Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

So good afternoon. My name is Tom Wadewitz. So I thank for those who have been following the transport presentations. You know what I've been doing here. It's -- we've got a really nice mix of presentations today. I'm really pleased to have Norfolk Southern as our fireside chat now. And we've got both the finance side and the marketing side. And so it's especially rich discussion, I think we're going to have here. So we've got Mark George, who I'm sure you all know is the CFO; and Alan Shaw, the Head of Marketing, the CMO; and then Meghan Achimasi, if I -- excuse me if I'm not saying that exactly right, but Meghan, thanks for joining us. Well, Mark, why don't I turn it over to you for some slides, and then we'll do the fireside chat. I'll be sure to look for questions if you want to send those in as well, and I'll work in the audience questions also. So Mark and Alan, thank you for joining us.

All right, Tom. Yes, we'll go through a few slides. Both Alan and I will cover some materials here. Thanks for the opportunity to present today. And before we start, of course, just a reminder that our discussions will include forward-looking statements. And those are, of course, subject to risks and uncertainties, as we explained in our 10-K. And when we do talk about our 2020 results, we'll be talking about our adjusted results. And that includes or excludes 2 items that we booked last year. One is a noncash charge $385 million related to the rationalization of 703 locomotives in the first quarter. And the second is a $99 million noncash impairment charge related to an equity method investment, and that was booked in the third quarter. There was a non-GAAP reconciliation posted on the website for this event. So if we start on Slide 3, recall, we launched a TOP21 operating plan in the third quarter of 2019. And since that launch, we really made meaningful progress on several asset and workforce productivity initiatives. You can see that both workforce and locomotive counts are down 22%, while train length and train weight increased 14% and 15%, respectively. I'll remind you we also idled 6 hump operations in this time, 2 in 2019, 4 in 2020. So this is meaningful progress, and it was against the backdrop, pretty significant volume fluctuations. A 2019 freight recession accompanied by sharp declines in coal and energy markets, followed by the sudden economic shutdown in Q2 of last year and the V-shape recovery following COVID's emergence that began in Q3. So we continue to execute on our operating plan, and we remain focused on driving more productivity into the business, which, as you know, contributes to meaningful operating margin improvement, as you'll see on Slide 4. The workforce productivity we just discussed has illustrated well in GTMs per employee, which were up 16% during that same period of time and that helped drive down our operating ratio to an all-time record low 61.5 in the first quarter. That's an improvement of 340 basis points since the third quarter of 2019. So this period represents a pretty long stretch of not only year-over-year improvement in OR, but also sequential progress with the only exception being the economic shutdown in Q2 of last year. So we're incredibly proud of our progress and I just would say we are not content. We're absolutely committed to drive further improvements. And you'll see on the next slide that technology is a key enabler to future productivity improvements. We're really transforming the company digitally, and we're putting real-time data and mobile technology into the hands of our customers and our employees. We're improving our internal and external processes through streamlined communication, automated technologies and data analytics. Just a few examples of what we're doing. We're using new information systems to improve utilization and efficiency at our intermodal terminals. We're incorporating predictive analytics to better plan, maintenance and prevent locomotive failures. And we're also harnessing machine vision technology to create a pathway for automated train inspections. Broadly speaking, investments in technology are expected to drive the next phase of improvements in really 5 key areas, Tom, service quality and customer experience, improving operating safety and performance, productivity and efficiency, driving and accelerating growth through the top line and very importantly, advancing sustainability. Alan, I know sustainability message is something that's resonating with customers right now. So why don't you talk about that in addition to the current volume.

Yes. I'd be happy to. Thanks, Mark. So I'm on Slide 6 now, Tom. At Norfolk Southern, we've been a leader in sustainability for well over a decade. Mark talked about how it is. It's becoming increasingly important to our customers. It's becoming increasingly important to our shareholders and our employees as well. However, it's not just something that we just started. You'll recall that in 2007, Norfolk Southern was actually the first railroad to appoint a Chief Sustainability Officer. And we had launched our sustainability program during that time period. Here, you've seen a number of initiatives that we have we've launched a couple of milestones. And recently, we were named by the Wall Street Journal as one of the 100 most sustainably managed companies. We partnered with the plastics industry and we're the first railroad to join a program called Operation clean sweep, which pledged zero loss of plastics following transportation. So it has been important to us. It will continue to be important to us. Because of our investments, say, in Green Trees or in wetlands, we've been able to generate credits from this, which has helped us with business development in the past, and we'll continue to do so in the future. We are continuing our focus on reducing our own greenhouse gas emissions as well, having recently committed to a science based target, and we're working with our customers to articulate the solution we'll provide them in reducing their own carbon consumption by simply selecting rail versus truck because, as you know, rail is 4x more fuel-efficient than truck. And so for example, we can move a ton of freight up to 440 miles on a single gallon of fuel. About 25% of our customers have announced carbon abatement goals. And so this is important to them. And as you know, Tom, we've got the most robust intermodal franchise in the East. And a really diverse industrial franchise as well. So there's plenty of opportunity for us, operating in the East, where more of the consumption, most of the production occurs for highway to rail conversions. So we're at the face of some of the really important growth opportunities in the United States. We've got a solid track record of leadership on sustainability, and we're going to continue to lead. And we're doing it because it's not just the right thing, which it is. We're doing it because it's also good for business. And that's a probably a pretty good segue into talking about the current business environment. So Tom, I will shift over to Slide 7. And you can see our volumes week over -- every week, have been pretty consistent. We had that dip in February because of the weather, but we rebounded very, very quickly and volumes have remained elevated, comps are pretty good and we're up 30% year-over-year, little bit more than that. As we move into the second quarter, last week, we had a little bit because of Memorial Day. There's a lot of demand out there, and I'm sure a number of your questions will be centered on that topic. Recall, we were the first ones out of the gate. And our guidance for the year, when we talked about 9% revenue growth year-over-year, and we're still -- we remain very confident in our ability to do that while improving the margins of our business. So I'll close with Slide 8 with our outlook. We're well positioned to capitalize on growth. Meghan and I were talking this morning about what the hot markets are, and her suggestion was maybe you ought to start with the ones that aren't hot. And it's a really short list. I think automotive is kind of a headwind for us in terms of volume, but demand is incredibly high. Just last month, finished vehicle inventories declined 26% from the previous month. So we're confident that as the semiconductor issue is resolved, we're going to see more automotive volumes. And we may have already hit an inflection point there as well as we're starting to see sequential gains there. But it can be consumer products with retail inventory levels near an all-time low, it's agricultural products with grain price is really high, it's lumber, with the warehousing market, it's metals or any commodity. There's a lot of demand for the specific service that Norfolk Southern provides. And so we're really confident about this year, and we see some prolonged opportunities into 2022 as well. So Mark, anything to add? If not...

No. Let's hand it back to Tom.

Okay.

Great. Thank you. That's a really good backdrop. This is a good perspective, good information. Let's continue with a little bit on the volume side. You showed the chart and your stability and up tremendously year-over-year. Is that broad-brush, what you would have expected in terms of volume trend? Is it kind of -- I don't know if it's kind of better or worse than what you'd be thinking going in?

Yes. I think we're kind of tracking along where we said we were going to be. Obviously, there's puts and takes within that, Tom. And export coal, particularly in the thermal franchise is performing a heck of a lot better than what we had anticipated this year. Now I'll remind you that, that has a lower RPU than our export metallurgical franchise. But we're still very, very happy to handle that. It's good for us. It's very good for our shareholders. I mentioned automotive. We figured we'd be handling much higher automotive figures as we put our plan together. And even when I -- during the first quarter or the fourth quarter earnings call, I probably understated the impact of the semiconductor headwinds. That's also -- that's not only impacting our automotive franchise, but we also have a component of that, that moves in intermodal as well. And so you see that bleed into some of the intermodal numbers. To sum it all up, we're tracking where we thought we would be. We're becoming more and more encouraged about what 2022 looks like with strength in areas that we didn't anticipate and some headwinds in some of the others like automotive, but we'll overcome that at some point.

How do you think about the segments that would maybe have a further ramp in second half, right? So there's a lot of evidence of supply chain constraints. I mean, I guess, automotive is maybe the most visible. But I think there are probably other areas where you've seen constraints that have maybe held back demand, which would seem to point to potential for further ramp-up in second half. Do you think that's fair? And are there areas outside of automotive that you could see increase in activity in second half?

Yes. There are a couple.

Metals, maybe.

Metals, right? You and I were with metals customers a couple of weeks ago, and they're increasingly confident about the back half of this year and then next year.

Especially as auto production probably resumes in the second half.

Right. And so you're seeing more production coming online. And as you know, Tom, we serve more integrated steel mills than any other railroad in North America, so that's going to benefit us. Chemicals is one where we saw kind of a decline in shipments out of the Gulf associated with the refinery, the impact on the refineries of the arctic blast in Texas. And just now, the Gulf Coast refineries are returning back to normal production. We could see a pretty healthy grain harvest in the fall and that's kind of shaping up. That might be pushed back about a month our volumes into October because there really is very little carryover right now, but that could be something that's really strong in the fourth quarter. So we're keeping an eye on that and paying close attention to our customers. And as drayage productivity and warehouse productivity improves, we'll be able to put more throughput through our intermodal franchise as well.

What do you think...

Coal itself, I mean, we'll see how long the coal strength last, but that could -- there's scenarios where that could last into the second half, but it also -- it's very fleeting, so it could disappear quickly as well.

Yes.

What about domestic utility coal, what's happening in that market? I mean obviously, said kind of longer-term issues, but is that -- what's that doing this year?

As we moved into the summer months, Tom, we had about 3 or 4 utilities that we're really interested in rebuilding their stockpiles, which is abnormal. Usually, as you move through the shoulder months, almost all utilities are trying to build stockpiles after the winter and ahead of the summer. So that didn't really look all that good for us. We've seen Henry Hub prices futures be above $3 a million BTU, that's positive. Depending upon the summer -- how the summer turns out, we could see some strength in those markets. However, since it's no longer baseload, it's much more difficult for us to project. And it's just going to be highly dependent upon what happens with the weather. And if the economy reopens a little bit faster, then that will create some more load for the utility sector as well.

How are you thinking about that, you said there's room for a ramp in intermodal, that seems like the demand is there, but maybe there's some fluidity impact on how much volume you're seeing, I guess we hear from different players across the system, and I think gives a sense that it's not one thing that needs to be done or two, it might be more. And so the kind of visibility to fluidity improvement is, I think, limited or at least there is caution about how rapidly that happens. How do you think about that in that kind of system wide? And how you think about Norfolk Southern, what you're doing to improving the capacity on the intermodal side?

Yes, I think it is system-wide, right? I mentioned the drayage community and the warehouses, they're having an impact, and we've seen Street dwell on our chassis increase about 20% year-over-year. And we got a role in this, too, right? We've got to get our train speeds up, particularly in our intermodal network, that will help. We've got to work with our terminal contractors to improve the productivity in our intermodal terminals. One of the things that we have been doing for self-help is really working on improving how we load our intermodal trains, and you see that in double-digit improvements in both train weight and train length, where train weight is actually growth in that is actually exceeding train length, which means we're doing a better job of double stacking, which means we're just adding more revenue density to existing trains. So there are a number of things that everyone in the supply chain ecosystem is focused on. We're very, very fortunate, Tom, to be aligned with the best channel partners in the business. And they're about as sophisticated as they get. And they know what they need to do with their interface with us and with the interface with the BCOs. And we know what we need to do to make them more efficient and how -- what we need to do on our own property to improve.

What are the specific things, again, like on the terminal side that would help you or are there other kind of Norfolk specific things that you're dealing?

Yes. I think on the terminal side, activity outside the gate, the drayage community picks up and you get more pools, that helps terminal fluidity as the drayage community improves and warehouse productivity improves, then your chassis street dwell declines and so you get better turns on our equipment, and frankly, our customers' equipment as well. We need to improve train speed, right? And you see us talk about those metrics quite frequently. And we need to work with our terminal contractors to make sure that they've got the labor in place to deal with the increased volume. And frankly, it's with a labor force participation rate of 61.5%, everybody in the supply chain ecosystem is dealing with labor issues right now.

Right. Yes, that seems to be pretty broad-based. How do you think about pricing? I think that we've seen -- I can't recall, I've followed the industry a long time, I just can't recall a year where there's been the magnitude of pricing increases in broader transport. So you could look at the Ocean container business and historically, kind of a -- I don't know if you want to say a bad business, but in tough business. Pricing-wise, a lot of cyclicality. And they're doing tons of price, you look at the trucking are across the board. How do you think that flows through to or how should we look at your pricing because rails have had a great run for 15 years, right? You -- railroad auto rate price. But is that second half, you'd see a little pickup? Is that 2022? And is it -- so is it kind of maybe a little more muted pickup versus some of the other areas or a time delay or both as we think about the pricing dynamic?

Yes. One of the things, first and foremost, we're really pleased that steamship lines and our channel partners are able to secure price now. We want them to be successful. We want them to be able to reinvest in growth. And so that -- ultimately, that helps us. Because of that, we've got longer-term contracts, right? We want to provide them with some level of rate surety as they do their annual deals. We rarely participate, Tom, in the spot market to any meaningful amount. And so as a result, in our merchandise network, you've seen 24 consecutive quarters of year-over-year improvement in RPU ex fuel and 17 consecutive quarters in intermodal. So that's they're in really hot markets and they're in really weak markets. And so that's -- that demonstrates execution of a long-term strategy. And so that's the way we play this. The average duration of our contracts is between 2, 2.5 years. So any given year, we're probably touching about 50% of our revenue. So as we looked at our price plan for this year, we're exceeding it so far, where we continue to update it. That -- we're going to see that in the second half of this year, and we're really going to see more of it fall into 2022 just because of the cadence of the contract renewals.

So within those comments is -- I mean, is it reasonable to expect some strengthening in price in a tighter market? Or are you just kind of largely disconnected from the broader truck market or other markets?

No. No, there are absolutely -- we are very well connected with the truck market. There is a lag there. And we want to take out the volatility. So our rates in intermodal went up in 2019 and the first half of 2020 when contract truck rates were actually going down. And over time, as you know, our rates and intermodal have exceeded the increase in contract truck rates and spot truck rates. So we are connected with it. There's a lag and a dampening effect in there also.

Yes. Okay. That makes sense. How do you think about the truckload -- or excuse me, the I guess, truckload conversion or kind of share gain strategy? We've seen your primary competitor in the East has bought or in process of buying a trucking tank trucking company, Quality Carriers. CN, I guess, had bought 2 intermodal related companies over the last couple of years. So that's something that, that I guess that's a way to kind of get -- try to get more truck business in or have an angle on that. You obviously have -- your kind of blessed with strong lanes and the investments you made on the corridor strategy. So you got a lot of probably room for inherent growth in intermodal. But how would we thinking -- how should we think about what you're doing to drive that conversion in both carload and in intermodal?

Yes. I think maybe we're unique. I don't know. We've got a lot of organic growth opportunities, right? And buying revenue is not part of our overall strategy. Really what we're focused on doing is partnering with our customers and partnering with our channel partners. We can partner with trucking companies, too, to provide that first mile last mile. We don't need to buy them. And in some cases, customers want optionality on who does first mile last mile. We partnered with interline partners as well. Last year, time, you saw us launch with BNN with UP service between the Southwest and the Southeast, which -- 2 fastest growing regions of the country. We've also announced and launched a new service product with the Florida East Coast Railway in the Titusville, which gets us closer -- gets our customers closer and a shorter drayage into the Southern Florida market and the Central Florida market. So there's plenty of opportunities to kind of expand your network reach and provide new products to our customer base in this dynamic and evolving supply chain by partnering with people. People will probably do things that -- they've got a core competency, we got a core competency. Let's see where we can fit together. It's kind of our strategy.

Right. Okay. That makes sense. Mark, I -- this is a while back, but we spent some time together, I guess this was, I think, end of 2019, and we're talking about OR improvement drivers. And I think that purchase services category came up is one that big category, not necessarily some components may be kind of fixed. But how do you think about that particular operating expense bucket? Is there room to drive improvement in that? Are there other expense buckets that you see as still meaningful opportunity, given you've already captured a lot of productivity in the last few years?

Yes, Tom, you're right. We did talk a lot about that. In fact, even during Q2 last year, we talked about the incremental costs that comes with volume or in the case of last year, when volume declines come, how much is really fixed versus variable or structural versus variable. In purchase services, we made some very good improvements on taking some more structural cost out. We still have more work to do. We have initiatives in place internally with all the groups responsible. Again, we purchase intermodal services as an example, with our terminal operator as we purchased a lot of IT services. We purchase engineering support on the network for certain work. That all flows through there. So we've got quite a few buckets that we are analyzing. We've taken a lot of cost out actually from the structural buckets. And I think there's more to go. Q1, we actually had a very good quarter for purchase services. I do expect that some of the lower level that we saw sequentially in Q1 is probably timing related, and I do think we may come back a little bit here through the balance of the year in that category. But long term, I think it's an area where we can leverage, and we intend to leverage. So our whole goal, and Alan touched upon it really is, we want to try to absorb as much incremental volume as we can without adding costs. So incremental margins is the result of that. And purchase services is no different than every other cost category where we're just going to try to leverage what we have. The other big area for us, Tom, is fuel. The big remaining bucket to go after is on the fuel efficiency side. We've had -- we've strung several good quarters together in terms of fuel efficiency improvement. But we know that there is more to go there. We have a lot of opportunity. Our DC to AC conversions has been something we've been investing in over the past few years, and we continue to convert a little more than 100 locomotives a year from DC to AC. And that's one of the key drivers. On top of that, we've taken a lot of locomotives out. And just by reducing your locomotive fleet, we're saving on fuel. We have fewer to idle in the winter months, as an example, to keep freezing. So that's also helping us. Not to mention the fact that the locomotives we idled or removed or rationalized are the older ones out of the fleet that are least fuel efficient. So now we're drawing from a -- the newer fleet, which are far more fuel efficient, fuel efficient than the ones we've retired. So that's another driver for us on the cost side. And the AC penetration is now up to about 54% and on its way to 65% in the next couple of years. So we're going to continue to increase that penetration. And then the other thing we're doing is, we are investing more and more in technology and energy management is one thing that we want to make sure every locomotive is furnished with. And we make sure that the locomotives that have the energy management are in the lead and they're set to optimize on fuel efficiency. And right now, that penetration is around 80%. So 80% of the lead locomotives today have energy management furnished on them, and we're trying to get that up to 90% in the not-too-distant future. So those are the little things that have been contributing. And the big, big initiative on fuel efficiency for us going forward is this concept of full pin. And really what that is, is just making sure that we don't waste any of attractive effort on a locomotive. That we fill it up with as much trailing tonnage as possible, and that's really how you leverage the fuel efficiency. If you've got a locomotive and you only got 3 or 4 cars behind it, you're wasting an awful lot of fuel. So we want to fill it up with as much weight as it can possibly handle and take full advantage of all that fuel your burning. So full pin is an area where Cindy and Rob's team is strongly focused for that next stage of step-change improvement in fuel efficiency. And I think the other cost bucket, I would mention, Tom, since you asked about other's ones is depreciation. Depreciation used to trudge along and grow every year at a certain clip. And we've kind of taken that down a little bit by the reductions that we've done in capital spend in large part, not to mention the rationalization of the locomotive fleet, and we took that out of the depreciation pool. So those are some of the cost buckets that we continue to focus on.

What -- how do you think about the operating changes. I think that in the fall, there were some changes made in the Southeast network. And I think of train schedule changes over the last couple of years is a big driver of efficiency for you and kind of you -- I think you had 4 separate train networks you're running. And I don't know if you got 1 or 2 or how do you think about that, but pushing together and running long trains, how much is there more to go on train schedule? Or is that something where it's more the go-forward is about, as you said, leveraging the cost base and adding volume? So I guess its kind of broader schedule in the PSR question.

Tom, I don't think we're going to see any like quantum changes in the train schedule like you saw and say, when we rolled out TOP21 in summer of 2019 or did the entire Southeast redesign. It's the nature of PSR to constantly iterate. I think one of the things that where that's really good is supply changes. Supply chains are changing like almost on a daily basis. And so customers' flows are changing, and volumes are changing. And so Cindy and her team are working really closely with our customers and the marketing team to kind of anticipate where we have these opportunities and modify our train plan. One of the benefits of that is the export coal opportunity that we talked about earlier, right? We absolutely exceeded all expectations on that. We've got an awesome service product in that corridor between the Pittsburgh coal region in Baltimore and we've been able to secure a lot of upside for our shareholders because of the product, quality of the product that we're delivering to our customer. We've got a lot of trains that I would say that are multi use. And so we've got -- we have intermodal trains that have got merchandise product on them. We used to run a stand-alone automotive network, and we no longer do that either. So it's -- as you co-mingle trains, it provides you a lot of opportunity to make iterative changes and also to pick up incremental volume without adding train starts, which is exactly what Mark was talking about with respect to participating in this great revenue growth environment that we see now and next year while adding very little incremental cost.

How do you think about the headcount framework, Mark? I think you had talked about kind of flat to down headcount. I think that was maybe on the -- I don't know, fourth quarter, first quarter call relative to fourth quarter, you say, okay, 2021 is flat to down headcount. Is that still on track? Or how would you think about that headcount framework?

Oh, yes, it's on track. And you'd see it from what we've disclosed, we are actually down since year-end. But make no mistake. I mean we have been hiring and we continue to hire. It's just attrition that's been outpacing the hiring, which is why we are on a net basis down. But clearly, we are in the market. We're doing select hiring. We want to make sure that we address our pinch points. And we do need people in certain locations. And one of the key things we're doing is we're trying to bring people through the training pipeline very quick, quicker than we have in the past. But I would say all in, hiring is a challenge right now for sure and attrition is a challenge. So it's something that we are focused on, but I do think that we will continue to be kind of in line with our guidance of flat to down from where we ended last year.

So off the level of being down at the present time, that's actually maybe a little lower than you want to be. You want to kind of add a bit more to have capacity? Is that what you think?

We have to look at where the volume comes now in the balance of the year because as I mentioned, certainly, if the unit train volumes are stronger and higher, we're going to want to add more into those networks. And so we could see headcount come up for just from that type of volume mix. But if we start seeing intermodal and some of the other manifest traffic come up, we can just lay that right into the existing trains without needing to add crews. So I think worst-case would be flat, but probably will continue to be down from year-end.

Okay. Where are you at on the system? I guess, I think of the -- your northern part of your network probably has more double track. Your southern part probably has more single track with sidings. So maybe it's more relevant for the southern part. But what's your kind of standard siding length in the south? And how does your -- maybe your overall train length compare to that?

Yes. First, you're spot on. I mean we're well equipped up North, especially the East West corridors there with double track and in some cases, triple track. And we've grown our train length considerably over the past couple of few years, where now it's over 7,000 feet, but we do have trains that are well in excess of 10,000 square feet. And the point is we have outgrown some of our sidings, especially in the south. So we are -- I'm not going to get into what specific siding lengths we have because they run the gamut. But we have actually started to talk about extensions this year. We've authorized extensions, 3 of them already this year, 2 in the Chicago to Atlanta corridor or another one in the southern region. And we're evaluating other opportunities as well. And this is what you do in PSR. You make longer trains and you make sure that you can accommodate them. So we're reprioritizing a lot of our CapEx spend to make sure we can afford it, but we're not going to hold back on what we think is a huge enabler for us to continue to grow out our trains.

So I mean I think of sidings, I mean, I guess, it takes some planning to get them in shape, but they're not typically I guess, depending on where you're doing them, if you're in Canada, maybe they're more expensive, but they're typically adding sidings isn't that expensive, right?

Correct. It's -- they're not huge numbers, and you're talking about quarter is not years to build-out. So maybe it's 3 to 6 months, and it's under $10 million. It's not tens of millions.

And to your point, Mark made the point. We're fitting this within your current capital goals. So it's not a big number, Tom, but it's going to -- it will be impactful on our productivity and our service.

Where do you think that if your train length is something over 7,000 feet today where do you think that number can go to over time? I mean can it go up to 9,000 feet? Can it -- are you -- is it like a 7,500 feet. I mean I don't know, I know it depends on traffic mix and everything, but how long is the runway on further expanding train lengths?

Well, we think we've got many years of train length expansion ahead of us. We think the opportunity is big. We've got about 10% of our trains, I think, that are over 10,000 feet. So we know that we can get up to that with relative ease once we have the siding capacity but it's going to take a while. But the good news is we're blending the networks that makes it easier to do. We're building out our distributed power expertise and knowledge, which also helps facilitate that. So if you talk to Cindy and our operating folks, we're confident that we've got many years of runway here of expanding our train lengths.

You did -- when you were talking about locomotives and fuel efficiency before, you didn't mention DP. What percent of your trains are running with distributed power?

Roughly a little -- I'd say, a little less than 50% right now on distributed power. Lots of runway there. But the longer trains are the ones that require distributed power. So as we grow our trains longer, that DP penetration will increase. And DP itself isn't a huge driver of fuel efficiency. It helps, but it's not a huge driver of fuel efficiency. What it really enables is the lengthening of trains. And the reduction of intra train forces that can cause problems, mechanical problems for you. But it's really the lengthening of trains that help on the workforce productivity.

Right. Okay. Yes, that makes a lot of sense. The -- I guess, we've had -- we've got some excitement going on the rail M&A side. And it's -- a couple of railroads directly involved in that, obviously, not Norfolk. But -- how do you think about the impacts if there is, if one of the Canadians ends up with, let's say, CN ends up with KSU? You have that, I guess, the right way to characterize how the equity piece and Meridian Speedway from Meridian to [ report ] and so I think you don't lose control over that, that would persist. But what -- I mean, what's the potential risk or upside to you if you see KSU with CN or with CP?

Well, Tom, you know that there's a whole process that plays out, and you can't really calibrate the risk until you go through the process. And both CN and CP as well as KCS, they're all important interchange partners with us today. And we just got to see the way this plays out. We'll have dialogues in due course with them. And then, of course, there's the entire regulatory process that you go through. And it's only really at that point, we'll be able to understand what potential impacts are. But make no mistake, I mean, we've got this shared asset with the KCS, as you mentioned, the Meridian Speedway, it's a very important lane for us. And we are going to protect that asset for our customers' sake as well as for our shareholders' sake. But right now, it's not something we can really talk about what the risks are because there's a process you go through to evaluate how an approval will proceed with the STB. And only after that, can we talk about it.

Do you think ultimately, there is some value in consolidation? I think we've heard different views. UNP seem skeptical. I think Jim Squires has been to the more skeptical side of it, but what's the kind of Norfolk position of maybe there's some value or there's too much risk relative to the potential value? What's the kind of high-level view at Norfolk?

No. Look, we think this is a good, healthy industry right now. And certainly, that seeing mergers take place could disrupt the apple cart, but it's not something we want to get into talking about right now.

Right. Okay. I've got -- I've been looking here, and I do have a question that came in. So I think we've got a couple of minutes left . Let me work this one in. Okay. So I've got -- could you put a finer point on purchase services in Q1 and what the major buckets of expense that were lower-than-expected and maybe how much lower than expected? So I guess more detail on kind of 1Q and the comments you had on purchased services.

Sure. I think we reported about $320 million or $315 million purchase services in the first quarter. And that was down roughly 8% sequentially from Q4. And some of the areas where we see a step-up happening is in the areas of IT. We know that it was a little bit more backloaded and the way money is going to be spent with our IT partners. As well as engineering services and engineering type of expenses, which always step up seasonally in the summer months when you're out there maintaining your track a little bit more. So those are a couple of the key areas where we see a step-up from Q1 into the back half of the year. And I would say there's a pretty good chance we get back on to the quarterly spend in absolute levels that we saw really at the end of last year. I think that our goal, again, see the revenue grow and hold purchase services to what those spend levels were toward the end of last year.

Okay. I've got one more that I'm going to ask. We've got 1-minute left. And how do you think, Mark, about CapEx and end use of cash? I mean is it kind of a similar level as percent of revenue, and that's going to be stable? Or how do you think about CapEx and free cash at a high level?

Yes. So all right. Capex, remember, we reduced -- we took a big step change reduction in our cash spend profile by $500 million in 2020, which was a 25% reduction. So we're at a pretty good level now. And in that CapEx envelope, we've got a guarantee that our infrastructure is safe and robust, but at the same time, we're going to invest in technology to continue to drive productivity and some of the things I talked about in the prepared remarks, and we want to fuel growth for the business, for sure. So that said, I would expect to see now at these levels, CapEx to grow modestly, very modestly. And our goal is to see revenue outpace the growth in CapEx going forward. And when it comes to share repurchase, that rapid recovery from the pandemic-induced shutdown, it's really starting to generate significant improvements in our earnings and therefore, our operating cash flow. And we're going to be within our credit rating of BBB+ and Baa1 and we're committed to staying in there. So as we maintain our leverage and we grow our operating cash, the recipe is really simple. We're going to pay a dividend that we raised our payout ratio in the first quarter. We are going to spend on the CapEx, the way I just laid out to you and all the excess cash is going to be put into share repurchase. So as operating cash flow grows, so we'll share repurchase. And we had $1.4 billion of share buyback in 2020, and we didn't stop during Q2, like many other companies did. We continue to go. So we're committed to continue to drive share repurchase up with our profitability. And in the first quarter, you saw nearly $600 million of share repurchase. And I would expect that will continue to grow.

Is that $600 million a reasonable run rate? Or I mean, I'm sure there's some variability around that, but what's kind of a reasonable quarterly run rate for buyback?

Well, I wouldn't -- if it's flat, it's only because earnings are flat. So as earnings grow, I would expect that number to grow on a quarterly basis as we go through this year. But like I said, it's what we do with the extra cash. It will likely grow from there.

Right. Very good. I think we're just over the time limit here, and so we should probably go ahead and wrap up. Mark and Alan, it's really a pleasure to talk with both of you. Thanks so much for spending time. Meghan, thanks for your time as well. And yes, thanks for participating in our conference.

All right. Thanks, Tom.

Good to see you, Tom.

Take care.

Good to see you too. Have a great day.

Bye-bye.