RR Reflections 3 - NSC PLUS Moving Blocks Day

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Rail Technology breakthrough at BNSF? First, a shout-out to Bill Stephens of Trains who broke this story:
BNSF receives patent for moving block system | Trains Magazine This could be a very big deal….Moving
blocks, the end zone goal for a generation of those working to get full benefits of PTC, would add
capacity, reduce or eliminate signaling assets, and change the service portfolio of the industry. The pace
of technological advancement on both sides of the ball for railroads, operations-driven, and customer-centric is clearly accelerating. And a good thing too. Interestingly, on the latter, concerning shipper
interface/visibility, NSC is a leader with its (along with 4 other partners) “Rail Pulse” project, so I was a
bit disappointed to hear only one mention of on their earnings call. I hope to get a deeper dive into NS
tech later this week.

The third look back at earnings involves Norfolk Southern’s estimate-beating Q4/20 performance which
was, in this case, more exciting than their traditionally rather….lukewarm? Opaque? Reserved? Clinical
presentation on their webcast…. Compare to CSX’s enthusiastic, animated, off-the-cuff presentation –
although I know that presentations and performances are ephemeral and that facts (and numbers) are
what matters in the end. I was also waiting on some information that still in the ether, but the gist is
well known by now. Some guidance was restored (compare that to KSU – NSC might be in the
Goldilocks bed on this issue): 9% YOY growth in revenues (implying a “high single-digit” volume gain and
less FY headwinds from Fuel Surcharges and Mix); a 300bps+ reduction in the OR (and “ending the year
on a 60% run rate” – narrowing their “OR gap”).

To start, their numbers were solid - NSC reported earnings that beat the Street by over 5% and Q4/19 by
4%, and reduced their quarterly OR by 240bps to a record 61.8%. Solid. Volume was still down by a
percent (and revenues by 4%) but as COO Cindy Sanborn said in her first full presentation, assets
(numbers & productivity) more than compensated (opex was down 8%). Velocity & dwell were not
great, but January appears to show recovery to trend-improvement levels. AS they restore (pivot) their
growth plan, Cindy announced their “full pin” strategy (or technique or technology or….) –
blending/blocking/adjusting. Claims were favorable, bucking a bad trend amongst their peers, but I
couldn’t find safety data.

Is it “Sleepytime down south”? Well, actually that phrase has Chessie roots (it’s from the old Greenbrier
Hotel) but while NSC is making big progress on PSR, it’s perhaps coming at a cost as the timing of CSX’
earlier (and more initially aggressive undertaking) adoption has led to CSX seemingly stealing a march on
NSC (see: Norfolk Southern digs its way into a volume hole - Trains Magazine - Trains News Wire,
Railroad News, Railroad Industry News, Web Cams, and Forms ). And of course, there’s the “Yield Up”
the strategy which netted flat RPU-less fuel for the year. While they are “preparing” for significant volume
growth” (meanwhile compare that to UNP) this year, NSC’s overall 2020 volume was down 2X that of
CSX (-12% compared to -6%) while in intermodal, NSC’s historic strength, the numbers show they
declined almost 6% while CSX’ numbers were up almost 2% (making it along with CP (which will be
covered in Reflections #4 along with its northern rival) to be the only rails to produce an FY gain. So how
much is anecdotal? Or the timing of the restructurings and the subsequent “growth pivots”? I know
there’s a “capacity dividend” that comes from PSR, but CAPEX was down 20% last year and they project
only a +5% recovery this year….another rethink on Capex towards the UNP “15% or below” of revenue
target, as CFO Mark George said he planned to “bury the 16-18% target right here” (although he did
correctly point out that the “%/revenues” has always been a false flag).

Business levels were better in the quarter, of course than the full pandemic year - the upward slant of
the “V” or the “shark’s tooth”, led by Intermodal’s full-fledged recovery (volumes up 5% while
Merchandise was still down by the same (-5%) amount and coal dropped by another 25%. In looking at
their guidance (returning strength in autos, manufacturing, inventory replenishment) helping both IM
and Merch, Coal is expected to be a continued drag. Now, the secular case remains open & shut on the
commodity, to be sure – but the EIA predicted a deceased feline rebound for 2021, as did Appalachian
rival rail CSX. NSC sees increased stockpiles in its territories. Given little life expected in the coal export
markets (exacerbated by Australia selling its coal everywhere but China), they expect “Energy” to be flat.

So even after the Q&A, their questions remain. NSC is clearly picking up the pace of its transformation
and has assembled its team. It has restored its crown jewel, its intermodal franchise, to a growth
trajectory. Now, I hope we get a chance to better evaluate their progress over the course of the year,
and that I get to fully understand the what? Where? And How? Of “Full Pin”



Anthony B. Hatch 
abh consulting
Twitter @ABHatch18