day,” he said.

Squires also noted that NS has taken steps to reduce structural costs, including consolidating dispatching in Atlanta by the end of the year, simplifying its local operating plan by collaborating with customers, and rationalizing its yard network.

“A classification network that can provide good local service is one of the keys to growth in the merchandise network,” Squires said.

One analyst wondered if NS has considered hiring operations people with precision scheduled railroading experience as a way to cut the workforce as CSX has done.

By comparison, CSX had 22,942 employees at the end of the second quarter, which was down 11 percent from a year ago, while NS had 26,535, a decrease of 2 percent.

“I’m very, very confident in our operations team and their ability to drive productivity while maintaining a foundation for growth. We’re in great shape with the team,” Squires said, adding that a railroad’s cost structure comes down to people and assets and NS remains focused on both as it looks to balance cost cuts with growth, service, and safety.

Squires didn’t bite when an analyst asked if CSX was enjoying short-term profits at the expense of long-term goals.

“We believe in our plan, and our plan is a balance of efficiency and growth, as I’ve said several times this morning,” Squires said. “That really is the right formula in our view.”

Squires elaborated by saying companies need to make investments for growth and that requires having a certain level of resources available, particularly in times that are conducive to growth.

“So while we are definitely focused on productivity going forward, right now is the time to make sure you have the workforce in place to handle the business so that you can grow when that’s possible. So I think our plan will be the right plan for our shareholders in the future,” Squires said.

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