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Norfolk Southern Says Operational Changes Key To Boosting 2019 Profits


Norfolk Southern (NYSE: NSC) expects continued operational changes will help boost profits and lower operating ratios in the second half of the year. 

Top21 and Clean Sheeting are two initiatives that arose out of NSC's version of precision scheduled railroading (PSR), an operating model that seeks to streamline operations. These initiatives "exposed numerous opportunities for cost savings in the second half of this year and beyond, which we are now aggressively pursuing. These savings, coupled with the modest top line growth we expect in the back half, give us confidence we will achieve our stated goals even amid economic uncertainty," said NSC chief executive officer Jim Squires during his company's second quarter earnings call on July 24.

The company earlier in the day reported a 2 percent increase in net profit in the second quarter despite a 4 percent drop in volumes.

From an operational perspective, NSC said it is focusing on finding cost savings by addressing efficiencies at serving rail yards and local operations. It is also exploring ways to address cost savings via locomotive maintenance. As part of its TOP21 plan, NSC is exploring how to expand the use of distributed power for its merchandise and automotive trains. Distributed power, which is the practice of putting locomotives in the middle or throughout the length of a train, enables longer trains. Norfolk Southern is also seeking to reduce circuitous miles by at least 20 percent by utilizing capacity at regional yards and focusing less on creating density at hump yards.

"We've already converted two hump yards to flat switch operations coming out of TOP21. And we'll continue to look things over. It really depends on the level of volume under the new plan that's moving through a given yard," Squires said. "Once that volume drops below a certain level, it makes sense to convert to a flat switch operation as long as you're going to keep it open. But we'll continue to work on that. There may be opportunities – other opportunities around the network, in addition we're looking over our entire portfolio of local serving yards to see what fits well with TOP21 and what doesn't," Squires said.

The company is also seeking to reduce trains miles for its manifest, automotive and local trains by 10 percent while reducing train starts by 10 percent, according to NSC chief operating officer Mike Wheeler. 

"This will result in a more efficient network with fewer trains," Wheeler said. "We are confident that execution of our new operating plan will drive further improvement in the near- and long-term."

When looking at commodities that could see revenue growth in the second half of the year, NSC factored in macroeconomic conditions such as high consumer confidence and low unemployment levels, with tariff uncertainty remaining a headwind primarily for the manufacturing sector, NSC marketing officer Alan Shaw said. Sectors that could see growth in the second half of the year include automotive, crude oil, fracking sand and aggregates. 

"We remain confident in continued growth in the economy, although at a lower rate than what we experienced in 2018," Shaw said. "Based on this economic backdrop, we expect modest year-over-year improvement in revenue, volume and RPU [revenue per unit] in the second half of the year, with the bulk of that growth in the fourth quarter."

The company also expects its domestic intermodal segment to grow in the second half of the year based on its conversations with channel partners, with further lane rationalizations could occurring sometime in the future, Shaw said. 

Intermodal spot rates are starting to improve, with intermodal volume projected to finish 2019 slightly above 2018 levels, Shaw said. Consumer spending is projected to boost the international and domestic intermodal markets, although domestic growth could be tempered by an increase in truck capacity, he said.

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