NS CEO Shaw at SEARS: Amid corporate crisis, we've delivered on safety, service and growth
3/5/2024
By Julie Sneider, Senior Editor
On Feb. 29, Norfolk Southern Corp. President and CEO Alan Shaw participated in a conversation with Georgia Chamber of Commerce President and CEO Chris Clark at the Southeast Association of Rail Shippers (SEARS) spring meeting in Atlanta. Clark asked Shaw to talk about NS’ strategy for growth implemented after Shaw became CEO in 2022; the recovery after the NS train derailment in East Palestine, Ohio, in 2023; and the ongoing activist shareholder effort to overhaul the NS board and replace Shaw and other top management at the company. Clark also asked Shaw for his take on economic trends affecting the rail industry overall and Norfolk Southern specifically.
A transcript of the conversation can be read here and NS posted a video of the conversation on its website, which can be viewed here.
Following is an edited version of the conversation.
CLARK: Share with us a little bit about what you and your team learned, the journey that you were on through 2023, what you’re proud of as you’ve come out of and what those key lessons have been.
SHAW: In 2023 we started implementing that new strategic vision for Norfolk Southern, which is a better way. It’s a better way for NS, it’s a better way in the rail industry. And it was a pivot from that near-term quarterly grind on just OR [operating ratio], where OR was the only focus. And it’s one where it’s a balanced approach . . . to drive long-term value for our customers, our employees, our shareholders and the communities we serve by balancing safe and reliable service, continuous productivity improvement and smart growth.
We started rolling that out. We faced a crisis with East Palestine and a crisis tests your resolve, and it reveals your character. We overcame a lot in 2023, and I’m really proud of how Norfolk Southern navigated this. We said we were going to make a safe railroad even safer.
And I looked outside of the industry and I looked for inspiration, and I hired a former admiral who used to run the Navy nuclear propulsion system. And I asked him to put together a team of folks with Navy nuke experience, reporting directly to me as an independent consultant to help us enhance safety.
We invested in technology to enhance safety in a partnership with the Georgia Tech Research Institute, we set up a next generation machine visioning train inspection portal that captures potential safety defects on a train as it passes through it that the human eye would never catch.
And we enhanced our safety culture and as a result, we delivered results. We delivered industry-leading improvements, and our train accident rate is down 42% last year. And mainline accidents were the lowest they’ve been since 1999.
CLARK: Wow.
SHAW: Yeah. We’re coming off of a pretty difficult labor negotiation as we entered 2023, and it was my goal to really engage with our workforce.
We were the first railroad to offer paid sick leave to all of our employees. And I’m proud of that. You can feel that cultural change when you go out into the field. And labor right now, my craft colleagues, are very interested in helping us drive improved service and improved productivity and growth.
We also reorganized our marketing department because we want to grow, and we know that the touchpoints that we have with our customers and our short line partners — we’re really proud to serve more short lines than any other railroad in North America.
We did the smart thing and we hired somebody from a short line — [a] chief marketing officer. We set up a first mile, last mile division within our marketing group to work with our customers and our short lines on improving productivity and looking at growth opportunities.
So, we really set the stage in 2023 for great things going forward.
CLARK: This change that you’ve undertaken at NS has been kind of called into question, there’s folks who have some dramatically different views about how to run a railroad. Tell us a little bit about why you chose this strategy. What were you looking at long term that said this is the path we need to go?
SHAW: I’m a finance guy. The math has to work for me. And I’m looking at the rail industry and I’m looking at an industry that is less expensive than truck, safer than truck, offers more capacity than truck, offers a sustainability advantage relative to truck.
But guess what? It doesn’t grow. And why doesn’t the rail industry grow relative to truck? Rails have historically underinvested in service and as a result, when they — whenever there’s an economic upturn, and there always is — rails never have the number of resources that we need.
"I believe that our strategy is the right way forward in the rail industry." — Alan Shaw nscorp.comAnd so, we would offer a lousy service product every two to three years and we’d miss all kinds of revenue upside, which would have provided a lot of value to our bottom line and our shareholders. So, we charted a new course where it’s more of a balance of investing in service, investing in productivity and investing in growth.
We’re confident that we can grow with that. We have a phenomenal franchise. You look at our franchise, we serve over 60% of the U.S. population. We serve over 50% of the manufacturing in the United States. We serve over half the U.S. light-vehicle production, and we serve more short lines than anybody else. So, we’ve got a very unique franchise that faces the fastest growing segments of the U.S. economy. Our strategy is designed to leverage that by bringing value to our customers and our shareholders.
CLARK: The other thing that you mentioned in this new strategy has been the safety component. ... Talk about that safety journey and obviously how last year impacted that and what that looks like moving forward.
SHAW: We accelerated our safety investments when I became CEO of Norfolk Southern in mid 2022. And then certainly in the aftermath of East Palestine we looked for additional opportunities. ... Norfolk Southern understands the role that we play in driving the economy and the communities that we serve. We take safety very, very seriously. And so, we’ve invested in safety. And as I noted earlier, we’re delivering results. You know, our mainline accidents, the lowest they’ve been in almost 25 years.
And we can get better. Right? That is the point. There’s no endpoint in safety. Right? You’re always looking for opportunities to get better. So, you always need to invest and you need to be extremely diligent in it. And to start the year in 2023, my chief operating officer held a series of town halls across the system with our operations leadership, and I went with him on a couple of those.
And his key theme there — and this was January of ‘23 — was everything starts with safety. That’s how we approach things.
CLARK: Let’s transition and talk about the elephant in the room. You guys are the target of an activist shareholder who wants to bring in new people, wants to bring in new operations strategy. STB Chair Marty Oberman is speaking a little bit later today. He said, quote, that he “believes that that could be harmful to the progress that NS and rail in general have made in the last year.”
And I think anybody that knows you knows that you’re a fighter, you’re fighting back against this. Tell the shippers in the room what they need to know about where you are in this particular journey and what that means for them over the long term.
SHAW: I’m fighting for what’s right. And I’m fighting for the industry. And frankly, I did that all last year. I think when we talk about where we are right now, let’s rewind to where we were about this time last year in the aftermath of East Palestine. You know, the rail industry had just come off a very protracted and contentious labor negotiation.
We had to repair our relationship with our craft colleagues who work 24 seven 365 in really difficult conditions. We had East Palestine, and I went through four Senate hearings — two state, two federal — in the span of about six weeks. We had immense scrutiny by our safety regulator, the Federal Railroad Administration, who called for a safety audit on Norfolk Southern.
The NTSB [National Transportation Safety Board] is still doing a report. And Secretary of Transportation [Pete] Buttigieg was asked on broadcast TV if he should shut down Norfolk Southern. That’s the position we were in. And we navigated that. That’s what good leadership teams do. We got Norfolk Southern through that. We protected the Norfolk Southern franchise. We protected our shareholders, and we protected the rail industry.
By the way, we reacted to this thing. And we enhanced safety, and we improved our relationships with our craft colleagues. We enhanced service. By the end of the year, our service and our intermodal franchise was the best it had been in over three years. If you take out COVID, it’s the best it had been since 2016. And we started to grow.
So, in the backdrop of navigating these immense, complex corporate crises, we delivered on safety, we delivered on service, we delivered on growth, all the while protecting the NS franchise, the industry and our shareholders.
Now we’re in a position where we can really start to focus on that continuous productivity improvement. I believe that our strategy is the right way forward in the rail industry. Now it’s a choice. Do we want to go back 10, 15 years where it’s just a grind on next quarter’s operating ratio? Or is it one in which we say there’s a lot of growth prospects out here if we work closely with our customers, with our craft colleagues, with our regulators and grow?
Now we’ve got to get our margin profile right. So, our strategy is about delivering top-tier EPS and revenue growth with industry competitive margins. Ultimately, shareholders want companies that can grow, right? And that’s what we’re delivering.
CLARK: The top message here to the shippers is business as usual. You’re plowing ahead, continuous improvement.
SHAW: That’s exactly right. We’re focused on delivering on this strategy. We’ve gotten great support from the shipper community throughout this. We’ve gotten great support from other railroads throughout this and from regulators and from our craft colleagues. Think about what kind of odd coalition that is. When you can pull together customers and regulators and labor right on the heels of a really difficult labor negotiation. ...
That tells you that we’re doing the right things. That tells you that we protect the NS franchise, that tells you that we protected our shareholders and the industry. And we’ve got a great path going forward.
CLARK: Talk to me about your thoughts on the macro-economic environment that you’re in right now and for the future.
SHAW: The macro environment and our footprint in the Southeast area that’s represented by SEARS is one of the reasons that we have the confidence to lay out this strategy and break away from the herd.
If you take a look at some of the macro drivers that are driving business towards rail, ... think about the proliferation of e-commerce. And yet everyone thinks — appropriately so — of e-commerce as that UPS or that FedEx van or Amazon vans snaking through your neighborhood. But most people don’t realize how rail intensive e-commerce is. It’s four times more rail intensive than traditional brick and mortar. So that package that’s being delivered to your front door probably moved on a Norfolk Southern train from Chicago to Atlanta.
That’s a growth opportunity for us. I talked a little bit earlier about sustainability. That’s becoming more and more important to our customers. Rail is four to seven times more sustainable than truck. And you think about onshoring, right? ... Its people are building factories and facilities in the United States because of access to talented labor, because of a logistics infrastructure that’s already in place and because of cheap and reliable energy.
And then you overlay that with our footprint. Eight of the top 10 states for doing business are just represented by SEARS and they’re in our region. Of course, Georgia is number one. ...
I think there’s a lot of upside here, particularly in the Southeast. I firmly believe we’re in a manufacturing supercycle. Broadly speaking, around the globe, there’s about $650 billion in factory builds last year, but $200 billion of that was in the United States. And a lot of that is in the Southeast. We talk about the battery belt, which reaches from Michigan and Indiana through Tennessee and Alabama and into Georgia. ...
And the Southeast is the fastest growing region in the U.S., right? It grew by 1.3 million people last year alone, and the wealth in the Southeast grew by $100 billion. So, we’re right in the middle of that.
CLARK: Talk about driving value. Let’s talk about sustainability for a minute. Talk about how you’re helping a lot of the customers in this room meet [their] emissions targets and programs.
SHAW: Take a look at Norfolk Southern’s network. We estimate that every year we remove 15 million tons of carbon from the air by shifting stuff from truck to rail. And then that also removes about 10 billion truck miles a year. ...
We provide solutions to markets. Rails don’t dictate markets. Rails anticipate where markets are headed and rail provides solutions. About four or five years ago ... customers really started talking to us about the importance of sustainability. As I’ve noted, we’re four to seven times more carbon friendly than truck.
So, with 25 to 30% of our customers already announcing carbon reduction goals, we’re a big component of reducing their Scope 3 emissions. They want transparency with that ... so we’ve put a carbon calculator on our website that lets them estimate the carbon savings associated with shifting from truck to Norfolk Southern from any number of origins and destinations depending upon the equipment type and depending on the commodity.
For folks who ship with Norfolk Southern, we’re able to give them a report that shows truck miles saved, carbon tons saved by shipping on Norfolk Southern. So we’re part of the solution here.
CLARK: Let’s keep looking in the future a little bit. We’ve talked about AI — I’d love just your perspective. What does the path look like for the next 10 years for the rail industry and particularly for Norfolk Southern?
SHAW: You know, I think there’s a lot of opportunity. Let’s go back. About 12 years ago, 35% of our revenue came from coal. And more than that in terms of profits. So, we’ve had a phenomenal transition on our top line. And we’ve done it by facing the markets and going to where the markets are headed.
And markets are heading to a more consumer-oriented, truck competitive service product. And that’s what we’re delivering. We do that in the East, where population centers are about 800 miles apart. There’s a lot of business that can transfer back and forth on a daily basis between truck and rail.
Now, every customer in this room wants to ship rail every single day. And really, it comes down to whether or not rail is giving the customer a good service product. That’s not only the physical delivery of the goods, but it’s also layering on top a best-in-class, consumer-oriented customer experience. Because that’s what we’re used to in our daily lives. We are a B2B company, but our customers are used to a B2C experience.
So, that’s what we’re investing in. You can see that in intermodal, but it also happens in the merchandise network as well. A boxcar or gondola or a multilevel — there’s a lot of opportunity to pull trucks off the highway and that’s why we’re taking a balanced approach to service, productivity and growth to drive long term shareholder value.
