Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

Okay. So we're going to keep things rolling here on the transports track of the industrials conference. So again, I'm Brian Ossenbeck, I cover transports and logistics for JPMorgan. We're going to talk with Norfolk Southern here. We've got Jason Zampi, the CFO; John Orr, the COO. So thanks a lot, guys, for coming. Really appreciate your time today. Clearly no shortage of things to talk about in railroading in the broader freight market in general, but we got a nice full room so if there's questions people want to throw in there, get my attention. We'll get you a microphone as well.

But maybe we'll just start off a little bit kind of state of the railroad, how are things operating at this point in time, obviously, it's a little bit of a challenging. There's always weather, there's always winter. But this 1 felt like it was a little bit abnormal. So how are things running at this point in time coming into -- it's usually the most important month of the quarter for freight in particular.

Yes. Well, thanks, Brian, for having us. And it's a pleasure to be here. And I'll tell you, you're right. Winter in 2025 had a different flavor than normally has, especially in the United States. Or at NS, we've had over 17 major storms that include polar vortexes. And most recently, we had a 2-inch rainfall that manifested into a 49-foot flood in West Virginia in our major corridor. And so what do you do about stuff like that ?as a Canadian, you prepare for winter. Some of my team were giving me a little grief that, hey, you're over preparing us, we don't get winter like that, that you're thinking about. But as luck would have it, we did. And for a short period, we were -- we had over 100-mile stretch after that flood that we had washouts and at risk where we had to take out the main line, put it back in and then the floods came again and we had to do it all over again. So we spent -- we -- I believe in putting all the resources to getting restored. We restored ourselves twice over a period of 4 days and we're back up and running to over 1 billion GTMs within a week. So it's like capability to respond, respond acutely, prepare, over prepare in a lot of cases and be ready to engage. And that's kind of the transition that we've been leading NS into overall, not just winter, but you saw it during the hurricanes last year. And we can't just say we're at the mercy cold weather, we can't just say that floods are going to shut us down. We have to be able to drive as deep into issues as we possibly can come out of them as fast as we can, come out of them as fast as we can and as the team matures and gets more capability and really gets confidence in speaking up to issues, we're able to respond a lot more quickly. So I just -- I was just in Williamsburg -- or Williamson last week, really checking in on the people affected by the flood and thankfully, nobody was killed in our area, but there were several fatalities on both sides of the state line and really reinforce the emergency capability, but then challenge them to get back on track faster. So we called it March Madness and got into really pushing hard like a college team to focus on the price at the end of the month really restoring as much as possible for the quarter. So winter has affected us. In some cases, affected our customers even more. But between Jason and I and Ed, we're really focused on what's out there, what can we recover. And I'm really, really proud of how we're picking it up.

So Jason, you've been around for a little while at the network and John kind of laid out some of the things that have changed are always working on like right now, but what would have happened last year or prior to the plan if something like this similar would happen at the network?

Exactly like you said, Brian, 18 months ago, 2 years ago, this would have put us down for quite some time. And we're not talking this incident kind of days, we'd be talking months to kind of revamp from something like that. So it's really incredible the resiliency that we've been able to build into the network and you've seen it with this storm, the series of storms this winter, the hurricanes last year, all kinds of disruptions that John and his team have this operational momentum that really helps us get out of these situations very quickly. And the other thing, it's -- when you think about resiliency, I think about the speed of recovery, but it's also the agility that John and his team have been able to show. So whether that's port strikes and freight completely shifting to a different coast or it's things like the Baltimore bridge outage and what we had to do there to continue to serve our customers. That agility and resiliency never existed before. And so that -- both of those things are super important right now as we come into a time that's pretty uncertain with a lot of other things going on. So it's really just incredible what the team has been able to accomplish.

So you talked about the number of days and number of storms and whatnot. First quarter is always a bit tough from an OR and financial perspective. Are you able to put any more context or color or quantify what has cost so far?

Yes. So I would say just starting off, we're super focused on our full year guidance, right? And just as a reminder that's at least $150 million of productivity savings and it's 150 basis points of year-over-year operating ratio improvement with about 3% revenue growth. So that is our key focus. But like you said, Brian, you know first quarter is typically the high watermark from an operating ratio perspective. If you think about it sequentially from fourth quarter going into first quarter. It's probably about 200 basis points of headwind there. But with these winter storms that we've just gone through here yes, winter happens every year, but I think John kind of pointed out, these were really abnormal impacts on us. So from an expense perspective, kind of incremental to that seasonality, we probably have upwards of $40 million of expense that's going to hit us this quarter. And obviously, it's going to have some top line impacts as well. Now John and Ed and the whole team are really focused on and we are recapturing a lot of that volume that was lost over the couple of weeks, months where we had these big disruptions. But we won't be able to get all of that back by the end of the quarter. So it's -- what it's really created is kind of a timing challenge, we will get that revenue. We're confident we'll recapture all of it, but most likely not all within the first quarter. So that adds kind of another headwind to the first quarter. So I think you're going to see some elevated results in the first quarter from an OR perspective. But having said that, all in, we still feel very confident in our full year guide.

So 1 of the other big piece of uncertainty, obviously, is just tariffs and the on and off nature of that. And I don't know if anything has come on or off since we've been speaking, but possibly. But in your conversations with shippers and John just preparing the network for that, I imagine railroads historically don't do -- or freight in general, just doesn't do well with on and off. So I guess, firstly, have you seen any behavior changes and then have you seen or felt any sort of impact from those on the network side?

Yes. Brian, I've had the privilege of working in Canada, United States and Mexico. A lot of those are import-export operations and I can tell you this that uncertainty in any environment is not healthy, whether it's a relationship or a business. And we saw that even with the East Coast port strike threat and a 3-day strike manifested into a lot of disruption in the supply chain. I think we took a lot of pages from that. Number one, even though there were some repositioning of freight to the West Coast, we were able to interchange and effectively move it within our catchment, whether it came from the East Coast or the West Coast. So we had enough capacity and capability and line of sight and trading relationships with our West Coast rail exchangers to be very responsive. And it's very much the same. Right now, we're jumping on everything. We've got locomotives in reserve. We've got them hot and ready, we've got them deployed wherever we need them. We've got a resource in cars that are still parked and we're pulling them out. So one of the most front and center commodities is steel. And we've been very responsive to our steel producers in pulling out some cars that are stored to help them move as much as they can and we're ready to do that with any of our customers. We want our customers to win in their markets. We're willing to use the resiliencies that we've accrued to be as agile and responsive as we can, and we've got the resources ready to go. And I think despite all the turbulence on the surface of water, they're steady state underneath it, and I think those steady states will come. And for all of the reasons that the tariff talks are on, there will be a healthy outcome at some point. And we're ready to work through the turbulence as well as a steady state. And I think when you have a railway working as closely as we are and as customer-centric as NS is, we've got, what I would say, a unique ability to be more responsive than perhaps others. And that's our wheelhouse. So we'll continue to serve our customers, be really agile and help them win despite the turbulence.

Jason, from a, I guess, end market perspective or financial on the volume side? Are there any commodities or trade flows that you're watching in particular that could be -- I mean, as written the tariffs are going to cover a wide range of things, but like export coal, for example, possibly export agriculture, obviously steel, autos. What do you look at kind of like the exposure as they stand right now on the network?

So first, adding on to your previous question. We -- I think like most people, customers, manufacturers, everybody is kind of in a wait-and-see approach, right? Just seeing how all this uncertainty plays out. Obviously, keeping a close handle on what's going on. But from our business perspective, about 75% of our businesses is domestic, but we move the U.S. GDP. So wherever the manufacturing occurs, wherever our shippers are, we stand ready to serve them. And I think that's the great part about the agility that I just mentioned and what the work John and his team have done if the volume is there, we're ready to move it, and we've got the capacity, the resiliency and the agility to handle it. So we'll see how it plays out, but I think we've got a good line on being able to move that traffic.

So on a related topic, I guess, with agility, if we do have a share shift back to the East and Gulf Coast, which is I assume we would, but it's hard to say for sure. Would that be net positive, negative, neutral and is a different way of trade flows, obviously or freight flows, rather, but would you be happier having more back on the East and Gulf Coast? Or does it not necessarily matter because you're getting some of that interchange from the West Coast anyway?

Yes. So I don't know if you have an opinion operationally, John. But I just -- the way I think about it is to your point, we'll see how it shakes out, right? I mean tariffs may impact that. But assuming freight does kind of come back to the East Coast, which makes sense for certain things instead of going from L.A. to New York, it comes in on the East Coast. I'd say we're kind of agnostic to it. There's puts and takes, benefits and detriments each way. As an example, something comes in on the East Coast, where we've got a lot of density there that we can serve, but we've got shorter length of haul. If it comes in West Coast, we've got longer lengths of hauls, but you could have some traffic leakage in some of the gateway cities like New York or Kansas City. So I think there's puts and takes to both. We've shown that wherever that traffic wants to come in, we'll move it. But I think we're -- we'll take it wherever it comes.

Yes. And for me, I invest in generation of rail roaders really focus on terminal performance and first mile, last mile capability. And of course, over the road, when their first mile starts on our territory, you've got the opportunity to really set the clock on PSR 2.0 really relies on a lot of accuracy and then stability. And if they're coming on to us, then you don't have a multi-thousand mile journey that had -- could be plus or minus several hours to make a connection or to optimize your train yield and when they're coming to us, then we can really have more influence on that and more of the quality of the first touch into the country and then the last touch into the marketplace but either way, we've got some really good railways that we interchange. We've got a very, very robust network that includes a lot of sophistication on how we move cars from one company to another. So from a financial position, I agree with Jason, just from an operating person. I like to control what I can control. So I'd prefer it to be on me, but we take it either way.

So one 1 more kind of operational freight flow question. If we see these fees, levies were calm on port calls for vessels that are tied to China in some shape or form. What I've heard is that it's going to create more bunching, potentially more congestion as these vessels just visit the larger ports on the East and the West Coast. But I don't know if you've heard anything different from your conversations with your ocean carrier partners, but would that be something you think the network would be able to handle just broadly speaking, rail network in general because I tend to think of more stuff at one place at one time, potentially causing some congestion.

Well, I won't work in hypothetical but just constructively, I would think that density helps rails and the frequency of departure and how we manage that is not a bad thing. It's the consistency and stability of what that event is happening. But I can tell you this, as a railroad person, if I'm looking at competing modal competition, and I'm a producer, I'm looking for the lowest cost, most reliable system of moving it. And a lot of times due to our service in the past or other economic drivers, including just-in-time supply. People have chosen other modes of transportation. I think the threat of increased cost or the reality of an increased cost really would drive me as a logistics person to go to the lowest cost transportation and shave money so I can provide end user a better product at a lower cost. So I think railways are positioned, especially us, who really work in that industrial complex of the Eastern United States to really be responsive and support the control over the net effective cost within the country. So I think, yes, it depends on how much capacity you have. We've got capacity to serve. We can manage through frequency of departure any kind of surges, and we do. We saw it during port strike, we see it as vessels recover from ocean-borne storms and the sequencing gets out of kilter. It's nothing we don't do. And the longer -- if it becomes a part of our landscape, we just adjust to it.

And I'd just add to wherever, if that concentration does occur, I mean, we serve every port on the East Coast, in the Gulf. So I mean, we're well positioned from that perspective. And like John said, we're ready to handle it.

So maybe talk a little bit more about truckload conversion. We've seen that pick up here, especially on the East, which is a little surprising, considering the truck markets recovering anytime soon, it looks like. But maybe you can talk just approaching that market. And I think in the past, you've called it more flexible freight. So how to get that to come to Norfolk, come to the railroad and then stay and not just go back and forth when it suits whatever that supply chain is that we're talking about.

Yes. So I think about that kind of in 2 pieces. So one, I would call share recapture. So that's freight that we used to move and no longer do and then shared growth right? So just new opportunities there. And I think the foundation for both of those is a really good, consistent service product. And that's something that we've talked about here, but that is what John and his team have built. So that's the key to either picking back up freight that we had lost or just growing with new customers. So I think that's key. The next step in that is then how do we enhance the ease of doing business with us and whether that's becoming a rail customer for the first time or it's providing that consistent reliable service that the customers can trust that is more truck-like. So I think those are the key components for us. But really, the good service product is the thing that really unlocks all of that conversion.

Yes. And Brian, you would have seen last year in 2024, we spent a lot of time stabilizing the level of service, creating a lot more reliable service product and a couple of cranks of the operational improvement wheel on our planning, our structure and our train service plan in general. This year, as I talked about in December or January, I guess. The -- we're taking now that capability that we've developed and turning up the heat a little bit more on ourselves, greater length of haul for our trains. That means our assets are going to be turning faster. The tighter standards within terminals so that our cars dwell and the utility of the cars are optimized. So we're taking what we've done as a base last year and turning it up. Our -- as we did that, we started with safety and capability. Now we're looking at safety, capability and business acumen. So we're really helping our leadership across all the stratas, understand the business outcomes that they're driving. If you can do that and still have a balance on your cost structure and your truck-like service, which that's the goal. That's one of the goals is that's going to help us now have a competitive front view and reputation from our -- from people who want to convert. They really want a lower cost, better choice to move or hedge a little bit. So we're going to really go strong on our service quality, still on our cost structure and our top and bottom line focus. But it's really about what do our customers need, how can we get -- be more inclusive to onboard more people?

Maybe, Jason, you can offer some comments on how the domestic channel partners are doing during bid season. Obviously, truck market, as I just mentioned, is not really going up anytime soon at least it doesn't look like it's bouncing around with seasonality, so that's a good sign. But how the folks with the private boxes, maybe even the rail road boxes feeling as they go into that sort of market. Service is certainly helping, but the competition probably not.

Yes. So I think -- I'd say I think we're around like 70% of the way into that process. We're hearing good things from our channel partners. I think a lot of positivity out there. We've -- I would say you talk about truck pricing. I mean, you see the same metrics that we do, and we're not really expecting a big rebound there anytime soon. That's not in our base case scenario. Obviously, we'll take it when it comes. But I think so far from where we are in the bid season, we're feeling pretty good about things as our channel partners and our beneficial owners as well.

So maybe you can talk a little bit more about pricing, Jason, as you get into again, come back to the service product, which is improving the time lag of catching up with inflation, certain contracts probably worked that way but still not the best market from a visibility perspective, but I think you guys are a little bit unique in terms of how you're able to approach that market and approach pricing which has been a little difficult for the industry to get ahead of cost recently. So how does that -- what's sort of your base case for the year? And are you sort of tracking along that to start?

So I mean, I think as you said, it's -- pricing conversations are always tough. But when you have a great service product, it makes that a little bit easier and we can show the value that we're bringing to them. I think from an overall perspective, it's kind of hard to talk about pricing at the high level because it is so -- there's so many different moving parts. So I think if you start with coal, you think about that's kind of tied to seaborne benchmarks and you see what's happening from that perspective. On the IP side, we've really done a really good job of strong pricing there, been very disciplined on our pricing side. And if I think, beat our own pricing plan there as we move through last year. So we expect to continue that momentum. And I think what the service product does is it allows us to, like I said, number one, continue that momentum; but two, add additional volume from that -- from those customers, whether existing or new. So that's what's going on, I think, in the IP side. And then on the intermodal side, kind of like I just talked about, really, because that is so truck competitive. We're really focused on what the truck pricing environment is and as I just mentioned, we don't have that any kind of significant rebound built into our base case plan there. But I think it's -- like I said, I think it's easier to think about the pricing across those 3 big commodities separately and what we can do there. But I think we've been really proud of what we've been able to do on the industrial products side from a pricing perspective. And now with this consistent service product adding volume to that as well.

John, one question I wanted to ask you for a little while now is car miles per day because we see that from typically the longer length of haul networks like when we spoke to this morning, where it's over 200, 215 which sounds great on an absolute basis relative to Eastern which are a bit shorter. So how do we put that -- it's relatively new for Norfolk to talk about that? How do we put that into context? Like where -- do you have a view on where that can go and what that would mean?

Yes. Well, it probably is a reflection of my roots. And so car miles per day are important. But it's a massive asset that reflects not only on the use of the car, but the product in it and how fast it's getting to where it needs to go. And -- but I don't -- I'll tell you Brian, I don't fall in love with any 1 particular metric. And I certainly won't allow my team to talk vanity metrics. So it has to have a business reason why we're focused in on it. And that is so tied into how effective we are over the road and how really precise we are within the terminal. So that's what I'm focused on. I just want to keep pushing myself in incremental improvements and really haven't really -- we haven't touched the value proposition for this network yet. I don't know where the ceiling is. I know we've created a lot of capacity for both trains, train length, train yield, throughput and terminals. So car miles is one of the things that you've seen a lot of improvement. And even despite the headwinds that we've had this winter through the storms, we're still improving across the board on our train speeds, our car miles or dwell gets impacted probably more than anything else and even our locomotive utilization. So I look at it as a balance. And as I talk through it, I always talk through our internal assets of car, car miles, our network productivity, horsepower for GTMs, et cetera, and then as the customer sees it. So I'm always trying to have that balance. So there's probably lanes, especially in the Northern Corridor where we could really crank it up but then at what costs and what value. So I really want to make sure when I'm going in the pit to change the tires, I'm going to get faster lap times for the -- and win the race. So we just got to be balanced in how we look at that. But I think car miles are very instructive to how we're running, how our network is planned and more importantly is the delta between expectation and reality that we have to drive into. But those help us and guide.

Another area that seems like a potential upside for Norfolk is just on the fuel economy and fuel efficiency. I know you've brought some people to help out with that. It's always been interesting that CSX, given the shorter length of haul has been able to lead at least the U.S. rails in that perspective. So is there -- is that achievable on your view over some period of time. Is there a mix differential because you have a bit more intermodal? Where does that stand? I guess you can use a baseball analogy in terms of innings.

Innings? Well, the home team or the away team?

We'll give you the home team.

Okay, perfect. It's the top of one inning or another. But I would say there are a couple of pieces to that. I am absolutely committed to being the best we can be in fuel. And I think we can meet and exceed our competition in the East on that. And it's early days, and we've made a lot of improvements, but there are administrative controls. So how do we account for fuel, what processes do we have in place? And then how do we reconcile, right, and how quickly. And so we've really worked at speeding all of those things up and creating as much automation as possible. But there are investments that we're prepared to make. We're in the midst of a 100-day review of all of our purchases and services and category management of those things. And front and center is fuel. And that's why I brought Mina and Carlo and other people into the company. They are absolute experts at this. And so you'll see deeper dives on that reconstruction of how we source fuel, how do we deploy it, even the -- cut some capital investment around managing those things. I would say that the nice thing is probably in the early innings of the World Series. So there's not just 9 innings it's up to 63 innings. But we're making a lot of progress. And so we're really looking at sustained improvement, and then we'll see inflection points where we get a lot of value and then the next iteration and improvement. And you saw that last year. So we're really challenging ourselves for a really aggressive improvement, and we're tracking fairly close to that. So I'm excited about it. Really, really excited about it.

Great. One question we're asking everybody here this week is we've seen more reports and the AR came out with one on cargo theft and how much that cost the industry and it's we hear from shippers at conferences we go to as well. So it does seem like it's not just any specific railroad and it's getting more organized, more challenging for freight in general. So has that reached a level of heightened focus from your conversations? And how is the industry trying to address that?

Yes. I'll say this, please report to me at NS, and I take it very seriously. And I want to give them all the tools and skills and support that they need to effectively protect our infrastructure, our people and, of course, cargo. And I don't know how to say this politically correctly, but I do not want places like Atlanta and Chicago to experience the same kind of theft and disruption that we saw in other parts of the country. And so we've really been focused on how do we do that? So for me, a train at rest is a train at risk. And the faster we move them, the better we're going to be to insulate, especially through risk areas. So we know where our risk areas are and in order to really energize our police, I brought in a group that I worked with in Mexico who were very skilled at assessing an action orientation around concentrically protecting key areas. And we're really looking at how do we do that, how do we then do what we can ourselves and bring our partners in other railways that we interchange in some of these areas, even groups that have interest, including BCOs and other people that may want to be a part of that. But we're taking it very seriously. We're able to work through very well right now. I just don't want to give any kind of opening to further disruption.

We have a couple of minutes left. If there's anybody in the room wanted to ask a question. If not, I've certainly got a few more in the back there.

The -- sorry, the 3-day port strikes that happened. You touched on that a little bit now. It didn't really have a huge disruption to your network. One of the issues with the port strikes was the automation at the ports and the union's desire to have that kind of kiboshed in some ways. How does automation at the ports affect your business? Does it affect how much you can load, when you can load? If they were to become 60% to 80% automated, would that change in what way or another, your business?

Well, I think globally, we've seen the impact on progress through technology and -- but progress through technology doesn't itself lend to optimization or improvements. It's how it interfaces with people and that willingness to engage in it. Ports are going to do what they're going to do. When they load the railcars and if they can find more efficiencies, whether it's traditional or new ways, then we're ready to jump on that. And I've worked in areas where there are more technologically advanced and others where it's more traditional. And either way, we're able to provide effective service and move the goods. I think where the benefit could or the thesis could be is how effective things move on that port in a constraint on acreage or limitations that are terrestrial that will be up to the ports on how they deal with that. But we're agnostic one way or the other. And we have great partnerships with our ports and they've been able to respond to changes that we've made and headwinds that we faced, and we're ready to support our trading partners in any way we can. So I don't think it's -- I've got a position one way or the other.

So John, maybe I'll wrap up with the kind of related question. When you look at staffing engagement, bench strength of the team, there's been a lot of operational changes we've seen pretty contentious negotiation with the industry and labor. We've seen work rest rules change, but how are you feeling right now in terms of how all that's positioned and being able to execute down to the field level?

Brian, one of the things that -- one of the first things I did was take the field leadership out of Atlanta and put them where they belong in the field. So our Vice President, Operational Vice Presidents, General Management, superintendents, that top 3 tiers of management that weren't necessarily in the field where they were able to make decisions influence people push them out. That's allowed us to decentralize some of the decision-making and put in controls into Atlanta to validate the decisions. That's helped us tremendously in the agility, the responsiveness, it's helped in safety. Our safety performance last year improved over 35% in injuries and accidents. We're on track to around 37% right now on top of that as we move through the year. So stability, safety and engagement has been improved tremendously. We're -- I'm still looking to build up the bench. That's why I'm spending a lot of time this year on clarity camps. So it will be a business acumen, communications and capability and safety for the top 30% graduates from my safety camps will advance into business clarity camps to really drive home that need and build the bench and create that capability. So we're finding ways to really develop people more rapidly within NS and we've got a great host of people with talent all over the place and finding those nuggets and moving them out into the field. We've got a group of PhDs that we -- in our operations research department. I brought them into my war rooms now. They still work for [ Aneel ]. And we're looking at the trending of traction motors and outputs of locomotives and any kind of erosion in power and traction then sending them out to the field, they're actually riding trains and feeling what they're actually experiencing in the academic world into a practical and connecting to our team. And so they're elevating. So the business is improving from places I didn't even anticipate last year. So we'll continue to do that. And I think it supports us and we're early days into this transformation but I would think that it's important to tell you across the board, whether it's the finance department, the commercial group, the back office or the operations team, we're really focused on improving NS, creating top and bottom line growth, closing performance gaps to our peers and providing the best service we can possibly provide and we're moving along that purposefully with deliberate practice. We know that we don't have all the answers yet, and we're really, really focused on developing that capability even more fully. So we can compete and we can win.

Okay. Great. Well, we're out of time. So we're going to wrap it up there. But John and Jason, thank you very much for spending your day with us.

Thank you.

Thank you, everybody.