CP Canadian Pacific Kansas City Limited

By Laura Stevens and Betsy Morris 

Norfolk Southern Corp. on Wednesday unveiled a five-year restructuring plan that will eliminate 1,200 jobs next year, idle track, close and combine operations and pare back both capital spending and stock buybacks in an effort clearly aimed at fending off another hostile takeover attempt by Canadian Pacific Railway Ltd.

Norfolk Southern Chief Executive James Squires told analysts in his fourth quarter earnings call that the plan would cut costs by $130 million next year and result in annual savings of $650 million by 2020.

The news was delivered along with the announcement of a near 30% decline in fourth quarter profit, to $361 million, or $1.20 a share, down from $511 million, or $1.64 a share, which came in three cents below analysts' expectations.

Dismal energy markets have depressed rail cargo over the past year. Norfolk Southern was hurt by declining coal and fuel surcharge revenue in the latest quarter, which together accounted for 84% of revenue declines.

Norfolk Southern's strategic plan is designed to reassure and bolster support among shareholders in the face of a possible proxy fight with Canadian Pacific. The plan plays to the eastern railroad's strengths, increasing its on-time performance to service-sensitive customers in the automotive and consumer markets and continuing to woo business from trucking. The railroad also expects to capitalize on new business from an expanded Panama Canal.

"We serve main population centers, and there's more of a market for consumer goods where our tracks go," Mr. Squires said in an interview.

Not all analysts were impressed. Norfolk Southern has three times rejected a roughly $30 billion merger bid from Canadian Pacific. While Mr. Squires wouldn't touch that subject, analysts still pushed him. Analysts wanted to know why he couldn't cut jobs and reduce capital spending more aggressively. Noting that CP has proposed to cut about $1.2 billion in costs over the same five-year period as Norfolk Southern's plan, one analyst asked: "what is it about your business that you feel CP does not understand that makes shareholders better off with $650 million dollars of improvement versus...a $1.2 billion improvement plan?"

Mr. Squires answered that his plan is flexible and might get more aggressive.

It has been expected that CP's chief executive Hunter Harrison will launch a proxy fight to win Norfolk Southern. In his own earnings call last week, he said he has talked to more than half of Norfolk Southern's shareholders and "all indications" are they support him. But he cautioned that shareholders don't hold all the cards, noted growing challenges, and said he might have to rethink his strategy. Since then, some analysts have speculated he might abandon his campaign for Norfolk Southern.

While Mr. Squires declined to discuss CP's next move, he said he talks to his shareholders all the time. "We've spoken to virtually all of our major shareholders over the last several months in order to get their feedback and their guidance," Mr. Squires said in the interview. "And one thing we heard from them was 'we want more details on your strategic plan'. That's what we gave them today."

Norfolk Southern shares rose more than 2%, to $70.40 in morning trading. That is still down significantly from a 52-week high hit in February of $112.05.

In the most recent quarter, revenue dropped 12% to $2.52 billion. Analysts surveyed by Thomson Reuters forecast earnings of $1.23 a share on $2.57 billion in revenue. The latest quarter included $31 million in restructuring costs.

Coal revenues fell 20% to $433 million due to warmer weather and a continuing shift to cheaper natural gas as a source of energy at power plants. Intermodal revenue fell 13% to $563 million.

Write to Laura Stevens at laura.stevens@wsj.com and Betsy Morris at betsy.morris@wsj.com

(END) Dow Jones Newswires

January 27, 2016 14:55 ET (19:55 GMT)

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