Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Norfolk Southern Corporation Annual Meeting. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chairman, President and CEO, Mr. Jim Squires. Thank you. Please go ahead, sir.

Good morning. I'm Jim Squires, Chairman, President and Chief Executive Officer of Norfolk Southern Corporation. It's 8:30 a.m. Eastern Daylight Time on May 14, and I now call to order the 2020 Annual Meeting of Shareholders. Thank you for joining us today. In light of COVID-19 concerns, we are hosting our 38th annual meeting virtually for the safety of our shareholders, directors and employees. We hope that this change has allowed a greater number of our shareholders to join us. I'll talk more in a few moments about how our company has responded to the challenges of the COVID-19 pandemic, but let me just say that I'm as proud as I've ever been to be a member of the Norfolk Southern team. We play a vital role in the nation's supply chain. Our employees have risen to the challenge of keeping the freight moving, and our leadership team has risen to the challenge with extensive measures to protect the health and safety of our employees. We tested our virtual platform this morning, and I can see that we have a large number of shareholders and guests joining us for today's meeting. As is our custom, we will conduct the business portion of our meeting first and answer questions at the end of the meeting. Though we may not be able to answer every question, we'll do our best to provide a response to as many questions as possible in the time we've allotted. In the event we have to interrupt our meeting for an emergency in our broadcasting location or connectivity issues, we will recess for 30 minutes and ask shareholders to rejoin after the recess. First, I want to extend a heartfelt thank you to a director who's not standing for reelection. Mr. Daniel Carp, former Chairman of the Board and Chief Executive Officer of Eastman Kodak Company, has served on our Board of Directors since 2006. Mr. Carp has worked to help steer our company through both rewarding and challenging times, chaired our compensation committee, provided oversight of our strategic plan and helped align our compensation program with our strategic plan goals. He's offered us his wisdom, judgment and strategic guidance for 14 years, and he will be missed. It's now my pleasure to present the members of our Board of Directors, who, with me, are standing for election at this meeting for a term expiring at the date of the 2021 Annual Meeting: Thomas D. Bell, Jr., Chairman of Mesa Capital Partners; Mitchell E. Daniels, Jr., President of Purdue University and Former Governor of Indiana; Marcela E. Donadio, former Ernst & Young partner and oil and gas sector leader; John C. Huffard, Jr., co-founder of Tenable Network Security and Tenable Holdings, Inc.; Christopher T. Jones, former President of the technology services sector of Northrop Grumman Corporation; Thomas C. Kelleher, former President of Morgan Stanley; Steven F. Leer, former Chief Executive Officer and Chairman of Arch Coal, Inc.; Michael D. Lockhart, former Chairman of the Board, President and Chief Executive Officer of Armstrong World Industries, Inc.; Amy E. Miles, former Chair of the Board and Chief Executive Officer of Regal Entertainment Group; Claude Mongeau, former President, Chief Executive Officer and Director of Canadian National Railway Company; Jennifer F. Scanlon, President and Chief Executive Officer and Director of UL; and John R. Thompson, retired Senior Vice President and General Manager of BestBuy.com LLC. All of these directors are attending online today. These hard-working directors consistently devote substantial time and effort to advancing the best interest of Norfolk Southern and you, our shareholders. They're a great Board. We also have with us our executive management team. They are an Ann A. Adams, Executive Vice President and Chief Transformation Officer; Mark R. George, Executive Vice President and Chief Financial Officer; John M. Scheib, Executive Vice President and Chief Strategy Officer; Alan H. Shaw, Executive Vice President and Chief Marketing Officer; Vanessa Allen Sutherland, Executive Vice President and Chief Legal Officer; Michael J. Wheeler, Executive Vice President and Chief Operating Officer; and Michael A. Farrell, Senior Vice President, Operations and Mechanical. I feel fortunate to have such a talented and outstanding executive management team, and I thank them for their leadership. We're also joined here today by our independent auditors. Representing KPMG LLP are Scott Flynn, Stan Bever and Paul Benedict. They will also be available to respond to appropriate questions during the general question-and-answer period following adjournment of this meeting. The corporation has appointed Broadridge Financial Services to act as inspector of election. Belinda Massafra from Broadridge is with us today and has taken the oath of inspector of election required under Virginia law. The inspector has informed me that a majority of the shares entitled to vote is represented, and that a quorum therefore is present for the conduct of the business. After the formal meeting has adjourned, we will provide 30 minutes for general questions. Only validated shareholders may ask questions in the designated field on the web portal. Out of consideration for others, please limit yourself to one question. Please note that this meeting is being recorded by Norfolk Southern. However, no one attending via the webcast or telephone is permitted to use any type of recording device. In accordance with the bylaws and notice of this meeting, there are 5 matters to be acted on today, which I and one of our shareholders will present. Please note we will give shareholders an opportunity to comment on the items themselves after all proposals have been presented. Please feel free to submit questions at any time. However, we will not respond to questions that relate to matters other than those to be voted on until the designated question-and-answer period following the meeting. Item 1 is the election of 13 directors named in the proxy statement for a 1-year term. The Board recommends a vote for the election of each of the nominees. Because no other nominations have been received from shareholders during the time period prescribed in the company's bylaws, I declare that the nominations are closed, and we will vote later in the meeting. The second item is the approval of 3 proposed amendments to the corporation's amended and restated articles of incorporation, specifically, an amendment of the voting standard required to amend the articles; approval of a simple majority voting standard to approve a merger, share exchange, conversion, sale or dissolution of the corporation; and approval of a majority of votes cast standard to approve redomestication of the corporation and affiliated transactions. The Board recommends a vote for the proposed amendments to the corporation's amended and restated articles of incorporation. The third item of business is ratification of the audit committee's appointment of KPMG LLP, independent registered public accounting firm, as our independent auditors for 2020. The Board recommends a vote for the ratification of the appointment of KPMG LLP. The fourth item is an advisory vote by shareholders to approve the compensation of our named executive officers as disclosed in the proxy statement for this annual meeting. The Board recommends a vote for the advisory resolution approving the executive compensation of our named executive officers as set out in the proxy statement. The fifth item is a shareholder proposal regarding the right to act by written consent, if properly presented at this meeting. The Board recommends a vote against the proposal. Under Norfolk Southern bylaws, no other matter may come before this meeting for a vote. At this time, [ Ms. Cam Franklin ] will present the shareholder proposal regarding the right to act by written consent on behalf of John Chevedden. As a reminder, [ Ms. Franklin ], you'll have 2 minutes to present your proposal, and I ask that you limit your remarks to reading the proposal. Operator, please open to Ms. Franklin's line to allow her to present the proposal.

Good morning. Proposal 5, right to act by written consent, John Chevedden sponsored. Shareholders request that the Board of Directors take the steps necessary to permit written consent by the shareholders entitled to cast the minimum number of votes that would be necessary to authorize an action at a meeting at which all shareholders entitled to vote thereon were present and voting. Norfolk Southern requires 20% of shares to combine their -- just a moment, to combine their holdings to call a special meeting, a higher level than the 10% of shares permitted by many states of incorporation. Dozens of Fortune 500 companies provide for both shareholder rights to act by written consent and to call a special meeting. The higher 20% threshold for shareholders to call a special meeting is one more reason that shareholders should have the right to act by written consent, plus the higher 20% threshold or errors. That could mean that 40% of shares would need a threshold of 20% of the request without errors. One can be sure that management will have a sharp eye to spot any errors. Taking action by written consent in place of a meeting is a means shareholders can use to raise important matters outside the normal annual meeting cycle like the election of a new director. This is important to consider after our combined Chairman/CEO, James Squires, received the highest negative votes of any director in 2019. Plus a lead director received the second highest negative votes. With a long tenure of 20 years, lead director Steven Leer may not be considered independent. The right for shareholders to act by written consent is gaining acceptance as a more important right than the right to call a special meeting, 2019 Intel Annual Meeting. The directors at Intel apparently thought they could divert shareholder attention away from written consent by making it less difficult for shareholders to call a special meeting. However, Intel shareholders responded with greater support for written consent in 2019 compared to 2018. A shareholder right to act by written consent will enable shareholders to engage with management more effectively since shareholders will have a solid plan B if management just wants to go through the motions of shareholder engagements. In the statement next to this proposal, management claims it is in favor of transparency. If management was really in favor of transparency, it would recommend that shareholders obtain independent proxy voting advice. Please vote yes, right to act by written consent, proposal #5. Thank you very much.

Thank you, [ Ms. Franklin ]. I'll now pause to allow shareholders who would like to ask a question about these balloted items to submit their questions through the web portal.

Jim, we have no questions related to the balloting item.

Thank you. So I'll now proceed. The polls are now open. Any shareholder who hasn't yet voted or wishes to change their vote may do so by clicking on the voting button on the web portal and following the instructions there. Shareholders who have sent in proxies or voted via telephone or Internet do not -- and do not want to change their vote do not need to take any further action. [Voting]

Now that everyone has had the opportunity to vote, I declare the polls for the 2020 Annual Shareholder Meeting closed. I now ask the inspector of election to provide a preliminary vote report. Operator, please open Ms. Massafra's phone line.

The nominees for election to the Board have been duly elected. The 3 proposed to the corporation's amended and restated articles of incorporation have been approved. The ratification of the appointment of KPMG LLP as the independent auditors for 2020 has been approved, and the compensation of the named executive officers has been approved by advisory vote. Proposal regarding right to act by written consent has not been approved. I now ask the operator to turn the meeting back to the Chairman.

Thank you. We will be reporting the final vote results for today's meeting in a Form 8-K to be filed within 4 business days. There being no further business to come before the meeting, the 2020 Annual Meeting of Shareholders of Norfolk Southern Corporation is adjourned. I'll make a few remarks at the conclusion of the following video. [Presentation]

As you can see, we have a remarkable team at Norfolk Southern. I'm proud to be able to share a glimpse of their dedication with you today, and hope you are as inspired by them as I am. In recent months, the challenges of COVID-19 have been at the forefront of all of our minds. We at Norfolk Southern have certainly felt the effects. Through this unprecedented crisis, our story is one of commitment and resilience. I'm pleased to share it with you today. It begins with our remarkable people. Ensuring every Norfolk Southern employee goes home safe every night is a responsibility we've always taken seriously. Now COVID-19 has caused us all to see our responsibility to employee well-being in a new light. Well before COVID-19 evolved into a global pandemic, Norfolk Southern's leadership team began moving. Our railroad took decisive, comprehensive measures based on CDC guidelines to put employee health and safety first. We acted quickly to equip every member of the NS team with the information and resources needed to safely and effectively do the job. We transitioned office employees to remote work environments where possible. For those on the front lines of operations, we implemented social distancing and established rigorous cleaning protocols for their work environments. As they always do in a crisis, our employees responded heroically. Our railroaders and dispatchers and network operations never wavered. They adapted to difficult circumstances and have our trains running as fast as ever. Within our sourcing, operations and safety and environmental departments, employees, ensure we have the supplies to protect our people. Sometimes that's meant finding creative solutions. As shortages of hand sanitizers swept the country, our employees partnered with enterprise and local distilleries to obtain more and painstakingly transfer that sanitizer into individual bottles for distribution. IT employees are working tirelessly to enable many groups, including our customer service specialists, to work efficiently from the safety of their homes. The transition was so seamless that customers asked our specialists if they would be working remotely in the future, unaware that they already were. Our HR team and Chief Medical Officer are functioning as an in-house public health department, providing guidance to employees and supervisors on how to respond to COVID-related health issues. When notified that an employee has been diagnosed with COVID-19, they immediately initiate a contact-tracing investigation to determine whether any other employees may be at risk. The entire Norfolk Southern team has rallied around our customers. They are counting on us to be reliable and responsive to their changing needs, and we're delivering with the best service product in the history of our company. We are keeping the steel wheels moving as we play our part to keep the shelves stocked and the lights on. I couldn't be prouder of the entire Norfolk Southern team, and I'm confident in our ability to weather the challenging months ahead. The final weeks of this year's first quarter saw a significant decline in traffic volumes. We expect that trend to continue. In addition to the economic disruption caused by the pandemic, energy price volatility has also impacted our business. None of us can predict the severity or duration of this economic downturn, so we are focused on the factors within our control. By continuing to execute our strategic plan and provide superior service to our customers, we will move through this period successfully and be ready to capture opportunities as the economy recovers. My confidence comes from our strong management team, our extensive preparation and the commitment of our remarkable employees. In 2019, as part of our initiative to reimagine possible, we began transforming our company to be more efficient and nimble. We built upon our brand of precision-scheduled railroading with the rollout of TOP21, a new operating plan that overhauls the way we move trains across our network. We are now running fewer heavier trains, reducing car handlings and increasing overall efficiency and network velocity. We are continuously improving our plan and are delivering its benefits in 18 months instead of the anticipated 3 years. As a result of our transformation, we've set records for metrics such as train speed, terminal dwell and shipment consistency. We've decongested our yards and road network, allowing cars to turn quicker in the terminals and trains to move faster on the network. Our success enabled us to dispose of 703 locomotives that are no longer needed because our network is more efficient, a strong sign that our strategic plan is working. After adjusting for a onetime charge in the first quarter related to those unneeded locomotives, we made further improvements to our operating ratio despite an 11% decline in volume during the quarter. Looking ahead, we remain committed to achieving a 60% operating ratio as quickly as possible, and we will have powerful operating leverage when growth resumes. Norfolk Southern has a history of successfully managing through business cycles and challenging economic environments. We've weathered world wars, depressions, health crisis and more because we run a stable, resilient business. We have a solid balance sheet and access to ample liquidity. We've taken proactive measures to reduce our capital expenditures to the lowest level since 2010, while promoting safety and future growth opportunities. We will get through the challenges ahead and emerge as an even stronger company. We will continue to manage our assets well and control our costs. Our emphasis on superior service will continue to drive our long-term growth strategy. And through it all, our Norfolk Southern employees will continue to get the job done safely with excellence and pride. Thank you for your participation in today's meeting, and thank you for your investment in Norfolk Southern.