Norfolk Southern heads toward its May 9 annual meeting and the resolution of its battle with activist shareholder Ancora over control of the company with a public campaign that may have taken a hit Tuesday, judging from a preview of the railroad’s first-quarter numbers.
In an outlook for Q1 earnings, which are to be released April 24, Norfolk Southern said adjusted earnings would come in at $2.49 a share and adjusted operating ratio would be 69.9%.
Those numbers are both below Wall Street consensus on how the railroad, which serves the Eastern half of the U.S., performed in the quarter. The report initially pushed Norfolk Southern (NYSE: NSC) stock down before a later rebound.
According to SeekingAlpha, the consensus forecast for adjusted EPS was $2.59 a share, 10 cents more than Norfolk Southern said it made in the quarter. The adjusted OR was expected to be 69%, according to consensus, 90 basis points better than what Norfolk Southern now says it will report.
The nonadjusted numbers are far different from the adjusted figures, primarily as a result of the company’s $600 million settlement over the East Palestine, Ohio, derailment and chemical spill last year. Those GAAP results, which take into account charges connected to East Palestine as well as other charges, take the OR up to 92.9% and diluted earnings per share to 23 cents a share.
Sitting down with Wolfe Research
As part of its campaign against the Ancora push for new management, which is taking place now through proxy voting, Norfolk Southern management has been making numerous public appearances. On Wednesday, an online interview with transportation analyst Scott Group of Wolfe Research had embattled CEO Alan Shaw saying the Tuesday report wasn’t all that bad.
“We had said that first-quarter OR was going to be 100 to 200 basis points deterioration from the fourth quarter, and it’s up 110 basis points with normal seasonality,” Shaw said. “But we’re encouraged by the fact that OR improved throughout the quarter each and every month and really positions us well to deliver that 400-to-500-basis-point improvement in the second half of the year.”
But Amit Mehrotra, the head of the transportation research group at Deutsche Bank, described the railroad’s preliminary numbers as “very difficult” in his daily transportation email update.
Settlement before May 9?
Mehrotra, who will host an online session with Shaw and other NS executives next week, added that the outcome of the proxy battle will not necessarily stretch until the May 9 annual meeting. Before that, Mehrotra said, there likely will be “significant visibility” on which way the vote is going. “So, it’s very possible for there to be a settlement in early May, in our view, if the results are overwhelmingly one sided,” he said.
“The bottom line is change is coming to NSC one way or another, in our view,” Mehrotra wrote. “Either with current management that will remain under pressure until tangible progress is achieved, or with new management and a new board that will likely adjust and accelerate the profit improvement plan.”
Ancora recently boasted that its effort to replace existing management got the backing of asset manager Neuberger Berman.
Shaw, in the interview with Group, of Wolfe Research, said there have been negotiations between the Norfolk Southern board and representatives from Ancora. He said part of the offer Norfolk Southern has made is to have “some” of what the railroad considers “their better candidates” become members of the Norfolk Southern board.
“The response from the activists has been unreasonable,” Shaw said. “They’re looking for wholesale change. And that’s not something that the board feels is the right approach for our shareholders going forward.”
But he added that the company is open to a settlement.
(Settlements between company management and activist investors often end a proxy battle. That occurred Tuesday in a battle over control over Macy’s (NYSE: M).
The Norfolk Southern statement of its projected first-quarter earnings reviewed the company’s operations during the three months. Among the highlights: Volume was up 4%, but revenues were down 4% because of headwinds from lower fuel surcharges and “the continuation of adverse mix,” a euphemism for the type of cargo the company is hauling being less profitable than might be seen at other times.
But NS also said the company had record revenue less fuel in its merchandise markets.
The report was not so dire as to change any Wall Street analyst ratings on Norfolk Southern stock. Wire services reported that the current outlook for the railroad was held steady by RBC Capital and Susquehanna even after the preliminary numbers were released.
Orr hiring attacked by Ancora
Ancora also released a letter to shareholders last week, which criticized the hiring of rail veteran John Orr as COO.
The letter held back little. Ancora criticized Norfolk Southern for not interviewing its candidate for COO, former CSX executive Jamie Boychuk. It also said Orr was hired primarily because of his ties to Claude Mongeau, a Norfolk Southern director and a former CEO of Canadian National, where Orr had worked before he was at Canadian Pacific, now known as Canadian Pacific Kansas City (CPKS) after its merger with Kansas City Southern.
Norfolk Southern said when it announced Orr’s hiring on March 20 that it had paid $25 million to CPKS (NYSE: CP) for the right to hire Orr. But the Ancora letter questions that figure, saying an analysis of what CPKC said about the deal and its impact on earnings suggests a figure that is far higher in total value.
Boychuk’s Ancora-backed candidacy for COO at Norfolk Southern runs alongside the candidacy of former UPS executive Jim Barber Jr. to replace Shaw if he is pushed out. Ancora also has nominated eight directors.
The letter also brought up accusations from Orr’s past that he was abusive to employees, with plenty of redacted adjectives he allegedly used to describe employees. The letter leveled charges of racism and sexual harassment.
Former Orr colleagues interviewed by Ancora representatives “indicated that they would provide sworn affidavits regarding Mr. Orr’s conduct,” the activist shareholder group said. “We do not understand how the Board and Mr. Shaw have decided to bet the Company’s future on Mr. Orr.”
The issues raised by Ancora did not come up in the interview with Wolfe Research.
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