Highlights Opportunity to Install
Trustworthy Leadership with Governance Acumen and the Operational
Experience to Implement a PSR-Powered Scheduled Network that has
Underpinned Superior Service, Safety and Value at Other Class I
Rails
Outlines Shareholder Slate’s Commitment to
Protecting Norfolk Southern’s Interests in the Meridian and Wylie
Assets Following the Board’s Costly, Opaque Deal with CPKC to Hire
a Third COO in 2.5 Years Amidst a Contest
Underscores the Risks Associated with Giving
Incumbent Leadership More Time to Control the Company’s Governance
and Run a Resilience Network Producing Worst-in-Class
Results
Shares an Appendix with Facts-Based and
Well-Sourced Responses to Incumbent Leadership’s Claims
Ohio-based Ancora Holdings Group, LLC (collectively with its
affiliates, “Ancora” or “we”), which owns a large equity stake in
Norfolk Southern Corporation (NYSE: NSC) (“Norfolk Southern” or the
“Company”), today updated shareholders on its campaign to elect
seven unaffiliated and qualified candidates (the “Shareholder
Slate”) to the Company’s 13-member Board of Directors (the “Board”)
at the Annual Meeting of Shareholders (the “Annual Meeting”) on May
9, 2024. Vote on the BLUE Proxy
Card to elect the entire Shareholder Slate at the Annual
Meeting.
***
Fellow Shareholder,
Ancora is a meaningful investor in Norfolk Southern. We’re
asking you to elect seven new members to Norfolk Southern’s
13-person Board at the May 9th Annual Meeting. Given the scope of
this ask, we committed at the outset of our campaign to provide you
with the respect and transparency an owner deserves when
considering a change to a majority of a board of directors. As our
campaign enters its final weeks, we will fulfill this commitment by
asking you to focus on substantive matters and ignore the
fearmongering, spamming and eleventh-hour stunts that often seep
into the last days of contested elections.
Rather than inundate you, we will continue to ask that you focus
on one defining question when making your ultimate voting
decision:
Do you want Norfolk Southern to have
leadership with the experience and judgment to properly implement
Precision Scheduled Railroading (“PSR”), so the Company can finally
achieve the service, safety and long-term value realized by every
other publicly traded Class I rail?
If the answer is “yes,” this Annual Meeting represents your best
opportunity to usher in the type of change that drove lasting
turnarounds at rails such as Canadian Pacific and CSX. Our position
is supported by three points:
1. The Right Slate at the Right Time
The Shareholder Slate as a whole is greater than the sum of its
parts. It is uniquely positioned to add value right away and build
consensus in an expeditious manner. Its attributes include:
- Rail Industry and PSR Expertise –
Nominees Sameh Fahmy and Gilbert Lamphere bring first-hand
experience overseeing orderly PSR implementations and supporting
turnarounds at Class I rails. Mr. Fahmy led a successful network
redesign and subsequent transformation as EVP of PSR at Kansas City
Southern from 2019 to 2021 and, prior to that, oversaw a rail
transformation as a director of Rumo Logistica (RAIL3.SA) from
early 2017 to early 2020. Mr. Lamphere hired industry legend Hunter
Harrison, helped develop the concept of PSR and participated in
value-enhancing network redesigns as a director of Canadian
National, Illinois Central and CSX. Both individuals will also add
decades of experience developing, reviewing and optimizing rail
safety and service protocols.
- Community, Government and Safety
Expertise – Nominees William Clyburn, Jr., a former Surface
Transportation Board Vice Chairman, and John Kasich, a long-serving
U.S. congressman and two-term governor of Ohio, bring policy
insight and public safety perspectives that only come from holding
the right leadership positions in government. Mr. Clyburn also has
direct experience advocating for shippers and leading a derailment
response effort to support communities impacted by Norfolk
Southern’s 2005 crash in Graniteville, South Carolina. Mr. Kasich
also possesses the important viewpoints of an Ohioan, who has spent
his life addressing underperformance within large institutions, and
a record of championing bipartisan legislation that put billions of
investment dollars into one of the country’s largest state
transportation systems. As governor, Mr. Kasich also oversaw Ohio’s
successful effort to become the first state to receive approval and
certification from the Federal Transit Administration for its State
Safety Oversight Program.1
- Change Management and Finance
Expertise – Nominee Betsy Atkins was a director during the
historic change-in-control transition at Darden Restaurants, served
as a director at Volvo during a period of increased technology
integration within vehicles and is a current director of Atlas Air
Cargo, which has operational and safety considerations similar to
Norfolk Southern. Nominee Allison Landry covered Class I rails as a
transportation sector equity analyst for 16 years and is now Vice
Chair of XPO Logistics, which has undergone a value-enhancing
transformation. Ms. Atkins and Ms. Landry also possess additive
expertise in areas such as compensation program structuring,
financial forecasting and performance measurement, and executive
leadership transitions.
- Shipper Relations and Human Capital
Management Expertise – Nominee and CEO candidate Jim Barber,
who previously served as UPS’ COO and ran its transportation
networks, has a unique background as one of the country’s largest
rail customers with vast knowledge of shippers’ needs. Mr. Barber,
who began his career as a unionized driver, rose through the ranks
of UPS to simultaneously lead reportable segments with 100,000+
employees, more than $25 billion in annual revenue and
approximately $3.4 billion in annual EBIT. During his tenure, he
also formed lasting and valuable relationships with unions while
negotiating mutually beneficial labor agreements across North
America and Europe.
The current Board, which is chaired by a long-serving member
with a background as a movie theater chain CEO, recently impugned
its credibility by calling the aforementioned individuals “inferior
director nominees” who have “little board and safety experience.”2
The Board further compromised its integrity by saying in the same
shareholder communication that the “East Palestine incident was not
due to bad management or inattention to safety,” despite the
directors knowing the National Transportation Safety Board
concluded the derailment was “100% preventable” and that the
Company’s people on the ground “lacked the scientific background”
to recommend what has been deemed an unnecessary toxic burn.3 This
same Board is now also telling you it has selected the right CEO,
the right COO (albeit the Company’s third in two-and-a-half years)
and the right strategy (even though the resilience model has
delivered worst-in-class results and is an outlier among Class I
rails). With all of this in mind, hopefully it’s clear that the
only credible path to actually reducing risk and shifting to a
proven strategy is to elect ALL
SEVEN members of the Shareholder Slate, so its proposed
management team and plan have support from a majority of the
Board.
Please know we do not use the term “risk” lightly. Contemplate
the risk associated with maintaining a Board that recently cut an
exceedingly costly, opaque deal with competitor Canadian Pacific
Kansas City Limited (“CPKC”) to hire a new COO in the middle of a
contest. In addition to agreeing to pay $25 million in cash, the
Board gave up Norfolk Southern’s right of first refusal on
significant intermodal volume moving to/from the Wylie Intermodal
Terminal and across the Meridian Speedway, resulting in the loss of
an exclusive strategic advantage for the Company and the opening up
of increased competition from the growing CPKC-CSX partnership.
Importantly, the Board also withdrew multi-year opposition to the
CPKC-CSX alliance that is strengthening the capabilities and
offerings of the Company’s Eastern competitor. Although Norfolk
Southern refuses to disclose its highly irregular agreement with
CPKC, we fear it agreed not to exercise its expiring purchase
option on the strategically important Wylie Intermodal Terminal.
The Board, of course, can prove us wrong any time it wants, given
that the window is open for the purchase option to be exercised.
All of these recent concessions appear to have been made purely for
self-preservation purposes, especially when considering that
Norfolk Southern was still filing opposition papers with the
Surface Transportation Board in the fourth quarter of last year.
Moreover, despite the Board’s claims this month that the
concessions are inconsequential, consider the Company’s previous
position:
“The Meridian-Wylie Route represents a
significant component of NS’s commercial and operational offerings
to intermodal customers […] Preserving NS’s ability to meet its
intermodal customers’ needs with competitive rates and services
over that line is a primary focus for NS.”4
If the full Shareholder Slate is elected, it plans to have the
Board protect the value of the Meridian Speedway assets for
shareholders. This includes, but is not limited to, proposing that
management exercise Norfolk Southern’s purchase option on the Wylie
Intermodal Terminal and asserting the Company’s rights over any
related trackage rights. Any undisclosed arrangements or verbal
understandings as they relate to the acquisition of John Orr and
related concessions will be challenged and defended for
shareholders.
2. The Right Management at the Right Time
The Shareholder Slate will work to appoint Mr. Barber as CEO and
Jamie Boychuk, former CSX EVP of Operations, as COO. This will mark
the first time in a generation that Norfolk Southern has a CEO with
an operational background. Additionally, this will mark the first
time in Norfolk Southern’s history that Norfolk Southern has a COO
with experience leading a network redesign and related PSR
implementation. You can learn more in the appendices to this letter
about their applicable experience and the irrefutable data
underpinning their accomplishments as transportation operators.
Those of you who have heard from Mr. Barber know that he is a
no-nonsense operator who is focused on delivering greater value for
all of Norfolk Southern’s stakeholders, including shareholders,
customers, labor, regulators and communities. Mr. Barber knows what
this will require based on his unique background as a major rail
shipper and former Norfolk Southern customer during his days at
UPS. He also has decades of experience negotiating lasting union
agreements and maintaining the trust of regulators across the
world. As you will continue to hear him say, delivering enhanced
value for all stakeholders starts with providing safer and more
reliable service. Improving Norfolk Southern’s worst-in-class Trip
Plan Compliance, which currently stands at just 76.5% for the
Merchandise vertical, is among his immediate priorities.5 The
Company’s Manifest Trip Plan Compliance has dramatically lagged the
Class I Average and the Surface Transportation Board’s 82%
compliance target for years.6
It is important to note that Mr. Barber has publicly disclosed
that he and Mr. Boychuk will seek an at-risk compensation model
that is governed by tangible value creation rather than the
arbitrary targets and discretionary milestones historically relied
on at Norfolk Southern. In our view, the Board’s recent and
reactionary tweaks to Norfolk Southern’s compensation model is far
too little, far too late. Messrs. Barber and Boychuk have committed
to forgoing the guaranteed cash compensation structure provided by
the Board to the Company’s current CEO and COO. Their desire for
the maximum amount of accountability further demonstrates that they
are the right leaders to turn around Norfolk Southern.
3. The Right Plan at the Right Time
The Shareholder Slate and its recommended management team will
implement a PSR-powered Scheduled Network. The PSR implementation
will begin after new leadership takes steps that include conducting
a listening tour, redesigning the network on paper and sharing a
transformation timeline and intended output summary with all
stakeholders. This methodical approach, which differs from previous
PSR implementations, has been informed by Mr. Barber’s
understanding of shippers’ expectations and Mr. Boychuk’s work with
Messrs. Fahmy and Lamphere to assess learnings from past
situations.
Under the Shareholder Slate’s plan, Norfolk Southern will spend
approximately 24 months evolving from a marketing-led railroad to
an operationally-led railroad by reducing assets, clearing up
congestion and cutting down on excessive touch points. The outputs
of this phase are expected to include improved service (reflected
in a much higher Trip Plan Compliance rate), greater efficiency
(reflected in a much lower Operating Ratio) and sustained safety
(reflected in declines in severe derailments and the number of
required reported accidents relative to total network activity).
The third year of the plan will be focused on leveraging
operational improvements and service enhancements to increase
Norfolk Southern’s wallet share and target top-line growth, with a
specific focus on the high-margin Merchandise vertical.
Despite Norfolk Southern’s recent hire of an executive who ran
inherited PSR systems at Canadian National and CPKC, it is
important to stress that the Board has confirmed its preferred
strategy is unchanged.7 The Board wants to maintain Norfolk
Southern’s existing network to run a resilience-focused model that
deprioritizes scheduling principles and prioritizes having excess
assets available in the event of unforeseen spikes in volume. The
Board seems to maintain the unfounded belief that Norfolk
Southern’s poor Trip Plan Compliance will not obstruct it from
being a partner of choice if there is an unexpected freight boom.
While shareholders wait, Norfolk Southern’s excess assets,
bottle-necked network and unproven operating model remain
structurally incompatible with true PSR.
With all of this said, you do not need to rely on our word.
Please review Appendix A to see what institutional investors and
respected financial analysts are saying about the Shareholder Slate
and its proposed management and strategy.
In Closing
We appreciate your willingness to consider what the Shareholder
Slate has to offer. To the extent you would like to review
responses to the Board’s recent claims and representations, they
are included in Appendix B. You can also evaluate all aspects of
the Shareholder Slate’s analysis and strategy by viewing the
193-page presentation available at www.MoveNSCForward.com.
This is a once-in-a-generation opportunity for us, Norfolk
Southern’s owners, to put in place the right slate of directors,
the right management team and the right strategy – all at the right
time. This is the best way to turn the page on a dark chapter and
move Norfolk Southern forward.
Sincerely,
Frederick D. DiSanto
Chairman and Chief Executive Officer
Ancora Holdings Group LLC
James Chadwick
President
Ancora Alternatives LLC
APPENDIX A –
SHAREHOLDER SLATE’S SUPPORT FROM INVESTORS AND
ANALYSTS
A Sampling of Support from the Financial
Community
“We believe the status quo at NSC will lead to
continued underperformance of the railroad. We also believe that
Board refreshment and Jim Barber's and Jamie Boychuk's leadership
are essential for enhancing safety and for ensuring outstanding
long-term achievements for the benefit of all NSC's shareholders
and other stakeholders.”
- EdgePoint Investment Group
“[W]e believe a change in management and
refreshment of the board at NSC are warranted and could stimulate
improved operations and thus equity performance. For these reasons,
we intend to support the election of dissident nominees Betsy
Atkins, James Barber, Jr., William Clyburn, Jr., Sameh Fahmy, John
Kasich, Gilbert Lamphere, and Allison Landry.”
- Neuberger Berman
“Important from yesterday’s town hall was
commentary that PSR implementation is going to be slower than what
we saw at CSX given in our view changes to the regulatory
environment and the proposed management team’s focus on the
customer […] Overall, we view this plan as contrasting heavily
against Norfolk’s Resilience Model and expect headcount reduction
can be achieved on the back of attrition, in addition to head
office cuts.”
- RBC Capital Markets note issued on April
19th
“NSC's activist campaign appears to have
unanimous support from institutional investors.”
- Deutsche Bank Research note issued on April
15th
“We see value in potential management change
with Jim Barber as CEO and Jamie Boychuk as COO as proposed by the
activist investor Ancora, especially given the historical margin
underperformance of Norfolk Southern.”
- Barclays Equity Research note issued on March
25th
APPENDIX B –
SHAREHOLDER SLATE’S RESPONSES TO THE BOARD’S RECENT
CONTENTIONS
The Case for Significant Change in the
Boardroom
The Board’s Contention
The Reality
Norfolk Southern has delivered
strong long-term returns for shareholders.
- From the announcement of Alan Shaw as the next CEO through the
start of our campaign, Norfolk Southern delivered negative shareholder returns and underperformed the Class I Railroad Median by
15.1%.
- Over the course of one year, three years and since the
Company’s 2022 Investor Day (ending with the start of our
campaign), Norfolk Southern has delivered
negative shareholder returns and underperformed the Class I Railroad Median.
- Over every relevant long-term horizon, Norfolk Southern has
consistently underperformed its Eastern
competitor and the Class I Average in terms of revenue, EBIT and
EPS growth and Operating Ratio.
- Norfolk Southern touts a cherrypicked five-year shareholder
return metric with start and end dates disconnected from the
Board’s relevant decision points.
- Mr. Shaw and Chair Amy Miles were not even in their leadership
roles for more than 80% of this five-year period.
“Norfolk Southern's board is an
agent of change, advancing shareholders' interests.”
- Since the Board announced its intended promotion of Mr. Shaw to
CEO, Norfolk Southern has only changed for the worse and
shareholders have only suffered, as evidenced by an objective
review of data:
- Negative shareholder returns
- Share price underperformance vs. all Class I peers
- Six straight quarters of missing analysts’ consensus EBIT
- Declines in carload volumes that outpace all Class I peers
- Worst-in-class Operating Ratio
- Worst-in-class Trip Plan Compliance (a.k.a. on-time
delivery)
- Increased congestion within its network due to excess
assets
- A preventable derailment that has cost $1.6 billion so far
- To date, 2024 has had four more headline-grabbing
accidents
- Three COOs in two-and-a-half years
- Three VPs of Transportation in two-and-a-half years
- Despite reportedly conveying that it has support from
unidentified passive investors, the Board has yet to receive any
public support from an institutional shareholder.
- A recent note released by Deutsche Bank Research following
one-on-one meetings with 90 investors in the freight and logistics
space stated that “we have yet to find one investor that is
planning to vote in favor of the current management, which reflects
long-run frustration with NSC's operating track record.”
“We expect to realize an
operating ratio of 60% or lower in three to four years, assuming a
market recovery and associated revenue growth in line with previous
freight cycles.”
- A recent under-the-radar change in Norfolk Southern’s Operating
Ratio forecast suggests Q2 2024 results are now worse than what was
communicated just a week earlier.
- Norfolk Southern issued a presentation with a projected
first-half Operating Ratio of 66%-67% on April 10, and then the
Company issued a revised presentation with a projected first-half
Operating Ratio of 67%-68% on April 18.
- This change was made without any call-out or explanation.
- If the Board cannot oversee accurate and effectively disclosed
Operating Ratio guidance related to the current reporting period,
shareholders are unable to trust its Operating Ratio guidance for
the years ahead.
- For more details, view “Another Instance of Impugned
Credibility for Alan Shaw and His Board: A New OR Target.”
The Board has a “steadfast
commitment to bringing in fresh ideas and diverse
perspectives.”
- When Board members heard the Shareholder Slate’s ideas about
adopting a PSR strategy, as has been done by every other publicly
traded Class I rail, they unanimously backed Mr. Shaw’s
resilience-focused strategy.8
- When Ancora offered Board members a chance to speak with Jim
Barber and Jamie Boychuk about their experience and proposed
strategy, they declined.
- When the Board decided to bring in John Orr as COO in the
middle of this contest, it cut a costly and poorly disclosed deal
with a competitor to hire an individual that previously worked
under director Claude Mongeau (who just weeks earlier told us Paul
Duncan was the right COO).
- Mr. Shaw and the Board seem to believe
this hire is worth $25 million plus (i.) giving up right of first
refusal on traffic coming from the Meridian Speedway &
Terminal, (ii.) not committing to exercise the purchase right on
the Wylie Intermodal Terminal and (iii.) dropping opposition to the
CPKC and CSX alliance.
- In a note that mentioned CPKC and its CEO “look great on this
trade,” Susquehanna Financial Group observed that Norfolk
Southern’s reactionary hire of Mr. Orr “comes at a high near-term
cost and very high potential long-term cost to the company for an
operational leader that could prove short-lived beyond May 9's
shareholder meeting when the Ancora proxy fight comes to a
head.”
The Shareholder Slate’s strategy
has generated “concern among key constituents.”
- Ancora has publicly disclosed its misgivings about Norfolk
Southern using shareholders’ resources to manufacture concern from
non-financial stakeholders, as can be seen in filings with the U.S.
Securities and Exchange Commission, which can be accessed at
www.sec.gov.
- Ancora publicly disclosed on February 22nd that it was aware
that the Company’s private jets had been heading to Washington,
D.C. with great frequency following the submission of a private
nomination notice in November of 2023. According to publicly
available lobbying disclosures, the Company has been represented by
41 lobbyists, who are tasked with engaging governmental bodies that
include the Department of Transportation, Surface Transportation
Board and Federal Railroad Administration.9 Nearly 80% of these
lobbyists are considered ‘revolvers,’ meaning they previously
worked at the very government entities they are now talking to on
behalf of Mr. Shaw and Norfolk Southern.10
- Norfolk Southern’s select union support, which parrots the
Company’s talking points, is coming from the same sources
management secured letters from when it sought to block an
unsolicited acquisition offer in 2016.11
- The Company appears to want shareholders to think that rail
workers may strike, even though there is a long-term labor
agreement in place (that the Shareholder Slate intends to honor in
full) and strikes at individual companies are prohibited.
- It appears that Norfolk Southern’s publicly supportive
“influencers” in academia and at rail sector trade publications
receive sponsorship fees and/or economic consideration from the
Company and/or its advisors.
- Norfolk Southern appears to have previously sponsored content
at the trade publications that have most aggressively attacked
Ancora and supported Mr. Shaw.12
- Norfolk Southern’s recent receipt of support from CPKC’s
officers and directors stems from the rails’ economic agreement
over Mr. Orr, including cash and strategic consideration going to
CPKC.
The Case for Changes in Management
The Board’s Contention
The Reality
“The Board appointed Alan Shaw as
CEO because the depth and breadth of his experience would best
position us to leverage PSR…”
- Mr. Shaw’s experience has nothing to do with PSR or related
network strategies, as evidenced by his prior roles at Norfolk
Southern:
- Chief Marketing Officer, 2015-2021
- Vice President of Intermodal Operations, 2013-2015
- Group Vice President, Chemicals 2009-2013
- Group Vice President, Coal 2008-2009
- Director of Coal Transportation Services, 2002-2008
- Various finance, coal and marketing positions, 1999-2002
- Cost Systems Analyst, 1994-1999
- Based on Norfolk Southern’s worst-in-class results in recent
years, there is no evidence to support the claim that Mr. Shaw best
positions the Company to integrate PSR.
- In fact, Mr. Shaw actually reversed prior improvements
generated from Norfolk Southern’s attempt at PSR over 2019-2021 by
implementing his TOP|SPG strategy in 2022. Since its
implementation, Norfolk Southern’s Operating Ratio has deteriorated
from the low-60s to 69.9% in 1Q24.
- The fact is that, when evaluating CEOs in 2021, the Board fell
back on a tradition of promoting long-serving insiders rather than
elevating former COO Cindy Sanborn or installing a qualified
external candidate.
- Jim Vena, a highly regarded operator who is now Union Pacific’s
CEO, was not even interviewed even though he was available at the
time.
Jim Barber “has no experience in
the railroad industry or with rail operations and is not qualified
to be Norfolk Southern’s chief executive.”
- Mr. Barber has the support of several institutional investors
and is eminently qualified to be Norfolk Southern’s CEO:
- As COO of UPS, which has a more than $100 billion market
capitalization, Mr. Barber had direct P&L responsibility for
business segments with more personnel, revenue, assets and earnings
than Norfolk Southern.
- At UPS, Mr. Barber led transportation networks that used rail
to ship packages with higher on-time delivery rates than Norfolk
Southern currently achieves.
- The principles of the UPS scheduled network, which integrates
rail, are directly analogous to PSR.
- As a member of the Shareholder Slate, Mr. Barber played a
pivotal role in recruiting Mr. Boychuk, a respected railroader and
PSR expert, as COO candidate.
The Board states that “PSR expert
John Orr, our new COO, will accelerate the execution of our
balanced strategy.”
- In order to even have a chance of catching up to competitors’
superior operating efficiency, Norfolk Southern’s network must be
redesigned for balance, fluidity and right sizing the assets to
match the volume.
- Shareholder nominee Sameh Fahmy hired Mr. Orr as a consultant
at Kansas City Southern because Mr. Orr is a yard operations
expert.
- Mr. Orr’s first step as NSC COO was to reclassify two hump
yards.
- Despite the Company’s claims to the contrary, Kansas City
Southern’s Mexico operations deteriorated significantly under Mr.
Orr’s watch (and after Mr. Fahmy’s departure), as can be seen in
equity research notes and publicly available data.
- Mr. Orr has no experience with network redesign, and no
executive or board member at Norfolk Southern has experience to
guide him.
- In previous instances at Canadian Pacific, CSX and Union
Pacific, attempts to blend a non-PSR model with PSR led to
separation with the COO and subsequent replacement of the CEO.
The Board says Jamie Boychuk
“offers more downside for Norfolk Southern than upside” and that
“his track record as an operator is not inspiring.”
- The late Jim Foote, a legendary
railroader and Hunter Harrison’s successor as CEO of CSX, said the
following about Mr. Boychuk on April 4th:
- “Jamie was an exceptional partner to me
for many years, especially when I promoted him to operations chief
at CSX. He was a driving force behind our operational
transformation into a top-performing rail, thanks in large part to
him successfully implementing operational improvements that were
critical to generating strong efficiencies. He is one of the best
operators I’ve seen in the rail industry, and any Class I would be
fortunate to have him as COO.”
- As EVP of Operations at CSX, Mr. Boychuk led a variety of
operational initiatives enabling CSX to outperform Norfolk Southern
on every key railroading metric.
- CSX, Norfolk Southern’s closest competitor and the only other
Eastern Class I railroad, had a 120.3% total shareholder return
(13.3% annualized return) during Mr. Boychuk’s tenure from April
2017 to August 2023.
- 50.6% of that total return is attributable to the period when
Mr. Boychuk was COO.
- Other past accomplishments, which Mr. Boychuk can help
replicate at Norfolk Southern:
- Industry-leading Federal Railroad Administration personal
injury rate.
- Hundreds of millions of dollars in savings from reduced train
starts.
- Redesigned CSX’s rail network to improve balance and fluidity,
minimize touches and promote safety.
The Case for Changes in Strategy
The Board’s Contention
The Reality
Norfolk Southern’s “strategy is
about being flexible, disciplined, and supported by the right
resources.”
- Running a strategy that prioritizes two conflicting principles
– discipline and flexibility – has led to worst-in-class financial
and operational performance before, during and after the East
Palestine, Ohio derailment in February 2023.
- The Shareholder Slate’s plan entails doing the hard work up
front on a network redesign and subsequent PSR implementation so
Norfolk Southern can leverage operational improvements to grow
profitably over the long-term.
Norfolk Southern has done a
“successful implementation of a modern version of precision
scheduled railroading.”
- No Class I railroad has ever done a successful PSR
implementation without first redesigning its network.
- Norfolk Southern has not committed to redesigning its network,
nor does it have anyone within the organization who has led a
redesign of a network.
- As noted, the Shareholder Slate’s plan involves laying the
right foundation for growing profitably by first redesigning the
network and then proceeding to a well-communicated PSR
implementation.
The Shareholder Slate’s plan is
“not supported by the mathematical reality.”
- As clearly noted in the April 15th investor presentation, our
detailed business plan highlights $800 million in asset-related
cost savings.13 Our team thoughtfully and
carefully developed our estimates with a degree of conservatism,
leveraging our nominees and proposed management team’s expertise.
The estimates we have provided are purposefully meant to match PSR
implementations that they have completed in the past.
- A resilience model has never been attempted in the Class I rail
industry, and akin to its unprecedented nature, the asset
expense-saving opportunities are equally unprecedented. Excluding
the operating expenses associated with East Palestine, Norfolk
Southern has operating expenses that are $1.1 billion greater than
CSX on a rail-only basis. If our assumptions are so far off the
mark, why has OR worsened every quarter under Alan Shaw’s TOP|SPG
plan and why does a significant margin gap exist relative to
peers?14 To be explicitly clear, Norfolk Southern’s OR was ~780 bps
worse than CSX’s rail-only OR in FY2023. In 1Q24, the OR
differential ballooned to ~900 bps.
- Locomotives: Given that Norfolk Southern does not
disclose its in-service locomotive fleet like CSX, our team used
its best judgment to estimate the number of in-service locomotives
at ~3,200, which has been corroborated by multiple industry
sources.15 That said, if one believes the Company’s comments,
Norfolk Southern has ~2,800 in-service locomotives compared to
CSX’s 2,427. This would still imply Norfolk Southern has ~375 more
locomotives than CSX. Regardless of the starting point, the
opportunity still exists based on the following:
- Our detailed business plan calls for the removal of 450
locomotives representing a decline of ~15%. As of December 31,
2023, the gross book value of locomotives at Norfolk Southern was
~19% greater than at CSX. From 2016 to 2023, CSX’s gross book value
for locomotives decreased by $1.1 billion cumulatively. Over the
same time period, NSC’s locomotive gross book value increased by
$566 million. Independent of amortization schedules, CSX saw a
substantial reduction in locomotive book value, while Norfolk
Southern saw a substantial increase.
- Our estimated savings and the percentage decline from removing
450 locomotives is directly in line with reductions seen during
prior PSR implementations at CSX and KCS. CSX’s PSR implementation
resulted in locomotives being reduced from ~4,000 to ~2,300. Under
proposed director Mr. Fahmy, KCS removed >20% of its
locomotives.
- Norfolk Southern can also likely support having fewer engines
than CSX (i.e., even lower than the 2,427), given Norfolk Southern
is actually moving less merchandise volume and considerably lower
gross ton miles than CSX. In FY 2023, Norfolk Southern completed
2.2 million merchandise carloads, which is ~15% less than CSX’s
value of 2.6 million. In FY 2023, Norfolk Southern completed
336,100 GTMs, which is ~12% less than CSX’s GTMs of 381,300.16
This point becomes especially true
following our proposed network redesign.
- Lastly, we will be taking the oldest, least reliable and
highest failure locomotives out of the fleet, which are the most
expensive to maintain. This will likely result in a
disproportionately higher percentage in cost savings realized
relative to the percentage of locomotives removed from the
fleet.
- Cars On-Line: Our cars on-line figures are taken
directly from public data that is reported weekly by all the Class
I rails.17 Our detailed business plan calls for the removal of ~20%
of cars on-line which is directly in line with reductions seen
during prior PSR implementations, where the mix of car ownership
was not a factor in achieving the reduction and savings from the
removal of cars on-line.
- We believe Norfolk Southern’s contention is quite simplistic
considering there are multiple types of car categories including
Company-owned, shipper owned, car hire from other Class I rails and
TTX, and car leases. Improved car cycles from a complete network
redesign and PSR implementation will undoubtedly reduce all car
categories as demonstrated during the PSR implementations at both
CSX and KCS.
- For example, CSX was able to reduce the average weekly cars
on-line by 43%, from 207,907 in FY16 to 117,668 in FY19. CSX owned
83,306 cars in FY 2016 and owned 69,479 cars in FY 2019.
Despite this, CSX was able to cumulatively
remove 90,239 cars on-line.
- Ultimately, our team’s PSR implementation will significantly
improve the efficiency of the network, and with increasing velocity
and fluidity, we can move the same number of volumes with much
fewer cars on-line because we are turning the assets more
frequently and improving car cycle times. This will save customers
money as their shipping volumes will require fewer cars to handle
their inventory. This results in direct
savings to customers’ bottom lines.
- Reduction in gallons per kGTM: Our detailed business
plan calls for fuel efficiency improvement of 15%. We do not expect
to get to 15% improvement in fuel efficiency in 12 months, but
rather expect it to occur over 18-24 months. These assumptions are
supported by the following:
- Historically, CN, CP, CSX and KCS saw 8-10% improvements in
fuel efficiency in a short period of time as their PSR
implementations progressed. Norfolk Southern director Mr. Mongeau
would remember the significant fuel efficiency improvements that
were achieved by our proposed director, Mr. Fahmy, when he was
Senior VP at CN.
- Our proposed plan will result in storing the oldest and most
unreliable engines, which will dramatically improve fuel
efficiency. As of December 31, 2023, Norfolk Southern’s average age
for in-service locomotives is 28.5 years, which is 3.5 years
greater than CSX’s average age of 25 years.18
- Lastly, Norfolk Southern has ~15% fewer merchandise volumes and
~12% fewer gross ton miles than CSX. Also, Norfolk Southern has a
lower gradient across its network relative to CSX.
- The aforementioned factors combined should enable a
best-in-class fuel efficiency opportunity at Norfolk
Southern.
- Reduced switching costs from network redesign: Our data
for merchandise switches comes directly from the annual R-1 filings
and incorporates our adjustments to reflect out-of-route miles from
Norfolk Southern operations intentionally directing cars to large,
centralized hump yards (i.e., Bellevue and Macon) purely for
blocking cars independent of points of origination or
destination.19 Our team was able to remove over 200 million
out-of-route miles during the network redesign and subsequent PSR
implementation phases at CSX.
The Shareholder Slate’s “strategy
would require thousands of job cuts, put the franchise at risk, and
be detrimental to long-term shareholder value.”
- Class I railroads have a normal attrition rate of 7% to 8% per
year.
- The only headcount reduction anticipated in our detailed
business plan is an assumed 3% attrition rate.
- The incumbent directors’ regard for the franchise rings hollow
in light of their decision to give up Norfolk Southern’s
irreplaceable Meridian Speedway advantage to hire Canadian
Pacific’s Chief Transformation Officer.
- Our strategy will restore service to competitive levels and use
that competitive offering as a foundation to recover lost market
share and deliver sustainable growth, with every 18-22 new carloads
translating into a new job at the railroad.
- Using conservative assumptions, our plan is forecast to deliver
a $420 share price by month 36.
***
About Ancora
Founded in 2003, Ancora Holdings Group, LLC offers integrated
investment advisory, wealth management, retirement plan services
and insurance solutions to individuals and institutions across the
United States. The firm is a long-term supporter of union labor and
has a history of working with union groups and public pension plans
to deliver long-term value. Ancora’s comprehensive service offering
is complemented by a dedicated team that has the breadth of
expertise and operational structure of a global institution, with
the responsiveness and flexibility of a boutique firm. For more
information about Ancora, please visit https://ancora.net.
Advisors
Cadwalader, Wickersham & Taft LLP is serving as legal
advisor, with Longacre Square Partners LLC serving as
communications and strategy advisor and D.F. King & Co., Inc.
serving as proxy solicitor.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
The information herein contains “forward-looking statements.”
Specific forward-looking statements can be identified by the fact
that they do not relate strictly to historical or current facts and
include, without limitation, words such as “may,” “will,”
“expects,” “intends,” “believes,” “anticipates,” “plans,”
“estimates,” “projects,” “potential,” “targets,” “forecasts,”
“seeks,” “could,” “should” or the negative of such terms or other
variations on such terms or comparable terminology. Similarly,
statements that describe our objectives, plans or goals are
forward-looking. Forward-looking statements relate to future events
or future performance and involve known and unknown risks,
uncertainties, and other factors that may cause actual results,
levels of activity, performance or achievements or those of the
industry to be materially different from those expressed or implied
by any forward-looking statements. Norfolk Southern Corporation, a
Virginia corporation (“Norfolk Southern”), has also identified
additional risks relating to its business in its public filings
with the Securities and Exchange Commission (the “SEC”). Ancora
Alternatives LLC (“Ancora Alternatives”), and as applicable the
other participants in the proxy solicitation, have based these
forward-looking statements on current expectations, assumptions,
estimates, beliefs, and projections. While Ancora Alternatives and
the other participants, as applicable, believe these expectations,
assumptions, estimates, and projections are reasonable, such
forward-looking statements are only predictions and involve known
and unknown risks and uncertainties, many of which involve factors
or circumstances that are beyond the participants’ control. There
can be no assurance that any idea or assumption herein is, or will
be proven, correct. If one or more of the risks or uncertainties
materialize, or if the underlying assumptions of Ancora
Alternatives or any of the other participants described herein
prove to be incorrect, the actual results may vary materially from
outcomes indicated by these statements. Accordingly,
forward-looking statements should not be regarded as a
representation by Ancora Alternatives that the future plans,
estimates or expectations contemplated will ever be achieved. You
should not rely upon forward-looking statements as a prediction of
actual results and actual results may vary materially from what is
expressed in or indicated by the forward-looking statements. Except
to the extent required by applicable law, neither Ancora
Alternatives nor any participant will undertake and specifically
declines any obligation to disclose the results of any revisions
that may be made to any projected results or forward-looking
statements herein to reflect events or circumstances after the date
of such projected results or statements or to reflect the
occurrence of anticipated or unanticipated events.
Certain statements and information included herein have been
sourced from third parties. Ancora Alternatives does not make any
representations regarding the accuracy, completeness or timeliness
of such third party statements or information. Except as may be
expressly set forth herein, permission to cite such statements or
information has neither been sought nor obtained from such third
parties. Any such statements or information should not be viewed as
an indication of support from such third parties for the views
expressed herein.
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
The participants in the proxy solicitation are Ancora Catalyst
Institutional, LP (“Ancora Catalyst Institutional”), Ancora Merlin
Institutional, LP, (“Ancora Merlin Institutional”), Ancora Merlin,
LP (“Ancora Merlin”), Ancora Catalyst, LP (“Ancora Catalyst”),
Ancora Bellator Fund, LP (“Ancora Bellator”), Ancora Impact Fund LP
Series AA (“Ancora Impact AA”) and Ancora Impact Fund LP Series BB
(“Ancora Impact BB”) (each of which is a series fund within Ancora
Impact Fund LP) (Ancora Catalyst Institutional, Ancora Merlin
Institutional, Ancora Merlin, Ancora Catalyst, Ancora Bellator,
Ancora Impact AA and Ancora Impact BB, collectively, the “Ancora
Funds”), Ancora Advisors, LLC (“Ancora Advisors”), The Ancora Group
LLC (“Ancora Group”), Ancora Family Wealth Advisors, LLC (“Ancora
Family Wealth”), Inverness Holdings LLC (“Inverness Holdings”),
Ancora Alternatives, Ancora Holdings Group, LLC (“Ancora Holdings”)
and Frederick DiSanto (collectively, the “Ancora Parties”); and
Betsy Atkins, James Barber, Jr., William Clyburn, Jr., Sameh Fahmy,
John Kasich, Gilbert Lamphere and Allison Landry (the “Ancora
Nominees” and, collectively with the Ancora Parties, the
“Participants”).
Ancora Alternatives and the other Participants have filed a
definitive proxy statement and accompanying BLUE proxy card (the
“Definitive Proxy Statement”) with the SEC on March 26, 2024 to be
used to solicit proxies for, among other matters, the election of
its slate of director nominees at the 2024 annual meeting of
shareholders of Norfolk Southern.
IMPORTANT INFORMATION AND WHERE TO FIND IT
ANCORA ALTERNATIVES STRONGLY ADVISES ALL SHAREHOLDERS OF NORFOLK
SOUTHERN TO READ THE DEFINITIVE PROXY STATEMENT, ANY AMENDMENTS OR
SUPPLEMENTS TO SUCH DEFINITIVE PROXY STATEMENT, AND OTHER PROXY
MATERIALS FILED BY ANCORA ALTERNATIVES AS THEY CONTAIN IMPORTANT
INFORMATION. SUCH PROXY MATERIALS ARE AVAILABLE AT NO CHARGE ON THE
SEC’S WEBSITE AT WWW.SEC.GOV AND AT ANCORA ALTERNATIVE’S WEBSITE AT
WWW.MOVENSCFORWARD.COM. THE DEFINITIVE PROXY STATEMENT AND
ACCOMPANYING PROXY CARD WILL BE FURNISHED TO SOME OR ALL OF THE
COMPANY’S SHAREHOLDERS. SHAREHOLDERS MAY ALSO DIRECT A REQUEST TO
THE PARTICIPANTS’ PROXY SOLICITOR, D.F. KING & CO., INC., 48
WALL STREET, 22ND FLOOR, NEW YORK, NEW YORK 10005 (SHAREHOLDERS CAN
CALL TOLL-FREE: +1 (866) 227-7300).
Information about the Participants and a description of their
direct or indirect interests by security holdings or otherwise can
be found in the Definitive Proxy Statement.
1 Letter from the Federal Transit Administration to the
Honorable John Kasich, Governor of Ohio, on August 29, 2017. 2
Company press release entitled “Norfolk Southern presentation: We
are creating a safer, more profitable railroad with long-term
upside for shareholders,” dated April 18, 2024. 3 Public statements
from National Transportation Safety Board Chair Jennifer L.
Homendy. 4 Trains.com, “Norfolk Southern says CPKC merger threatens
Meridian Speedway intermodal business,” March 2, 2022. 5 Company
filings with the Surface Transportation Board (76.5% represents the
year-to-date average through April 12, 2024). 6 Company and Class I
railroad filings with the Surface Transportation Board. 7 Company
press release entitled “Norfolk Southern presentation: We are
creating a safer, more profitable railroad with long-term upside
for shareholders,” dated April 18, 2024. 8 Company press release
entitled “Norfolk Southern files preliminary proxy statement,
recommends shareholders vote for its director nominees,” dated
February 26, 2024. 9 www.OpenSecrets.org. 10 www.OpenSecrets.org.
11 Public communications from Transportation Trades Department,
AFL-CIO on February, 21, 2016 and March 8, 2024. 12 Based on a
review of conference and content programs, Norfolk Southern is a
financial sponsor of Railway Age, which has recently run
pro-Company material that includes “Norfolk Southern’s Alan Shaw
and John Orr: Rail Group on Air Podcast” (April 16, 2024), "Shipper
Survey Indicates ‘Significant Concern’ Over NS Takeover Attempt"
(April 7, 2024) and "NS: ‘Committed to Enhancing Safety, Aligning
Management With Shareholder Interests’" (March 4, 2024). Norfolk
Southern, when promoting Railway Age material, has not disclosed
its financial ties and its listed sponsorship of an upcoming
publication event. 13 Move NSC Forward: The Case for Operationally
Proficient Leaders and a PSR-Powered Scheduled Network, Slide
151 (April 15, 2024). 14 Move NSC Forward: The Case for
Operationally Proficient Leaders and a PSR-Powered Scheduled
Network, Slide 15 (April 15, 2024). 15 CSX 2023 10-K filing.
16 Company filings. 17 Company filings and Wolfe Research Class I
Rail Service Stats Summary. 18 NSC and CSX 2023 10-K filings. 19
R-1 Data,
https://www.stb.gov/reports-data/economic-data/annual-report-financial-data/.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20240422486533/en/
Longacre Square Partners Greg Marose / Joe Germani, 646-386-0091
MoveNSCForward@longacresquare.com
D.F. King & Co., Inc. Edward McCarthy 212-229-2634
MoveNSCForward@dfking.com
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