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Norfolk Southern's earnings offer railroad chance to defend its strategy ahead of control vote

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Norfolk Southern's earnings offer railroad chance to defend its strategy ahead of control vote
News

News

Norfolk Southern's earnings offer railroad chance to defend its strategy ahead of control vote

2024-04-25 03:19 Last Updated At:03:20

Norfolk Southern’s first-quarter earnings report Wednesday gave the railroad the opportunity to publicly defend CEO Alan Shaw’s strategy again before investors decide on May 9 whether to back him. Since the railroad already preannounced its disappointing results earlier this month when it disclosed a $600 million settlement over the disastrous February 2023 Ohio derailment there were few surprises in Wednesday’s numbers.

Norfolk Southern confirmed the $53 million, or 23 cents per share, that it earned in the first quarter. Without the settlement and some other one-time costs, the railroad said it would have made $2.39 per share while Wall Street was predicting earnings of $2.60 per share. The Atlanta-based railroad’s profit dropped from $466 million, or $2.04 per share, a year ago even though the railroad delivered 4% more shipments during the quarter.

“Our strategy is about balancing service, productivity and growth with safety at its core,” Shaw said, and he promised to close the profit margin gap with other major railroads over the next couple of years though several analysts have expressed doubts about whether Norfolk Southern will be able to do that as all the other railroads keep improving.

The railroad and Ancora Holdings disagree over whether Shaw ’s strategy of keeping more workers on hand during a downturn to be ready to handle the eventual rebound is the best way to run Norfolk Southern and whether he is the best man to lead the railroad.

Ancora's CEO candidate, Jim Barber, was formerly UPS’ chief operating officer and said keeping more workers on hand during slower times is wasteful.

“This concept of Precision Scheduled Railroading is the exact same way that UPS has run its network for 60 or 70 years, which is you run it very efficiently, very effectively, and very balanced with as few assets as you can and leverage the efficiency of your employee base and the assets,” Barber said in an interview with The Associated Press.

All the railroad unions, which have been complaining about the deep job cuts since PSR became the industry’s standard operating model, came out in support of Shaw even though Norfolk Southern has also cut workers. And key regulators at the Surface Transportation Board and Federal Railroad Administration warned that Ancora’s strategy could jeopardize the advancements in safety and service Norfolk Southern has made since the East Palestine derailment.

But control of the railroad will ultimately be decided by investors — not the unions or regulators — who will vote on Ancora’s seven board nominees, and investors have reason to be disappointed in Norfolk Southern’s results given that the railroad’s profit margins have lagged behind peers. Several big investors, including EdgePoint Investment Group that ranks in the top 10 of the railroad’s shareholders, have said they will back Ancora’s slate, and a Deutsche Bank analyst said in a research note that the activists seem to have strong support among institutional investors.

Barber and Ancora’s pick to be chief operating officer argue that Norfolk Southern needs to aggressively implement the lean Precision Scheduled Railroading model to make the best use of its locomotives and crews and bring its profits in line with the other major freight railroads. That model calls for running fewer, longer trains on a tighter schedule and switching cars less often, so the railroad won’t need as many workers, locomotives and railcars.

If keeping more workers on hand was really the answer, Barber and the man Ancora wants to be Norfolk Southern’s Chief Operations Officer, Jamie Boychuk, questioned why Norfolk Southern can’t deliver more shipments on time now while business remains slower. The railroad said Wednesday that during the first quarter, it delivered 86% of the shipping containers it handled and about 76% of all the other goods on time. Norfolk Southern predicted that would improve in the second quarter, but its nearest competitor in the East, CSX railroad, was already significantly better.

Ancora wants to shrink Norfolk Southern’s workforce by about 1,500 jobs through attrition over the next three years while working to cut more than $800 million in expenses in the first year, and another $275 million by the end of three years.

Norfolk Southern says there’s no way to save that much in a year without laying off about 2,900 workers. The railroad said it believes the steps Ancora has outlined would only save about $400 million in the first year. Norfolk Southern has predicted that its own plan will generate that much cost savings within two years.

In one example of the dueling letters and presentations to investors, Ancora replied to that criticism and said most of its initial $800 million in projected savings come from things like parking hundreds of unneeded locomotives and thousands of railcars and improving fuel efficiency — not from layoffs.

Boychuk has experience helping CSX implement Precision Scheduled Railroading after a different investor group pressured that railroad to hire industry legend Hunter Harrison in 2017. That led to all kinds of service problems that year when CSX overhauled its operations quickly in the last few months of Harrison’s life, but since those initial problems CSX has come to be regarded as the industry leader in most respects and routinely outperforms Norfolk Southern in the eastern U.S.

Boychuk and Barber have promised to implement the model more gradually at Norfolk Southern, but they say major changes are needed — not the incremental adjustments the railroad is making under new Chief Operating Officer John Orr that it paid CPKC railroad $25 million to get the right to hire this spring.

Orr touted his background at other railroads and the efforts he has made in the first month on the job to streamline the way Norfolk Southern's railyards are working.

But Boychuk said improving the way individual railyards operate without reworking the entire network will just push the problems out somewhere else along the railroad.

“It’s not about a point here, a point there. Or because I massaged a yard,” Boychuk said.

Norfolk Southern shares fell more than 3.5% Wednesday to trade around $236 after the report. Ancora predicts shares will reach between $420 and $525 over the next three years if it implements its plan.

Regardless of how the vote ends up, the fight over Norfolk Southern has already put all rail CEOs on notice, and the industry already had a history of investors forcing changes. Just last year, Union Pacific hired a new CEO in response to pressure from a hedge fund, but the most famous examples were when CSX and previously Canadian Pacific both hired Harrison to implement Precision Scheduled Railroading.

Current CSX CEO Joe Hinrichs knows he has to keep costs in line while also trying to improve customer service and grow the railroad.

“I think the way to bring those two together is to continue to deliver efficiency while demonstrating the ability to serve customers. And that’s the balance we’re trying to achieve and what we’re focused on,” Hinirchs said. “I think when you can’t achieve that, like we’ve seen, people are going to push for improved cost performance, to improve margins. And so we talk very openly and actively with our team about that.”

FILE - A Norfolk Southern freight train runs through a crossing on Sept. 14, 2022, in Homestead, Pa. Norfolk Southern reports earnings on Wednesday, April 24, 2024. (AP Photo/Gene J. Puskar, File)

FILE - A Norfolk Southern freight train runs through a crossing on Sept. 14, 2022, in Homestead, Pa. Norfolk Southern reports earnings on Wednesday, April 24, 2024. (AP Photo/Gene J. Puskar, File)

PARIS (AP) — The Syrian soldiers came first, at night, for the son, Patrick, a 20-year-old psychology student at Damascus University, and said they were taking him away for questioning.

They came back the next night for his father, Mazen.

Five years later, in 2018, death certificates from Syrian authorities confirmed to the Dabbagh family that the French-Syrian father and son would never come home again.

In a landmark trial, a Paris court will this week seek to determine whether Syrian intelligence officials — the most senior to go on trial in a European court over crimes allegedly committed during the country's civil war — were responsible for their disappearance and deaths.

The four-day hearings, starting Tuesday, are expected to air chilling allegations that President Bashar Assad's government has widely used torture and arbitrary detentions to hold on to power during the conflict, now in its 14th year.

The French trial comes as Assad has been regaining an aura of international respectability, starting to shed his long-time status as a pariah that stemmed from the violence unleashed on his opponents. Human rights groups that are parties to the French case hope it will refocus attention on the alleged atrocities.

Here's a look at those involved:

— Ali Mamlouk, former head of the National Security Bureau overseeing Syrian security and intelligence services. Allegedly worked directly with Assad. Now in his late 70s.

— Jamil Hassan, former Air Force intelligence director. Survivors testifying in the case allege having seen him at a detention center in the capital, Damascus, where the Dabbaghs are thought to have been held. In his early 70s.

— Salam Mahmoud, in his mid-60s, a former investigations official at a Damascus military airport believed to house the detention center. Mahmoud is alleged to have expropriated the Dabbaghs' house after they were taken away.

The three men are accused of provoking crimes against humanity, giving instructions to commit them and allowing subordinates to commit them through the alleged arrest, torture and killing of the father and son. They also are accused of confiscating their house and of putting Air Force intelligence services at the disposal of people who allegedly killed them.

The accused are being tried in absentia. French magistrates issued arrest warrants for them in October 2018, despite acknowledging that there was little likelihood of their extradition to France. Defense lawyers will not represent them and French magistrates determined they don't have diplomatic immunity.

“The three people accused are very senior officials of the Syrian system of repression and torture. This gives a particular tone to this trial. They are not small fish,” said Patrick Baudouin, a lawyer for rights groups involved in the case.

“The legal file is very detailed, full of evidence of systematic, very diverse and absolutely monstrous torture practices," Baudouin said.

Patrick and Mazen Dabbagh had dual French-Syrian nationality, which enabled French magistrates to pursue the case. The probe of their disappearance started in 2015 when Obeida Dabbagh, Mazen's brother, testified to investigators already examining war crimes in Syria.

Obeida Dabbagh lives in France with his wife, Hanane, and is also a party in the case. According to the trial indictment, seen by The Associated Press, he told French investigators that three or four soldiers came for Patrick around 11 p.m. on Nov. 3, 2013, during the height of Arab Spring-inspired anti-government protests that were met by a brutal crackdown. The soldiers identified themselves as members of a Syrian Air Force intelligence branch. Obeida also testified they searched the house, taking cellphones, computers and money.

They came back the next night for Mazen Dabbagh, who was 54 and worked as a counselor at a French high school in Damascus, and also took his new car, the brother said.

Their death certificates said Patrick died Jan. 21, 2014, and Mazen on Nov. 25, 2017, but didn't say how or where.

French investigating magistrates collected evidence from those who deserted the Syrian government and military, and prison survivors as they built the case.

Testifying anonymously, survivors' accounts speak in the indictment of rape and of being denied food and water; of beatings on the feet, knees and elsewhere with whips, cables and truncheons; of electric shocks and burnings with acid or boiling water; of being suspended from the ceiling for hours or days.

Investigators also studied images provided by a Syrian policeman, who anonymously turned over photographs of thousands of torture victims.

Cameras are generally banned from French criminal trials, but this one will be filmed for historical record.

In a separate investigation, French magistrates have also targeted President Assad himself but face questions about whether he benefits from presidential immunity.

Magistrates are investigating chemical weapons' attacks that killed more than 1,000 people and injured thousands of others in the suburbs of Damascus in 2013. They issued international arrest warrants for Assad, his brother Maher Assad, commander of the 4th Armored Division, and two Syrian army generals — Ghassan Abbas and Bassam al-Hassan — for alleged complicity in war crimes and crimes against humanity.

The French probe was opened in 2021 in response to a criminal complaint by attack survivors. The investigation is being conducted under the principle of universal jurisdiction, which argues that in some cases, crimes can be pursued outside the countries where they take place.

The Syrian government and its allies have denied responsibility for the attacks.

The French warrants, very rare for a serving world leader, were seen as a strong signal against Assad’s leadership at a time when some countries have welcomed him back into the diplomatic fold. Victims' lawyers hailed the warrants as “a crucial milestone in the battle against impunity.”

The Paris appeals court is weighing whether Assad has absolute immunity as head of state. French prosecutors asked it to rule on that question at a closed hearing May 15.

That procedure does not impact the warrants for Assad’s brother and the generals.

In March, Swiss prosecutors indicted Rifat Assad, the president’s uncle and a former Syrian vice president, for allegedly ordering murder and torture more than four decades ago to crush an uprising by the Muslim Brotherhood, an Islamist movement, in the city of Hama, where thousands were killed.

A court in Stockholm put a former Syrian army general who lives in Sweden on trial in April for his alleged role in war crimes in 2012.

Courts in Germany found two former Syrian soldiers guilty in 2021 and 2022 of crimes against humanity. One was sentenced to life imprisonment, the other to 4 1/2 years for complicity. They had claimed refugee status in Germany before former detainees recognized them there. They were tried under the principle of universal jurisdiction.

Surk reported from Nice, France. Associated Press writer Kareem Chehayeb in Beirut contributed to this report.

FILE - In this photo released on Nov. 9, 2019 by the Syrian official news agency SANA, Syrian President Bashar Assad speaks in Damascus, Syria. In a landmark trial, a Paris court will this week seek Tuesday May 21, 2024 to determine whether Syrian intelligence officials were responsible for Patrick and Mazzen Dabbagh's disappearance and deaths. The hearings are expected to air chilling allegations that President Bashar Assad's regime has widely used torture and arbitrary detentions to keep power in Syria's civil war. (SANA via AP, File)

FILE - In this photo released on Nov. 9, 2019 by the Syrian official news agency SANA, Syrian President Bashar Assad speaks in Damascus, Syria. In a landmark trial, a Paris court will this week seek Tuesday May 21, 2024 to determine whether Syrian intelligence officials were responsible for Patrick and Mazzen Dabbagh's disappearance and deaths. The hearings are expected to air chilling allegations that President Bashar Assad's regime has widely used torture and arbitrary detentions to keep power in Syria's civil war. (SANA via AP, File)

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