CP Canadian Pacific Kansas City Limited

   (FROM THE WALL STREET JOURNAL 1/28/16) 
   By Laura Stevens and Betsy Morris 

Norfolk Southern Corp. on Wednesday unveiled a five-year restructuring plan that will eliminate 1,200 jobs in 2016, idle track, close and combine operations and pare capital spending in an effort aimed largely 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 in 2016 and result in annual savings of more than $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, and 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. While coal volumes are expected to continue to fall in 2016 before stabilizing, the net effect of fuel should be modestly positive for earnings this year if oil prices stay about the same.

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. It is also designed to play to the eastern railroad's strengths, increasing its on-time performance to service-sensitive customers such as those in the automotive and consumer markets and continuing to woo business from trucking. It 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. Analysts wanted to know why he couldn't cut jobs and reduce capital spending more aggressively. Noting that CP has proposed to gain way more in operational efficiencies over the same five-year period when compared with 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 of improvement versus . . . a $1.2 billion improvement plan?"

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

CP also wasn't impressed. Norfolk Southern's "ambitions to lower costs, improve efficiency and generate shareholder value by 2020 fall well short of the targets envisioned in CP's proposed combination with NS," a CP spokesman said. He added that a combined railroad would result in "greater savings, greater efficiency and stronger shareholder returns."

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."

In the most recent quarter, Norfolk Southern's revenue dropped 12% to $2.52 billion.

(END) Dow Jones Newswires

January 28, 2016 02:47 ET (07:47 GMT)

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