A look at Norfolk Southern Corporation & TOP/SPG (Tony Hatch - ABH Consulting)

20161212 Tonyhatch (Cropped)

Norfolk Southern broke the Q2/22 pattern by, ever so slightly, reporting results below Street consensus estimates. They were in-line with their American peers in reporting a tough service quarter (dwell up 21% and velocity down 13%), big hiring and training efforts, incremental improvements as a result (though they wont hit their hiring goals, according to their plans, till 2023 as opposed to CSX by quarter-end). Volumes were down 3% but revenues up 16% on yield growth of 20% - some of that was Fuel Surcharges and we need to remember that, for Q2, the 117% spike in fuel expense was a net headwind. Core OR was flattish and FY22 OR target was adjusted up to +50-100bps. Capex will be at the "high end of the guidance range" (~$1.9B) due to inflation – so that's good….

Some thoughts, reflections – and really, more questions:


  • Operations were poor, as was expected and measured in the weekly metrics. Crew starts matched the volume (-3%) - but what if they didn’t? what is the relationship in the summer of 2022 of crew starts to volume potential? July numbers in velocity and dwell were better, and there were 224 more "Qualified T&E" personnel in the field. Safety numbers improved, accidents by 15% YOY, P/I (personal injury) by 36%
    • Is the hump comeback a sign of pulling away from PSR as some suggested? (It really never was a "central tenet of PSR"). Is that plus the 3% increase in locomotives a sign of physical capacity constraints as opposed to labor-only? Or is it, as I have suggested, a sign of the lack of experienced crews to handle the challenges of flat switching? Is it to be permanent? No answers, yet....
    • NSC didn't answer the employee plans in a recession (which to be clear was not forecast) - put as "what are your plans for the 1000 new T&E folks if we get a downturn?" But then N/A was better than the answer I heard from UNP, though I think that might have been a mistake...
  • Just what is TOP/SPG, anyway? This much-vaunted plan, focused on Intermodal, begun in Q2/22, is about simplicity and balance....well, what plan isn't? In trade press interviews VP of Network Planning & Operations Paul Duncan, a prize recruit out of BNSF, talked about achievability which lends itself to consistency (all good; always good).
    • Not to pick on the presentation by COO Cindy Sanborn or Paul's explanations but this cries out for details- I am not the only analyst to be confused or confounded here and given the relative inexperience of the financial community, like new T&E and switching, here some back-to-basics understanding would be very useful (an Investor Day at long last?).
    • Apparently about 90% of the scheduled train schedules were "adjusted"....meaning schedule inflation a la the airlines? There does seem to be some green shoots - trains are longer, aided by Distributed Power (the goal in IM is ~"10-30 cars" per train start) and July is showing on time arrivals up, etc.