LAGUNA BEACH, Calif. – Norfolk Southern, which has struggled to maintain consistent and reliable service in recent years, will no longer tolerate mediocre operational performance, new CEO Mark George says.
“The tolerance for poor performance inside of rails has always bothered me,” George said this morning in his first public remarks since replacing Alan Shaw as chief executive on Wednesday.
“I spent 30 years inside of another industrial conglomerate, United Technologies, and I’ve seen the world operate differently without a whole lot of patience for anything other than excellence on the operations side,” George, who had served as NS chief financial officer since 2019, told an investor conference.
George says he’s pleased with the steady operational improvements that have been made since John Orr became the railroad’s chief operating officer in March. Orr brings 40 years of experience as a veteran of Canadian National, Kansas City Southern, and CPKC.
“We now have that legitimate operator,” George says of Orr. “I’m thrilled … because we can’t have patience for anything other than excellence. Because if you’re not excellent in the way you serve your customers, they have options. And we’ve suffered from that over my first four and a half years.”
George praised Orr for setting up so-called war rooms where operational problems are identified, analyzed, and fixed. It’s a process, he says, that should exist at every company with high standards.
“You drill into the processes to understand what broke down, and then what process changes you need to fix it permanently. He’s got these war rooms set up with these guys … and gals behind these huge screens identifying the issues, what the root causes are and how to permanently fix ’em.” George says. “And we haven’t seen that. And I’m thrilled because that’s what I’ve been looking for and waiting for.”
NS remains committed to the profitability and productivity targets it established during the proxy contest with activist investor Ancora Holdings this spring. Among them: Harvesting $250 million in cost and productivity savings this year, another $150 million next year, and then ultimately reaching an operating ratio below 60%.
NS reported an adjusted operating ratio of 65.1% for the second quarter, which lagged rival CSX by 4.2 points.
“Right now we are out of balance with the industry. We have got to get our profitability back in line and that is our principal focus right now. We’ve got to get our operating ratio back in line in the same ZIP code as our peers and we’re committed to do that,” George says. “We fell out of balance, but I think we’ve demonstrated here that we’re making the moves in the right direction.”
NS needs to drive revenue growth to the bottom line, George says.
NS is regaining volume, particularly in service-sensitive intermodal and automotive traffic, thanks to its operational improvements this year. A bigger recovery in freight volume – whenever it comes – will push the operating ratio below 60% thanks to the productivity and operational improvements NS is making now, George says.
“We have got to focus on earnings growth in dollars,” George says. “And earnings growth in dollars will generate a lot of free cash flow, which then allows for share repurchases to help drive [earnings per share] growth at a faster rate than the profit growth.”
The railroad also needs to make smart investments, like prioritizing information technology spending so that key operational data is put at everyone’s fingertips, from headquarters on down to trainmasters in the field. “We have a lot of data today,” George says. “I wouldn’t say that we have good clear access to it.”
George says NS will be glad to put controversy in the rearview mirror so that the railroad can focus on moving forward.
“We’ve been in the news for all the wrong reasons in the past week, but I am super proud of our board for moving very swiftly and very decisively and very quickly so that this is just a speed bump and it’s not a continuation of all the distractions that our organization has been dealing with for the past 18 months,” he says.
The 18-month stretch includes the disastrous hazardous materials derailment in East Palestine, Ohio, subsequent derailments, an intense spotlight on the railroad’s safety record, and a bitter proxy contest with Ancora this spring.
Then on Sunday came word that NS was investigating allegations of ethical lapses by then CEO Alan Shaw. On Wednesday, NS fired Shaw and Chief Legal Officer Nabanita Nag for having a consensual relationship in violation of the company’s ethics policy.
The string of controversies has been tough on NS employees, George says. “They’re eager to move forward with pride. Norfolk Southern has a very long history of being successful – and we want to get great again,” he says.
George and Orr spoke at Morgan Stanley’s 12th Annual Laguna Conference.
“War rooms” … a chance to manage by snapshots, without any of the process and thought that is needed to run a complex operation.
The Friendly Southern Pacific was well-known for its “24-hour office”, where people could disrupt the operation on a continual basis. And they did. One result was my directive to our Yardmasters to review the Blocking Instructions when they assumed duty, because they changed every day, or more frequently. It’s a hell of a way to run a railroad.
Jack:
Good post. My experience has been if there is not “buy in” at the local level, PSR war room “directives” fall short in the area of effectiveness. When you have folks dictating movements and those executing the movements know that the dictating folks have never worked a yard or line-of-road switching job, compliance lags.
I hope not much business is lost because the shippers made a point that they would be gone if Shaw wasn’t CEO and he isn’t CEO anymore so we shall see how this goes.
It might have been better form NS to quietly find a way to have the two “resign” and then not make a production out of the firings. Unless this might be certain stockholders to get revenge. who knows?
Barely been there, and a priority is stock buybacks, IT and operating ratios. How about fixing your rail system? The system is sad mirror of itself – shedding capacity and trying to run trains longer than sidings resulting in slow delivery and failure to meet customer (including Amtrak) commitments.
It seems the stock market does not like what is going on at NS. Its shares fell 3.45% today.
He lost me and my shares when voting when he mentioned “share repurchase.”
Maybe NS will luck out and they will repurchase Ancora’s stock… but I doubt it. The fox has gained entry to the hen house!
What a way to throw your former boss under the bus. Essentially, he is saying that NS wasn’t any good until they brought in John Orr, under pressure from Ancora.
Orr wasn’t brought in under pressure by Ancora. In fact Ancora criticized giving CPkc the 25 million it cost to let Orr walk away and come to NS. Of course their choice would have been to let Jaime “Take it down to the studs” Boychuk run the railroad into the ground so they could make a quick profit and then flee the scene of the crime. Ancora’s proxy fight is the gift that keeps in giving. No more Shaw, and now reprioritization back on the operating ratio. Yes, George talks a fine talk, just like Kamala Harris, but his words do not ring true to what the “better way” strategy was all about: Take care of the customer and the rest will take care of itself. Here is betting that we will soon see layoffs in the train crew and maintenance ranks, all to the detriment of NS and to the joy if Ancora and other minority investor who supported Shaw. They didn’t win the battle but it looks like they may have won the war with this finance-first guy in charge. Maybe the majority investors should demand a recall vote…
This guy has 5 years of railroad experience and it’s all been in charge of the purse?
Is this the best they could do?
Bill sounds like someone at NS read my cover story in the Fall issue of Classic Trains. John Reed never tolerated poor operating performance on the Super Chief (or the Super C) and Mike Haverty never tolerated it with the Super Fleet.
Yeah, but John Reed and Mike Haverty didn’t live with the pressure to have an operating ratio so low that they didn’t have any ability to pivot. The only thing that allows that nowadays is that the huge majority of stock is owned by members of Warren Buffet’s Berkshire Hathaway team and operating ratio is NOT the primary concern but getting and sustaining customers is. Its like Buffet said about utilities once: “They won’t make you rich but they will keep you rich…” If run right, railroads are the same these days…