January 27, 2016 / 1:41 PM / 2 years ago

UPDATE 3-Norfolk Southern unveils cost-cutting plan as profit slumps

(Adds statement from Canadian Pacific, updates stock price)

By Nick Carey

CHICAGO, Jan 27 (Reuters) - No. 4 U.S. railroad Norfolk Southern Corp on Wednesday reported lower quarterly net income, as coal freight volumes in particular continued to slump, and announced a cost-cutting plan to boost profitability.

Norfolk Southern shares rose more than 1 percent after the news.

The Norfolk, Virginia-based company, which rejected a takeover bid from Canadian Pacific in a move that could lead to a lengthy proxy battle, hopes to persuade shareholders that it is a better prospect as a standalone entity.

Canadian Pacific in mid-November disclosed its $28 billion offer to buy Norfolk Southern, touting $1.8 billion in cost savings.

That bid comes as the rail industry faces a freight recession and falling commodity volumes, especially coal. Low fuel prices mean utilities are burning more natural gas, while the strong U.S. dollar hurts exports.

Railroad coal volumes fell nearly 12 percent in 2015 and the slide has continued, according to industry data reported to the Association of American Railroads. In the week ending Jan. 16, coal volumes tumbled 32.6 percent versus the year-ago week.

North American manufacturers may also face an industrial recession, which would further hurt railroads.

Overall, freight volumes at Norfolk Southern fell 6 percent in the fourth quarter. Coal volumes plunged 18 percent.

The company posted fourth-quarter net income of $361 million or $1.20 per share, down nearly 30 percent from $511 million or $1.64 per share a year earlier.

Analysts expected earnings of $1.23 per share.

Revenue totaled $2.52 billion, down from $2.87 billion a year earlier. Analysts expected revenue of $2.57 billion.

In a separate release, the company announced a strategic plan touting annual cost savings growing from $130 million in 2016 to more than $650 million by 2020.

Norfolk Southern said the savings would include cutting employee headcount, reducing overtime, trimming its operating regions to two from three and downgrading 1,500 miles of secondary lines.

In a conference call with analysts, executives said the company would cut 1,200 jobs in 2016, a roughly 4 percent reduction, and 2,000 jobs overall by 2020.

The railroad said it would reduce its operating ratio, a key metric for analysts and investors, to below 70 percent in 2016 and under 65 percent by 2020.

Canadian Pacific said in a statement that the cost savings would “fall well short of the targets envisioned in CP’s proposed combination with NS.”

In late trading, Norfolk Southern shares were up 1.2 percent at $69.74. (Reporting By Nick Carey; Editing by W Simon and Meredith Mazzilli)

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