Ancora Lays Out 3-Year Plan for Norfolk Southern Ahead of Board Vote
Norfolk Southern’s activist investor has outlined a three-year proposal to cut costs at the rail company and establish infrastructure to support the precision scheduled railroading (PSR) operating model.
In a 14-page letter to Norfolk Southern shareholders on Tuesday, Ancora Holdings said it had plans to cut the company’s operating ratio from 67.4 percent of revenue to 57 percent within the 36-month stretch.
More from Sourcing Journal
The culmination of Norfolk Southern’s ongoing proxy fight with Ancora will occur May 9 with a vote at the railroad operator’s annual shareholder meeting.
The vote will determine whether Alan Shaw stays on as CEO of the railroad, and whether new chief operating officer John Orr will keep his position. Additionally, seven current board members could be ousted in favor of Ancora’s director candidates.
In the first 100 days of the potential new regime, Ancora would begin “listening tours” with employees and customers, before establishing a “network redesign” in September 2024 and implementing PSR in October and November.
Shaw’s tenure at the Atlanta-based rail company has been criticized by Ancora, namely for lagging competitors in certain growth metrics like operating ratio and revenue, as well as the company’s train derailment in East Palestine, Ohio last year that made national news for its spillage of hazardous chemicals.
Ancora also has called out Norfolk Southern for its declining service levels like train speed, terminal dwell and volume transported in recent years, further underlining the hedge fund’s calls to shift to a PSR model, which involves consolidating rail networks through the use of point-to-point delivery tactics and more consistent departure schedules.
Shaw still has his support from 37 unions across transportation nodes, with the AFL-CIO’s Transportation Trades Department head Greg Regan saying that replacing him as CEO “doubles down on a failed strategy.”
The unions, as well as many rail workers and industry analysts alike, are highly critical of the controversial PSR operating model that Ancora is calling on Norfolk Southern to implement, saying it is a detriment to service quality and safety due to staff cuts and longer trains.
Norfolk Southern was in the midst of debuting a PSR operating plan in 2019 under then-CEO Jim Squires, before pulling an about-face on the decision in 2022, instead opting to run what it calls a “resilience railroading” strategy. The model emphasized more resources in down freight periods, with the intent to pick up extra market share from under-resourced trucks and rail competitors when market conditions improve.
Ancora, on the other hand, claims that the “resilience” model only led to difficulty handling trough volumes, blaming it for the railroad’s 72 percent merchandise on-time arrival record.
On March 20, Norfolk Southern announced it replaced chief operating officer Paul Duncan with Orr, the executive vice president and chief transformation officer of another Class I Canadian Pacific Kansas City (CPKC). Norfolk Southern is ponying up $25 million to CPKC to waive a non-compete clause Orr had signed when working for the rail competitor.
Ancora had wanted to replace for Duncan, but with its own candidate, former CSX executive vice president of operations Jamie Boychuk. The hedge fund criticized Norfolk Southern’s decision on the grounds that Orr hasn’t had experience at an Eastern U.S.-based railroad, and that the board rejected the opportunity to speak with Boychuk.
On the other hand, the rail company wasn’t as enthralled with Boychuk due to leaving his last two companies “under uncertain circumstances.” They noted margins deteriorated by 400 basis points (4 percentage points) during his tenure at CSX, with mainline accident rates increasing by 76 percent.
“If this multi-faceted process is carried out by Messrs. Barber and Boychuk, Norfolk Southern can reduce its operating ratio to the low 60s within 12 months,” Ancora argued in the Tuesday shareholder letter. “Assuming they are successful, Norfolk Southern will then be able to achieve a significantly higher valuation and start delivering higher-margin volume based on consistently stronger service and new leadership’s relationships with a broader spectrum of domestic and international shippers.”
Later that day, Norfolk Southern sent out a letter of its own to shareholders once again throwing support behind its 13 “highly qualified and experienced” director nominees.
“It is this cohort of extremely talented and experienced directors that Ancora would have shareholders dismantle and replace with inferior nominees who the board has determined lack the necessary qualifications to serve on the board,” said the letter. “They are being put forward solely as part of Ancora’s campaign to remove management and take control of the board to implement Ancora’s ill-conceived and reckless strategy. Ancora’s attempt is not only unwarranted, it would introduce significant risk to our strategy and result in value destruction for our shareholders.”
