Good morning, and welcome to Norfolk Southern's Conference Call. Participating on the call this morning is Jim Squires, Norfolk Southern's Chairman, President and CEO. We will begin the call with some prepared remarks and we will then open the call for questions. At this point, we do have all of your lines unmuted or listen only mode. After the speakers' remarks, there will be a question and answer session.
The call has concluded. At this time, I would like to introduce Katie Cook, Norfolk Southern's Director of Investor Relations. Please go ahead.
Thank you, Jackie, and good morning. Before we begin today's call, I would like to mention a few items. First, the slides that will be referenced during the presentation are available on our website at northusouthern.com in the Investors section. Additionally, transfers and downloads of
today's call will be posted
on our website. Please be advised that during this call, we may make certain forward looking statements. These forward looking statements are subject to a number of risks and uncertainties and our actual results may differ materially from those projected. Please refer to the forward looking statements on Slide 2 of our presentation and in our annual and quarterly reports filed with the SEC for a full discussion on those risks and uncertainties we view as most important. Now, it is my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Spire.
Thank you, Katie. Good morning, everyone, and thank you for joining us on such short notice. As you saw in our press release issued earlier this morning, Norfolk Southern's Board of Directors has unanimously rejected Canadian Pacific's premium, non binding, highly conditional indication of interest. Norfolk Southern's Board thoroughly reviewed Canadian Pacific's unsolicited indication of interest in consultation with our financial and legal advisers. The Board determined that the proposed transaction is grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome and is not in the best interest of the company and its shareholders.
As I will outline on this morning's call, Norfolk Southern, by successfully navigating macroeconomic headwinds and capitalizing on growth opportunities is creating sustainable value for shareholders. The Board believes the Canadian Pacific's proposed transaction is opportunistically timed to take advantage of a North Southern market valuation that has been adversely impacted by the challenging commodity price environment. The indication of interest grossly undervalues the significant infrastructure investments that Norfolk Southern has made and does not reflect the upside we expect to realize from the operating initiatives that the company is implementing. As a new CEO, I've got a new management team in place. They are strong and laser focused on identifying additional growth and cost saving opportunities, which represent only upside to our plan.
In short, the Board is confident that the continued execution of our strategic plan delivers substantially more value to Norfolk Southern shareholders than Canadian Pacific's proposal without the significant regulatory risk, delay and disruption. Turning to Slide 4, I'll begin with an overview of the North and Southern franchise. Our railroad operations connect businesses to the marketplaces of the world. We are safe, efficient and capable transporters of raw materials, intermediate and finished goods for all manner of shippers and receivers. We serve approximately 77% of the U.
S. Population, ship materials that account for 55% of total U. S. Energy consumption, and our network reaches 65% of U. S.
Manufacturing. We also operate the most extensive intermodal network in the East, which generates about half of our volume. We estimate that more than 50,000,000 long haul truck shipments transit our service area annually. With extensive port access, our vast network helps facilitate international trade. Overall, our vision for value creation is clear.
We strive to be the safest, most customer focused and successful transportation company in the world. That's what drives value for Air Force. Slide 5 provides additional detail on our network. We cover most of the densely populated Eastern U. S.
Spanning 22 states and extending over 20,000 route miles. We provide service to 59 intermodal terminals in 36 markets, with no dock and near dock rail services at every major port on the East Coast. We work in close partnership with the shipping lines that are adding capacity between the Far East and the East Coast. Our efficient and extensive intermodal franchise meets the wide range of needs of our diverse customer base. Norfolk Southern serves 25 seaports, 10 river ports and 9 Great Lakes ports where we handle not only international intermodal freight, but break bulk and bulk freight as well.
In automotive, we directly serve more auto assembly plants than any other railroad and 35 vehicle distribution facilities. And our merchandise customers have access to 32 bulk transfer facilities in 17 states. Importantly, we have connections with 254 short line partners to expand our market reach. These unique attributes and capabilities enable us to provide excellent service to our existing customer base and efficiently accept break as demand from new industries and products emerges. Let me turn now to Slide 6 to provide a high level overview of our strategic plan and why North and Southern is well positioned for long term growth and to maximize shareholder value creation.
We are confident in our ability to deliver superior shareholder value through the continued execution of our strategy, focusing on delivering efficient service to build a more profitable franchise based on price and volume, promoting growth to secure our position as a market leader, increasing ROE and increasing returns on capital to strengthen our financial performance. Northern Southern's operating model is focused on providing superior customer service while continually improving performance. At the same time, we are implementing a number of efficiency improvements, including actions to manage headcount, increase locomotive productivity and integrate technological innovations. We are promoting revenue growth by continuing to optimize pricing and increasing margins from service sensitive traffic, proactively responding to emerging market trends and increasing volumes by pursuing highway to rail conversion with minimal incremental investment. Finally, we are pursuing a disciplined capital allocation strategy while investing appropriately in our network.
We are promoting effective utilization of existing assets, properly sizing the capital budget as a percentage of revenues, rationalizing non core assets and continuing our disciplined return of capital to shareholders. Slide 7 provides detail regarding our near term and long term operating and financial plans to deliver volume growth, optimize pricing and deploy capital in a disciplined manner. We are dedicated to creating value for our shareholders and are optimistic about our financial outlook. Specifically, with regard to the operating ratio, we expect to achieve a sub-seventy percent OR in 2016, with additional improvement over the 5 year period to a below 65 OR by 2020. Improving density and turnover to maximize asset utilization lifts earnings to yield double digit compound EPS growth throughout this period.
Focus on asset utilization results in lower capital expenditures. In 2016, we expect to reduce capital spending to $2,100,000,000 and after 20 eighteen's conclusion of PTC implementation, 17% of revenues. The culmination of these actions will result in continued significant returns to shareholders. In short, Norfolk Southern is well positioned to deliver compelling value. Now I'll provide a deeper dive into the key initiatives under our strategic plan.
Turning to Slide 9. Rail industry is facing significant challenges and opportunities that have demanded a deliberate approach to building long term value. We are currently seeing the same commodity and strong dollar challenges as in the 1st 9 months of the year. Coal markets are undergoing structural changes as a result of weak market demand and global oversupply and depressed crude oil prices have resulted in decreased fuel surcharge revenues and lower shipments of crude oil. The shipping landscape for coal has been built across our industry.
As a result, we are implementing various strategic reductions and network rationalizations to respond to these structural changes in coal markets and to minimize energy market related risks to revenue going forward. The availability of truck capacity has limited our near term domestic intermodal growth. But notwithstanding these challenges, we are focused on opportunities in consumer driven markets as well as continuing to grow our international and domestic intermodal business. We also are pursuing a number of exciting operational improvements. This enhances service and provides lift to pricing and volume opportunity and continues our diversification away from commodity intensive revenue base.
On Slide 10, you'll see an overview of the key initiatives we are implementing to improve efficiency and in turn Norfolk Southern's financial performance. Starting with our near term initiatives. Most importantly, in the last month, we have restored service to approach all time best service levels. In September, we downsized our Triple Crowns subsidiary to focus on the transportation of automobile parts. This restructuring eliminated approximately 200 jobs and is expected to be accretive to Norfolk Southern's earnings beginning in 2016.
The Triple Crown restructuring also has the added benefit of allowing us to avoid capacity investment in some parts of the network. In July, we consolidated our Roanoke offices with our corporate headquarters in Norfolk and operational headquarters in Atlanta. This consolidation enables us to more effectively use Norfolk Southern's real estate assets and furthers our goal of streamlining the company's workforce. We are also streamlining headcount across our core network to align Norfolk Southern's operations with current cold traffic volumes. As you can see on Slide 11, our operating initiatives have led to acceleration in service levels, faster train speeds and shorter dwell times.
The 3 metrics outlined on this slide have significantly improved as compared to last year. Our performance now is approaching our record service levels. These significantly improved service levels will translate directly into increased revenue and improved margins. The faster railroad is a less expensive and more profitable railroad. Moving ahead, Slide 12 provides additional detail on the ongoing initiatives highlighted on the prior slide.
We have been rationalizing our 16 yards in terminals since 2,009 and are currently evaluating additional yards with a goal of making a hump yard system more efficient. We've also been reducing Norfolk Southern's secondary mainline network to align with coal volume declines. These reductions have been focused on rationalizing our capital investment, manpower and maintenance expense. To manage interim costs, we have trained service and investment on approximately 300 miles in the Central Appalachian region. We continue to evaluate approximately 1,000 miles of line to identify opportunities to consolidate traffic volumes and improve to further realize maintenance cost savings.
Optimizing Norfolk Southern investment in locomotives is another major ongoing initiative as locomotive productivity is critical for the consistent delivery of efficient and superior service. We will be adding 50 new locomotives to the Norfolk Southern's fleet in 2016. Our average age will decrease from these purchases and from rebuilds, thereby improving locomotive efficiency, reliability and productivity, while also reducing maintenance expense. Norfolk Southern has also implemented specific programs to minimize the time that locomotives are out of commission, improving locomotive availability. Now I'll provide you with an update on Norfolk Southern's financials.
We are focused on delivering efficient and superior service to build a more profitable franchise based on price and volume, promoting growth to secure our position as a market leader and increasing returns on capital to strengthen our financial performance. We have made significant growth investments. We expect to realize the benefits of these investments in the years ahead as our merchandise and intermodal volumes continue to grow. As we look to drive operational improvement, our strategic plan includes achieving an operating ratio below 65 by 2020. We have tremendous confidence in our ability to grow Norfolk Southern and drive operational improvement to create value for our shareholders.
Turning to Slide 15. In order to drive revenue growth, our strategic plan includes optimizing pricing to reflect the value of our superior service. Increasing our contribution from service sensitive traffic is another way to drive growth. Our overarching strategy is to have a network that can deliver a high value product that attracts service sensitive traffic. We do not want to become just a commodity railroad.
Therefore, over the duration of our plan, we will focus on maximizing revenue contribution through pricing increases and opportunistic volume growth, largely utilizing existing infrastructure. In order to maximize profits and grow traffic volumes, it is crucial for Norfolk Southern to align our service capacity and investment. We have made significant infrastructure investments such as in the Heartland and Crescent Quarters and Mormon Yard in Bellevue, Ohio. And we will continue to promote this growth through targeted capital investments in our core network. Finally, we continue to see opportunity to drive value from small scale acquisitions that incrementally improve our existing rail network, such as our recent acquisition of the D and H and South.
As we continue to increase our free cash flow, we believe that low risk, high return acquisitions
are an
effective use of cash, expanding our network footprint and provide single line service for shippers. Each of these drivers will contribute to Norfolk Southern's growth. I'll now turn to Slide 16 to discuss some of the key market trends that I mentioned are impacting our business and how we believe Norfolk Southern is well positioned to capitalize on these opportunities in the long term. As we discussed on our Q3 earnings call, low commodity prices and the strength of the U. S.
Dollar are leading to a short term pause in energy demand. We estimate that about 50% of our revenue base is tied to commodity pricing or foreign exchange rates. However, as we move forward into 2016, we expect commodity volumes to stabilize. In domestic intermodal, excess truck capacity has recently limited our ability to convert truckload freight. Despite this challenge, we expect truck capacity to tighten and to increase regulation and truck driver demographics to benefit Norfolk Southern.
As we look towards 2016, truckload conversions represent a significant growth opportunity for Norfolk Southern. Congestion and labor disputes in West Coast ports earlier this year have shifted more international intermodal traffic to the East Coast. This shift will only accelerate with the expansion of the Panama Canal. Our investment in service, infrastructure improvements and technology will allow us to capitalize on this opportunity. As we move into 2016, we expect strong intermodal growth, following a correction in retail inventory overhang, which caused a weak peak season this year.
On Slide 17, you'll see what we identify as key areas for growth in consumer driven markets beyond Intermodal. This is led by automotive, our highest growth business unit, which has been growing at a 9% volume increase year over year, benefiting from increases in U. S. Vehicle sales. Ethanol volume is also expected to increase as a result of falling gas prices.
Demand has increased from basic chemicals and plastics as a result of increased automobile production and consumer products for homes. The fundamentals of housing and construction have also improved pointing to future growth. We are encouraged by the positive dynamics in these consumer markets, which will contribute to our success going forward. Turning to Slide 18. We remain committed to pursuing a disciplined capital allocation strategy to enhance shareholder value.
Continued significant return of capital to shareholders remains an important component of this strategy. Over the past 10 years, the company has distributed nearly $15,000,000,000 to shareholders, consisting of an average of approximately $1,000,000,000 in share repurchases per year and a steadily increasing dividend and a 10 year annual compound growth rate of 14%. I'll now move on to discuss communication of interest from Canadian Pacific as well as the Board's evaluation process and final conclusion. Turning to Slide 20. As I mentioned, the Board unanimously determined that Canadian Pacific's unsolicited indication of interest is grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome and is not in the best interest of the company and its shareholders.
The company is confident that the continued execution of our strategic plan will deliver substantially more value than Canadian Pacific's proposal. Importantly, this decision was prepared for careful review by our Board, including consideration of input from shareholders. Slide 21 provides an overview of our contact with Canadian Pacific to this point. There is a lot of detail on this slide. From a high level, we did seek to meet privately with Canadian Pacific and media leaks, some that were factually incorrect, occurred both before and immediately following our meeting.
We offered to meet further pursuant to a customary confidentiality agreement which CP rejected. Moving to Slide 22. The Board carefully evaluated complex regulatory environment and determined that there are substantial regulatory risks and uncertainties that Canadian Pacific's proposed transaction would face. Among them, the lengthy review process, the low likelihood of approval for a funded trust structure and the transaction itself. And in the unlikely event the merger were to be approved, onerous conditions under the 2,000 and 1 major merger rules.
Over the next three slides, I'm going to take you through key regulatory concerns in greater detail in order to illuminate why we think these hurdles are highly unlikely to be overcome. Slide 23 delves deeper into the regulatory review timeline. Notably, any transaction must be determined by the Surface Transportation Board to both enhance the competition and be in the public interest. Based on the advice of regulatory experts, Norfolk Southern's Board does not believe that SDP would approve this merger because of the absence of any compelling public interest justification and the expectation that it would trigger further consolidation that would likely ultimately demand industry wide changes in the current regulatory framework. Importantly, opening trust structure would require a 2 stage public interest regulatory approval process.
1st, to approve the proposed voting trust structure and second, to determine whether the merger is in the public interest and thus approve the acquisition. The multiple stages of our view create additional complexity and potential for business disruption. In any case, the regulatory review process would be lengthy, complicated and would force Norfolk Southern to exist in limbo for an extended period of 2 years or more, undoubtedly causing significant disruption to both our business and to the implementation of our strategic plan. Turning to Slide 24. As a solution to and in acknowledgment of the difficulties of a 10 plus year approval process, Canadian Pacific has suggested an untested voting trust structure.
The proposal would likely fail STP's public trust stipulations that the trustee must be independent, the voting trust must insulate the carriers from premature common control and the voting trust must be in the public interest. Specifically, Mr. Harrison has publicly proposed a structure under which Canadian Pacific personnel will be hired or moved to Norfolk Southern in order to implement Canadian Pacific's scheme as quickly as possible. Let me be perfectly clear, under the governing statutes, 1 railroad may not exercise or require the ability to exercise premature common control of another railroad's management and operations by any means. It's important to understand that whatever voting trust structure that AP Pacific comes up with would be subject to approval by the STB as being in the public interest.
There is no certainty that any voting trust structure would be approved. In fact, as you can see in the outline of the Illinois Central Kansas City Southern transaction in the bottom half of the slide, the last time Mr. Harrison attempted to employ this voting trust merger, he triggered strong opposition and the transaction was abandoned. I've mentioned the STT's major merger rules several times. So let me just give you a little more color on the agency's considerations and why our Board thinks that they lead to a high likelihood of disapproval or a combined entity hamstrung by the imposition of onerous conditions.
As Slide 25 highlights, STP's approval framework was adopted in 2,001 and essentially established a bias against rail industry consolidation. Specifically, a merger of Class 1 railroads must serve our public interest. And this is only achieved when substantial and demonstrable gains in important public benefits such as improved service and safety, enhanced competition and greater economic efficiency outweigh any competitive effects, potential service disruptions or other merger related harms. Furthermore, the STB will not consider Canadian Pacific's indication of interest in isolation, but rather in context of whether it will drive further rail industry consolidation, the domino effect, if you will. This new consideration increases the probability that in the unlikely event that the transaction was to be approved, it would be saddled with time consuming and costly conditions.
In particular, SDP has historically imposed substantial community and environmental mitigation conditions and is required to impose labor conditions. You are able to see the severe extent of some of these possible conditions in the columns on this slide. In addition, the public benefits of this proposal are hard to see. Canadian Pacific's and Norfolk Southern's networks are largely end to end. They serve entirely separate regions and only connect at 5 points, thus severely limiting the opportunities for the operating synergies and public interest benefits that mergers typically produce.
In addition to the high bar to achieve regulatory approval, we would also anticipate substantial opposition from various stakeholders, including, but not limited to, other railroads, customers and labor and community activists, which would only increase the heavy regulatory scrutiny we anticipate. Ultimately, the North and Southern Board is unable to see a clear or desirable path to approval for this transaction under the existing regulatory framework. Moving to Slide 26. There are other negatives to the proposed transaction in addition to and in some cases contributing to the substantial regulatory risks and uncertainties. From an operational standpoint, Norfolk Southern's commitment to long term value creation stands in stark contrast to Canadian Pacific's single-minded focus on the operating ratio.
For Norfolk Southern to adopt Canadian Pacific's operating model, we believe this will come at the expense of the long term value of the Norfolk Southern franchise ultimately would be detrimental to shareholder value. Under Canadian Pacific's model, we would be forced to drive away service oriented truck competitive traffic that is crucial to the Norfolk Southern business, even more so as it continues to replace lost commodity traffic and presents profitable growth opportunities. We are notably more truck competitive than Canadian Pacific, and we are proud of this competitive advantage. Naturally, this requires a different balance of priorities that include consistent delivery of efficient service and capitalize on lucrative truckload conversion opportunities. We believe a Canadian Pacific Norfolk Southern merger is a poor combination.
The merger of Canadian Pacific and Norfolk Southern,
the
smallest Canadian railroad and the smallest U. S. Railroad other than ACS, ensures Canadian Pacific and Norfolk Southern to be part of a smaller geographically inferior system in the context of the industry mergers that would inevitably follow. Indeed, CPNS interchange traffic is not large, less than 3% of NS traffic per volume is substantially less than NS's interchange traffic with PNSF, CN or UP. Given the state of the industry and the lack of new railroad construction, the lack of scale and scope of a combined Canadian Pacific Norfolk Southern will create its long term network disadvantage for the combined entity and damage the shareholder value of a combined company.
Turning now to Slide 27. I want to address an important point about open access. Canadian Pacific's open access proposal would adversely affect the financial performance of the combined entity, grade service investment levels overall. Norfolk Southern's Board believes that Canadian Pacific's proposed transaction will create service disruptions and curtailments that would significantly harm FX Southern's business and the business that our customer brings and introduce substantial risk of compression. These would disincentivize companies to invest in the rail network.
As you may know, open access produces more intermediate handling of shipments, which leads to increased transit cycle times and increased well times. As you can see in the quotes from this slide, even Canadian Pacific has acknowledged the detrimental impact on service of open access. Not only does Open Access negatively impact service levels, but we believe that a combined Canadian Pacific Norfolk Southern would be at a severe competitive disadvantage and that as much as 60% of Norfolk Southern's carload and port traffic would be vulnerable to poaching. Furthermore, Canadian Pacific's open access proposal is voluntary and not contingent on any other competitor railroad taking similar steps, again disadvantaging the combined entity. This level of revenue loss, operating disruption and expense is unacceptable.
Slide 28 takes a look at Canadian Pacific's claims about Chicago congestion. Canadian Pacific has repeatedly and correctly suggested that a Canadian Pacific or for Southern combination would help alleviate rail congestion in Chicago. Canadian Pacific's Chicago traffic volumes are the smallest of any major rail carrier, accounting for less than 5% of all Chicago traffic. And thus, any rerouting of this traffic would have a minuscule impact on overall congestion. In fact, we anticipate that in the unlikely event the merger was to be repeated, the combination of Canadian Pacific and Norfolk Southern with increased traffic congestion in Chicago.
There are several reasons for this. Given the layout of the existing routes of both companies, Chicago is and would remain the primary connecting point between Canadian Pacific and Norfolk Southern. Less than one train per day of current Canadian Pacific and North and Southern Pacific could be rerouted around Chicago hub and these trains would incur substantial increases in distance expense and time for Norfolk Southern and our customers. The proposed transaction would cause more, not less, rail traffic through Chicago. We expect Canadian Pacific to increase margins by converting interline traffic between Norfolk Southern and both BNSF and Union Pacific to single line traffic in the proposed Canadian Pacific Norfolk Southern system.
Much of this Norfolk Southern traffic with BNSF and UP avoids Chicago today. Unlike BNSF and UP, Canadian Pacific does not have efficient Chicago bypass routes, so Canadian Pacific would have to route most of this traffic through Chicago. Frankly, it is difficult to envision any scenario where a potential Canadian Pacific Norfolk Southern combination could help alleviate what is a major concern for our industry. In summary, the Board conducted a comprehensive review of specific indication of interest and ultimately believes the proposed transaction is grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome and that pursuant the proposal would cause unacceptable harm in our business and our shareholders. We are confident in the strong strategic plan that we have in place and in our ability to generate greater sustainable shareholder value through execution of our strategy.
This includes delivering efficient and superior service to build a more profitable franchise based on price and volume growth, cost control and increasing returns on capital. Norfolk Southern is well positioned to deliver compelling value to our shareholders now and into the future. With that, operator, we would now like to open the call for questions.
Our first question comes from the line of Jason Seidl with Cowen and Company.
Hey, Jim. Hey, team. How are you guys doing this morning? Good morning, Jason.
Two quick ones here. I guess, number 1, you talk about sort of your new longer term strategic plans for, I guess, your investors to focus on to see what you can bring to the table over the long run. Can you talk a little bit about achieving those goals? What economic backdrop that you're looking for specifically in 2016 to get to that sub CVOR level? We are already successfully executing on revenue growth and cost saving initiatives, Jason.
Our 'sixteen plan produces an OR below 70. We are targeting double digit compound EPS growth and increasing ROE over 5 years. And in a supportive economy, we may be able to do even better. In 2020, we believe our OR will be below 65. We are laser focused as a management team on identifying additional growth and cost saving opportunities.
And our Board is really confident in our strategic plan and that it is superior to CP's inadequate high risk proposal.
Our next question comes from the line of Justin Long with Stephens.
Thank you and good morning. So my question is, CP has talked about this offer being a starting point for discussions. So I wanted to ask if you would consider a higher offer or just given some of the regulatory hurdles and the other items you discussed, any potential business combination completely off the table at this point?
I'm not going to speculate on what may be later developments. Our Board is committed to acting in the best interest of shareholders. I will say that at any price, the regulatory risks, including the risk to close, remain the same.
Our next question comes from the line of Sajid Chiamo with BMO Capital Markets.
Yes, good morning. Jim, I wanted to ask, so in the last, say, 6, 7 years, the Norfolk operated at below 70% operating ratio. Now I know you've sort of taken the helm just recently and you have sort of a maybe different approach to how you're going to go about the strategic plan going forward. But this is a major step down that we're looking at in terms of operating ratio in the next few years. Can you talk a little bit about what's different, how you're approaching the business differently to be able to make those kind of achievements?
And secondly, what is the revenue growth assumption going into that plan? And specifically, what are you assuming for coal?
I have just recently taken the reins as CEO and Chairman of the Board. We have a new team, a new Chief Marketing Officer, a new Chief Information Officer and we'll soon have a new Chief Operating Officer. We are full of energy and enthusiasm and new ideas for driving shareholder value. And our plan focuses on both revenue growth and cost saving initiatives. Let me give you a couple of examples of things that we have already done.
First, we have restored service to near record levels. That is a powerful driver of cost savings down the road. 2nd, we restructured an unprofitable subsidiary, focusing it on transportation of automobiles and sharpening our overall intermodal strategic focus. 3rd, we closed a headquarters location, resulting in significant G and A savings in addition to the 200 jobs that we eliminated through downsizing Triple Crown. And lastly, we've taken steps to rationalize our asset base and our employees in our coal franchise in Central Appalachia.
That was a necessary and appropriate move given the outlook for our coal business, especially in the Central Appalachian.
Our next question comes from the line of Scott Gruff with Wolfe Research.
Hey, thanks. Good morning, guys. So, Jim, can you clarify if in this regulatory response, you are able to consult with the Board to reach that conclusion? And then also, I just want to try and focus on kind of some of the comments with respect to shareholder value. Based on kind of the investors that we've spoken with this morning, I think the sentiment is that the response is
kind of largely the same and
then also kind of based on an assumption of commodity market stabilizing. And I think shareholders were hoping for more with respect to either more aggressive cost cuts, financial targets, use of the balance sheet. And I know you mentioned in your comments that you've spoken with shareholders. Maybe can you share some of the sentiment from those meetings that support the response today and you just respond to concerns, this is just more of the same and it's not enough?
Scott, we understand that our shareholders are looking for value creation and we believe we have a team with the right plan in place to improve results. That's our goal. Our Board is confident that our strategic plan is a superior alternative to CP's closely inadequate high risk proposal. We are driving shareholder value through a combination of revenue growth and expense savings. I went through some of the things that we have already done in terms of cost restructuring.
We are busy working on other ways in which to reduce our cost structure. I ran through some of them in the presentation. We are looking at consolidating secondary lines and yards. We are looking at reducing headcount wherever we possibly can. And last and most important, we have achieved service levels at the end of the year that are near record levels and that will result in significant cost savings down the road.
Our next question is from the line of Brandon Oglenski with Barclays.
Hey, good morning. Thanks for taking my question. Jim, I guess I want to respectfully disagree a little bit because you said in the release that Canadian Pacific's plan here is to really cut to the bone on costs. And I think the way I would look at this as a shareholder of Norfolk, we've been discussing with them as well. You have an offers here to give you a proven management team that has implemented both Canadian railroads where we actually have some terminal access already in place.
And now you're asking to stay with Norfolk with a plan that feels we've talked about
this before where it's all
growth, coal stabilizes, the OR up. But if coal keeps going down, that will get improvement. So I guess how do you speak maybe this is Scott's question, but what are the specifics that you can do on the cost structure to ensure to a shareholder today that you're going to get to that C5OR target even if coal is
still coming down, which it is today? Let me just comment first on the synergy targets. We do believe they are overstated and that they are premised on a short sighted plan to cut to the bone. These purported synergies are out of line with historical precedent and not achievable in our view. They are premised on significant reduction to investment and employment that would harm service and would be unacceptable to NS.
The achievable synergies are fundamentally limited as the CP and NS networks only connect at 5 points. And the negative revenue synergies from revenue loss and rate compression are not even factored in here as we went through in the discussion of proposed open access. In short, it's a short term plan that would harm our customers and ultimately our shareholders. It's not in the public interest. We know what we have to do to deliver shareholder results.
We are focused on driving revenue growth and cost savings initiatives. As I discussed this morning, we are highly confident in our plan to produce superior shareholder value. And lastly, let me just emphasize lastly, these substantial regulatory hurdles to CP's proposal, the risk and the uncertainty compared to NS's strategic plan. CT's proposal is highly unlikely to be completed. It might trigger a domino effect of further consolidation.
And the transaction must be determined by the STP to both enhance competition and be in the public interest. Interest. It's just unlikely the STP would approve either the voting trust or a proposed competition.
Our next question comes from the line of Chris Hetherbee with Citi.
Hey, Jim. Thanks for taking the question. I guess I wanted to touch on sort of the service comments that you made with getting back towards record improvements. And I know there's been some headwinds from particularly from the commodity side. But how
can we expect it to sort
of translate into the performance going forward If you have the commodity headwinds still sort of persisting, it just feels like service alone and I know there's some cost components there, seem to be a bit challenging. And then when you compare sort of the performance of the company even to geographic competitors, it seems like just getting back up into the playing field next year with service. I guess I just want to sort of understand how you think service got a reaction to all this and if it really needs to be something beyond that that could get you over the hurdle?
Well, certainly the current commodities backdrop is not supportive, but we do expect commodities volumes to begin to stabilize and that will, when it occurs, provide an additional tailwind to our performance. But in the meantime, we are fundamentally focused on driving growth in consumer oriented businesses, businesses like our automobiles business, which is currently performing very well. And our intermodal business continues to present major growth opportunities building on the significant investments that we have made in those businesses.
Our next question comes from the line of Tom Wadewitz with UBS.
So Jim, I just wanted to focus on 2 of the points that I think you're pushing back on pretty hard here. So one is the trust, I would say that there's very low probability that the Board would embrace that approach. Another is the synergy of the legacy interchange, where you see we basically don't interchange a lot of traffic. So I guess the question is, if CP if there's a structure where the deal is contingent upon approval of a voting trust, then it seems like that would be a way of addressing your concern that about whether voting cost could be achieved. So would you consider a structure like that if you took some of the voting cost approval risk out?
And then the second component is just you really focused on there's a lot more interchange with Western Rail. Would you consider a proposal from a Western Rail where there would inherently, as you point out, be a lot more interchange efficiencies? Thanks.
Let me begin by commenting on the voting trust proposal. First, we must understand that the rules changed in 2,000 and 1 for major mergers after the C and BN proposed mergers. Voting trusts now require public comment and STP approval, as you know. And the voting trust itself must be in the public interest. And with that change, there is no certainty that any voting trust would be approved according to the device we have received from experts.
Secondly, it's important to recognize that CP is not proposing a traditional voting trust, but instead a structure that provides CP with premature control over Annex. And that voting trust structure is not likely to be approved. In fact, over the last 50 years, there has never been a voting trust approved like the 1 CP is proposing here Because the CP management team would control or be substantially involved in NS operations prior to regulatory approval of the transaction.
Our next question comes from the line of Rob Salmon with Deutsche Bank.
Hey, good morning and Jim. Thanks for taking the question. In light of your of the Board's views about kind of the inadequate offer as well as the regulatory risks, has the Board contemplating putting in place any measures which should make it more difficult to bring a proposal directly to shareholders? Is that something that's currently on the table? Can you give us an update in terms of what your bylaws state as well as what it stands?
Look, our Board's overarching objective is to drive shareholder value. And they certainly understand their fiduciary responsibilities. And they are a shareholder friendly Board fundamentally.
Our next question comes from the line of Pascoe Majors with Susquehanna.
Yes, Jim. So you've already gone into a tremendous amount of detail about the regulatory hurdles that a Class 1 merger is going to face here and your position here is very clear. But again, are you saying that the risks of any Class 1 merger transaction are so great involving an asset, your Board is simply unlikely to agree to a deal that compensates you properly at any price?
I am saying that the hurdles are very, very significant to this proposed combination. Yes, we believe that this proposed combination would face substantial regulatory risks and uncertainties.
Our next question comes from the line of Allison Landry with Credit Suisse.
Good morning. Thanks. So following on that last question, I understand that you think the proposed synergies are overstated and maybe CLR is not achievable. But Kiki is clearly willing to pay you for some probability of that today and the management team does have a track record in place. So just to be clear, I mean, is this really coming down to the regulatory risk surrounding the transaction?
No. As I've repeatedly stated, we view CP's proposal as grossly inadequate in terms of value. And I won't comment or speculate on any other potential combinations. But at any price, the regulatory risks, including the likelihood of those, remain the same.
Our next question comes from the line of David Vernon with Bernstein.
Good morning. Thank you for taking the question. So Jim, I just wanted to understand, have you talked to the STB at all? It seems like a lot of what we're talking about
here is the idea that
the STB may not like it or may not approve it. Do you think it would be have you had a conversation with the STB? Have you gotten any feedback
from them?
And then obviously, do you think in your interest, could you be sound them out more clearly before putting it as a regulatory as to why you don't want to move forward with the deal?
We have spoken with and retained numerous STB regulatory experts, including former STB commissioners and counsel that is intimately familiar with the rules to a person, their view is the regulatory obstacles probably would be insurmountable to complete the transaction.
Thank you, gentlemen. We have time for one more question. The next question will come from John Barnes with RBC Capital Markets.
Hey, John. Thanks for taking the question. Listen, obviously, everybody's zeroed in on this other transaction. I mean, as I went through your slide deck, the last bullet on Page 26, where you talk about the interchange traffic, the amount you do with the other rails, almost sounds like you're basically soliciting another offer. And I think that's where people are a little confused here.
I think could you maybe lay out for us prioritize which of the things how you object to them? Is it the offer price is kind of number 1 that it doesn't pay you well enough or is
regulatory concern the biggest risk?
I mean, can you prioritize that for us so we can gauge if there was some other structure proposed to you, how we might think about a reaction? Thanks.
Well, I've said over and over again that we view the proposal before us as grossly inadequate. So I think So I think you know where we stand on that. Similarly, we view this transaction as facing substantial regulatory risks and uncertainties that would likely be insurmountable. I'm not going to speculate on any other potential transactions or proposals. But look, at any price, the regulatory risks remain, including the likelihood to close.
Ladies and gentlemen, this concludes Norfolk Southern's conference call. Thank you very much for your participation. You may now disconnect.