Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

So we're going to be kicking off right now with Norfolk Southern. John Orr, now almost a 2-month veteran COO of the company. And I'm going to pass it to John -- I'm going to come sit with you, John. I'll pass it to you for some opening comments, and then we'll get into questions. I think John had some slides, those are up. So thank you, John, for being here.

Thank you, Scott. Well, a great day to be in New York and just checking in with the field this morning, and it's a great day to be railroading. The team is really engaged and really focused on getting down to the business of closing the gap to our peers and increasing our service performance and capabilities. So just to do a little housekeeping. Everything I talk about is forward-looking. The full details of the disclosures, normal disclosures are available on our website as are the two slides I'm going to just refer to just with some context to what we've been up to and where we're going. And over the last 60 days, you're right, it's been a couple of months since I've been at NS. It's been a very exciting time. And it's been a time where we've had ambiguity and now we have clarity. And so I'm sure we'll talk about some of that today. But within that space, the team has been busy. It hasn't distracted from the mission, and the mission is to increase service capabilities, really hone down on what resources we need to dedicate to our service proposition, align that with our commercial and stakeholder commitments and really drive performance. And I've looked at some of the key measures that give me leading indicators where we're making headway on those items. And like it's a journey. And it's always going to be a work in progress, but there are going to be milestones that I look at to make sure we're on track. And then to turn up the heat on the team or to take time to celebrate and then move on to the next thing and pivot to a higher level of standard. Some of those things that as we define KPIs and constrain some of the access to resources in the field give discipline to how we use them. And our locomotives, our car cycles, some of the -- those yields that I'll talk about are important elements to closing the performance gap financially. At the same time, delivering exemplary service levels to restore the confidence of the shippers and to really attack some of the opportunities in IP and merchandise to bring back repatriate to NS or to compete head on with other modes of transportation. Over the next 6 months, we've committed to taking out significant costs and align our cost structure with our service proposition. And a lot of those first crank savings, first crank improvements on visibility and accountability are in flight. As I move through the next 6 months and even the next 12 months, I'm very confident that as we move towards the latter part of the year, we'll see the commitment of 400 to 450 basis points take out on our cost structure will come into play. And while these are important things, making use of the network upstream and downstream blocking, making sure our terminals are performing at the levels they need to, particularly as it applies to merchandise and then really getting into optimization of our lanes and the yields that we'll expect to see. Some of the metrics I talked about at our earnings call -- on our earnings call, really are threefold. We talk about network health, how we use assets and how the customer sees what we're doing. And those are three important elements where it's not a singular focus on one particular stream, although emphasis could be added in particular context, depending on the conditions, and it gives us the ability to flex up and flex down around that kind of purpose-driven leadership and outputs to our shareholders and people who should be able to see this level of visibility. And of course, there are just 6 measures. There's hundreds of things that go underneath that to cross check and check in balance and validate. And these are sort of the 6 things that I've decided to talk about in order to put context to how we're doing, how we're working on the network, how we're managing our assets and how our customers are seeing it. And I look forward to the discussions. I hope that gave you enough time to have a break, Scott, so you on for complete 8 hours, but the 5 minutes will give you a little bit of rest.

That's perfect. Thank you, John. So I'll start with questions. If you have any, raise your hand, we'll make sure to get you involved. So maybe just, John, let's just start at a very high level, right? You've been here now for 2 months. Sort of, what's the -- just big-picture diagnosis of maybe what was missing at Norfolk and what are you -- we see the network updates of what's happening, but -- how are we changing, what are we actually doing to accomplish some of these changes?

Yes. Scott, that's a great question. That's a question I ask myself the minute I walked into the door the first time. How do I look at this because it is a great network. It's a big network and it's arguably or unarguably, underperforming. And where was that -- what are the big buckets of underperformance? And what are the rocks that are in that we can move in order to free up the capability of the network and the team within the network. So two elements. First and foremost, the fiscal execution of our service plan and then the capability of leaders to drive performance, hold accountability and have enough perspective to adjust and continuously adjust the service plan to fine tune to the current need. One of the first things I did was after, kind of, diving into the data set was to realize that our merchandise business was the biggest opportunity for improvement. It is a true case for change. You couldn't argue it was underperforming. In fact, it was underperforming to the extent that we were disproportionately expensive as far as organizational cost but also from a reputation and a growth perspective, it was a big drag. And one of the things that I want to look at in context to what the -- what that meant to the network and then go down, zoom in and zoom down right down to the terminal level to figure out where can we make the most impact? How can we then make changes, replicate it, go to scale across the entirety of the network from a terminal perspective and then pull it back up on a macro to redesign the network around the improvements in the new standards. So I would say in simplest forms, merchandise was dragging. The terminals were underperforming and the accountability and visibility to make the changes were lagging and putting those kind of conditions, resetting them, resetting expectations, providing organizational support and impetus for change around those things and then really driving that. And that helped establish some of the improvements that we've seen so far.

So when we say merchandise underperforming, terminals underperforming, what are we doing to sort of change that? What are the metrics when -- specifically -- I mean we could look at terminal dwell time. Is that ultimately the metric that we're focused on? Are there other sort of KPIs that you want to -- that you're looking at every day.

Yes, there's checks and cross check. So from a terminal, our commitment to customers is on a plan that is all predicated with on-time performance. So on-time performance for train departures and how the trains arrive at destination are two important bookends. Within that, terminal dwell helps us understand, okay, it's one thing to say we're going to run everything on time. But if we're going to run everything on time and not connect the traffic that needs to connect that day, then we're underusing our assets. And so on-time performance, dwell, connections, cars, car miles per day and GTMs per available horse, tell you that on-time performance, if the other things are lining up and improving, [indiscernible] on-time performance is not only the discipline of running to the plan, but the mechanisms and the churn of delivering within the terminals is working because all of those other things are in line. If you didn't, then you could say, okay, we're not connecting enough traffic. We're not processing. So are we not flat switching or humping enough cars? Why not? Is it mechanical? Is it engineering? And how do we coordinate that? And we've had to ask those questions at every terminal. And not every terminal had the same answer or the same bogie, so to speak. And so we've -- having the war rooms and the task force create the playbook and the standards, takes all of these things, unifies our objectives, unifies our standards and commitments and obligations within the terminals. And now we've got more energy around all of the right things in place. And it also helps us train people and develop the skills necessary to really read the data, respond to it and then have that playbook executed.

We were talking last night about the redesign of the network in the South and the North. Maybe just give an update there.

So the network is, from my perspective, is our terminal is connected by over the road lanes. So it's the sum of the whole of terminals and first mile, last mile. One of the things that after we got into our terminal management and really focusing on our two major -- two of the major hump yards, we're able to then pull back and look at how do they work together? How do the networks and nodes coordinate traffic. And while after fixing the terminals and improving the terminal clocks on the flows in and out of the terminals, we're able then to put more context around a north-south orientation. So we've redesigned the train service plan for the south of the network. We did that 3 weeks ago. We're running a reinvigorated plan. On the north next week, the end of May, we are introducing the next phase, so the northern part of it. And we want to give time for the balance to take hold to see how the network responded to the changes. And it's working. I mean, the North is running very well right now. It's probably the strongest ever ran in the last 5 to 10 years, which is significant because that's the main corridor and especially in light of East Palestine and some of the drags that were really centric up in the north. And in the south, there's a lot of merchandise, a lot of growth opportunity. So getting those rightsized and calibrated is important. So it's not our last change. We'll be continuing to move the dials in the next crank of the improvement wheel is really about standards and tightening down the standards and making that new plan more difficult to deliver and more constrained on assets and how we see the customers so that we can continuously improve and challenge the team.

So when you're -- so you do the network redesign in the South 3 weeks ago. What -- is there a metric or two that say, here's where we were 3 weeks ago, and here's where we are today. And so here's the proof point that the network redesign is working?

Yes. I think they're really in line with what we're saying, and we're keeping it simple by using these 6 types of data points. And speed -- network speed is an important component of it as much as the car miles per day. And while they seem the same, they're not really the same. But it also -- we also have had some really, really difficult weather horrific weather in Texas and in the south of our network. And what I've been really, really happy to see because I'm into it every day is we can go deeper into the problems without being impacted in faster exiting the problems. So that tells me not only is the plan robust enough to service the customers, but the team is readily engaged and understands it has to be managed. You cannot set and forget a plan.

So when I look at this slide, I want to spend a couple of minutes here. The second quarter metrics, they're all through, I guess, your earnings call April 21. Like when you guys actually report Q2, do you think that ultimately, these Q2 numbers, are we making incremental progress as Q2 is progressing? Or as we're implementing some of the changes, I don't know, are we taking any step back? I don't know any -- how should we think about that?

You can tell your experienced because you know it's not linear, right? There's going to be ebbs and flows and our objective is to lock the tops of the sign waves off the bottom and the top and create as much stability as possible within a dynamic environment. But I would tell you this, the asset efficiency is tracking on a linear path and really improving. So car miles per day and available GTMs for horsepower are really significant and tracking absolutely in the right direction. We're Intermodal composite, we're peeling back the -- to overperform, we're peeling it back a little bit so that we can balance merchandise. And while we're doing that, it's outperforming itself. So we've had some of the best intermodal composite performance over the last 2, 3 months -- well, 2 months that we've seen in almost a decade. And that's pulling back some of the behavior over the road and creating more balance for our merchandise, more prioritization of our merchandise. But that's only made possible by terminal engagement and making sure that first mile and last mile are absolutely efficient and giving up a little bit in the middle so that we can benefit the overall network. So I would say those things are there. Terminal dwell as we work through the master plan and the playbooks, that's going to vary, and it's really conditioned on the cycles. But I would say I'm really impressed by what we're doing so far.

And so 6 months from now, right, where do you think -- if we want to gauge success here, right? Where do you think each of these metrics, where should they be? Where do they need to be for you guys to be hitting some of the cost and productivity targets that you're laying out for us?

Yes. And I guess I look at asset efficiency, right? Because that tells you you're going fast, but you're doing something with that speed. And so the car miles per day would -- as it increases. And we talked about modest double-digit improvement on that. I would say, I'll be looking at the team with a smile on my face as we hit 115 on car miles per day, and then I'll take the smile off and say now we're going higher, right? Now we're going to 120, 125. And how do we get there together? What do we need to do? And that's a function of curtailing the number of cars that are on the network as well as making them work very effectively while they're there. And there's a couple of lines of thought on that. Our GTM available horsepower, that's an important measure for me that locomotives are an important asset, and they're expensive to maintain the double-click benefit of this right now is that we've been able to pull out underperforming locomotives, either from a reliability or fuel consumption. So as we pull these out and put a more favorable mix, gives the locomotive team more time to really get into the reliability index on the stuff we're pulling out, and it allows us then to really recondition our view on capital. So in the next 6 months or a year, all of these come into play, but that asset efficiency is something that's going to be dialed into completely.

And guys, there are some seats over on this side, if you need. Okay. So the car miles per day, we said we want to get to 115, the GTMs per horsepower. Where else any of the other metric KPIs in terms of where we want to get those?

Well, our merchandise trip plan, I mean, that's a subset of on-time performance -- on-time delivery and on-time departure. And the health of how our throughput at the terminals. And so I would think that as we improve our merchandise delivery, whether it's viewed through compliance on trip lands or on-time arrivals, that's going to give us the benefit not only of cost reduction and waste reduction, but also now the case for change for our shippers to come back or to choose a rail instead of a truck or whatever mode they're using.

You talked in the sort of -- I think the slide earlier, crew starts down 35 per day. What's the base of that? I just want to just understand how much improvement that is and is there more to go in terms of reductions in ...

I would talk more in terms of more to go. And there are -- it depends how you look at it from a crew start where the crew started is because of a recrew that is a very wasteful use of a crew. Not only are you spending an additional crew where you hadn't planned it or you are stopping the train to wait for that crew to get into place, because inevitably something along the over the road process is broken down. And so big ig takeout on that. We've made a lot of headway. In fact, we have a subgroup from our task force in war room in Atlanta that's solely focused on mechanical, all of the reasons why a train stops. And so we're drilling down on any train that has not stop that's not by design, whether it's by service, by failure or by our wayside detection and really getting into the what, the why and the how. And we're finding -- gleaning a lot of information that's giving us more capability at our terminals. But that our starts for yards or starts for our local switches, we're taking a very hard look at that because we don't want to impact the service component and we don't want to pull the [indiscernible] out from underneath some of the customers who are in a rotation. But we also want to work with them to rightsize the level of service and the frequency of service based on their needs rather than what historically we may or may not have done. So I would say I would look to be -- that is one of the ones that will probably be in the Century Club here as we move through the second into the third quarter, where we've got better than 100 takeouts, and we'll continue to do that. But that's something you want to be very smart about thoughtful about how you do...

So just to understand, so to date, a reduction of about 35 crew starts per day, you're saying that could get to 100 crew starts per day in terms of production.

Yes.

And so when we think about past [indiscernible] implementations, if that's what you want to call this. One of the big things that people think about is headcount. And when I hear crew start reductions, again, headcount, like help us think about what a 100 -- reduction of 100 crew starts per day. What does that mean from a headcount perspective or if it makes sense more broadly from a labor cost perspective?

Yes. I would think labor cost perspective is how I'm viewing it. Because as I've said throughout this whole last 6 weeks is that this is not a headcount reduction exercise. And as had to a various degrees, the implementation of PSR for last 3 or 4 years. The issue is really how do we create accountability all around? How do we use people? How are they adding value and contributing to the top end over growth of our company and the course correction that we need to do to close the gap on our financials. And so it's the discipline around how we use people, the visibility to that and driving down those decisions to where people actually understand the financial implications to the decisions they make on people. And cost takeout, crew starts take out, they all have an end decision point. And when we get to a point where we may be long on crews in a particular area because of either the growth in develop or the discipline is such that we've got surplus. There are a lot of ways that we can manage that. Attrition can outpace or has historically outpaced the number of takeouts that we're doing right now. And even I think changing how we train people, training forward to have qualified locomotive engineers during the [indiscernible]. So as we pick back up there -- we've got trained people available to go to work. And even working with the unions, I mean, it is not lost the importance of having this commitment with our labor organizations that we're going to treat people respectfully. We're going to value their contributions, and we're going to hold them accountable to perform, the way show up when they're supposed to work safely. Use common sense and go home safely. That's the value proposition that I've asked them to give me. In return we've committed that we're not going to furlough. But there are a lot of historic elements within CBAs that we could work with the unions to be able to move people around in an environment where we may be wrong and put them to work in other places temporarily or whatever arrangements we can make. I think there's a lot of value in having that stakeholder engagement and partnership attitude towards labor and management.

So you guys have previously said by the end of the year, headcount would be down about 2%, I guess, including attrition. Any change to that? Does that...

No. Our headcount projection is really truly based on attrition. There's going to be no need to put anything in place to hold people longer than they wanted to stay. And I'm really comfortable with what we've talked about as far as headcount and as far as people count. And if anything, that discipline around our people spend and eliminating the punitive elements of payroll like recrews over time, held away, those sorts of things. I think we'll make a lot of headway on those.

And then what about hump yards?