By Julie Sneider, Senior Editor
In one of the company's first presentations since the May 9 vote by Norfolk Southern Corp. shareholders to reject activist investor Ancora Holdings Group LLC’s campaign to overhaul the company’s board and replace executive leadership, NS Executive Vice President and Chief Operating Officer John Orr yesterday spoke at the Wolfe 17th Annual Global Transportation and Industrials Conference. Orr joined NS on March 20 to oversee railway operations, including safety, transportation, network planning, engineering and equipment maintenance.
During his four-decade career, Orr earned the reputation as a leader in applying scheduled railroading principles to drive long-term value create, NS officials said in a press release announcing his appointment. Previously, Orr spearheaded a turnaround of Canadian Pacific Kansas City's Mexico operations by implementing a high-efficiency operating model; shaped and guided Kansas City Southern's service-focused scheduled railroading initiatives; and drove improvements in CN’s safety and operational performance.
In his Wolfe presentation, Orr reviewed what he’s been up to since March to close the company’s financial and performance gap with its peers.
Following are edited excerpts of the presentation, which included a question-and-answer session with an event moderator.
ORR: The last couple of months have been an exciting time at NS. The team has been busy; it hasn't been distracted from the mission, which is to increase service capabilities. Some of the key measures give me leading indicators that we're making headway. It's a journey; it's always going to be a work in progress, but there are going to be milestones that I look at to make sure that we're on track.
MODERATOR: Let's start at a high level: What’s the big-picture diagnosis of what was missing at Norfolk Southern? We see the network updates [on the slides] of what's happening, but what are you doing to accomplish some of these changes?
ORR: Great question. That’s something I asked myself the minute I walked through the door at NS for the first time: How do I look at this? Because it's a great network, it's a big network and it's underperforming. Where are the big buckets of underperformance?
So, [there are] two elements: First and foremost, the physical execution of our service plan; and the capability of leaders to drive performance, hold accountability and have enough perspective to continuously adjust the service plan to fine-tune to the current need.
One of the first things that I did — after diving into the data sets — was realize that our merchandise business was the biggest opportunity for improvement. ... I would say in simplest form that merchandise was dragging, terminals were underperforming and the accountability and visibility to make the changes were lagging. Resetting expectations and providing the organizational support and impetus for change around those things and then really driving that — that's what helped drive some of the improvements that we've seen so far.
MODERATOR: When [you] say merchandise was underperforming, terminals were underperforming: What are [you] doing to change that? What are the metrics key performance indicators that you're looking at every day?
ORR: There are checks and cross checks. From a terminal [perspective], our commitment to our customers is to run a plan that is predicated on on-time performance. So, on-time performance for train departures and how the trains arrive at the destination are two important look-ins. Within that, terminal dwell helps us understand that it’s one thing to say that we're going to run everything on time, but if we're going to run everything on time and not connect the traffic that needs to connect that day, then we are under-using our assets. So, on-time performance, dwell, connections, car miles per day and GTMs [gross ton miles] per available horsepower — if the other things are lining up and improving, that tells you that ... the mechanisms of delivering within the terminals is working because all those other things are in line.
If you didn't, then you could say OK, we're not connecting on traffic, we're not processing. Are we not flat-switching or humping enough cars? Why not? Is it mechanical? Is it engineering? And how do we coordinate that? We’ve had to ask those questions at every terminal, and not every terminal had the same answer.
[Editor’s note: Since joining NS, Orr set up a “war room” and task force at the NS Network Operations Center to assess network-wide resource utilization and come up with ways to drive out waste.]
So, having the war room and the task force create the playbook and the standards takes all of these things, unifies our standards and obligations in the terminals and now we've got more energy around all of the right things in place.
MODERATOR: Give us an update on the redesign of the network in the South and in the North.
ORR: After fixing the terminals and improving terminal clocks on the flows in and out of the terminals, we're able to put more context around a North-South orientation. So, we've redesigned the train service plan for the south end of the network. We did that three weeks ago.
We're running a reinvigorated plan on the North. At the end of May, we are introducing the next phase, so the northern part of it, and we want to have time for the balance to take hold to see how the network responded to the changes. It's working. The North is running very well right now; it's probably the strongest it's ever run over the past five to 10 years.
MODERATOR: The second-quarter metrics are through your [April 21] earnings call. Do you think [NS] is making incremental progress as Q2 is progressing?
ORR: You know it's not linear, there will be ebbs and flows. Our objective is ... create as much stability as possible within a dynamic environment. I would tell you this: The asset efficiency is tracking on a linear path and improving. Car-miles per day, and maybe a little GTMs per horsepower, are tracking in the right direction.
We've had some of the best intermodal composite performance over the past two months that we've seen in almost a decade, and that's pulling back some of the behavior over the road and creating more balance for our merchandise. That’s made possible only by terminal engagement and ensuring that first- and last-mile are efficient.
Terminal dwell, as we work through the master plan and playbooks, that's going to vary. And it's really conditioned on the cycles, but I would say I’m impressed by what we're doing so far.
MODERATOR: Six months from now, if we want to measure success, where do each of these metrics need to be for you to hit some of the cost and productivity targets that you're laying out?
ORR: I would look at asset efficiency because that tells you that you’re going fast but that you’re also doing something with that speed. So, as car-miles per day increases go, we've talked about a modest double-digit improvement on that. I would say I’ll be looking at the team with a smile on my face if we hit 115 on car-miles per day. Then I’ll say to the team: Now we're going higher to 120 or 125, and how do we get there together? And that's a function of curtailing the number of cars that are on the network as well as making them work very effectively.
Our GTMs per available horsepower, that's an important measure for me. Locomotives are an important asset; they are expensive to maintain. We've been able to pull out underperforming locomotives, either from a reliability or from a fuel-consumption standpoint. Pulling out those in favor of a more favorable mix gives the locomotive team the time to get into the reliability index on the stuff we're pulling out and then allows us to recondition our view on capital. So, in the next six months or a year, as these come into play, that asset efficiency is something I’m going to be dialed into completely.
MODERATOR: You talked about crew starts down 35 per day. Is there more to go?
ORR: I’d say more to go. It depends on how you look at it. When the crew start is because of a re-crew, that is a very wasteful use of a crew. So, we've made a lot of headway on that. We have a subgroup on the task force in Atlanta that's solely focused on mechanical and all of the reasons why a train stops.
MODERATOR: To date, you're saying about 35 crew starts per day and you're saying that could get to about a 100 crew starts per day in terms of reduction. When you think about past PSR implementations, one of the big things people think about is headcount. Explain what a reduction of 100 crew-starts per day means from a headcount perspective or if it makes more sense from a labor cost perspective.
ORR: Labor cost perspective is how I'm viewing it. As I've said over the past six weeks, this is not a headcount reduction exercise. NS had the implementation of PSR to various degrees over the past three or four years. The issue is how do we create accountability around how we use people; how they are adding value and contributing to the top-end growth of our company and the course correction that we need to close the gap on our financials.
MODERATOR: What about hump yards? In some prior PSR implementations, we've seen reductions and changes in hump yards. Is that part of this?
ORR: Everything is part of it; everything is on the table. ... Hump yards are very modern at NS; they are great work centers. But hump yards are costly. So, if you're getting volume and the right mix and value proposition for upstream or downstream cost savings, then it makes sense to have them. And that's all in play right now.
MODERATOR: You talked about $250 million cost reduction in the first six months. Are you on track?
ORR: Yes, I am really pleased how we're tracking on cost takeout.
MODERATOR: You guys did a 70% operating ratio in Q1. The guidance is for a 65% to 66% for the second quarter. Do you feel you’re on track?
ORR: Yes, I’m really pleased on where we're tracking, and I think our guidance is solid.
MODERATOR: And a similar answer on the back-half-of-the-year guidance?
ORR: Yes, because one of the exciting things is that volume and revenue looks like it’s going to pick up steam in June, and then carry through the year.
[Editor’s note: Below, Orr talks about getting service back on track following the sudden closure of the Port of Baltimore on March 26. NS is one of the two Class Is that serve the port, which closed after a massive container ship struck the Francis Scott Key Bridge, causing it to collapse.]
I’m really excited to get Baltimore back on track because that was a significant headwind, and the team responded really well. We pivoted within 12 hours; we moved our whole supply chain to start feeding Norfolk [the Port of Virginia]. That headwind goes away when Baltimore picks back up and we proved how much capacity we have at [the NS] Lambert's Point [Yard]. And I’ve challenged the marketing team to fill that back up.
MODERATOR: What is the timeline in terms of the new Norfolk Southern board and when we learn who the new chairman is?
ORR: Friday [May 24] is the first meeting with the board. At that time, the board chairman will be selected as well as the committee chairs.
MODERATOR: How do you as one person think about undergoing a culture change at a company?
ORR: When [NS President and CEO Alan Shaw] and I met in the days or hours before I came to NS, we talked about leadership, the need for change and the value of respecting the history and culture at NS. But, also, the glaring case for change. I’ve taken that approach all through it. I didn't have to ask Alan for the authority to make decisions for operations. He was very overt in his willingness and ability to give me that support. ...
The people we have coming in to support the some of the leadership needs that the organization has to stimulate these results — but also to imbed the culture of operational and service excellence — are being well supported by the board, by Alan and the leadership team.
