Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

All right. Great. We're going to go ahead and get started continuing on the rail track at the conference this morning. We're very pleased to be joined by Norfolk Southern. From Norfolk, we have John Orr, Chief Operating Officer; and Jason Zampi, Chief Financial Officer. Gentlemen, thanks very much for joining us. I think I saw Michael Barr and Luke are also in the audience. So thanks, guys, for joining, and welcome to the conference.

Thanks, Chris.

Yes. Thanks for having us.

So I think we're going to turn it over to you for a couple of intro comments. We can kind of get the ball rolling, and then we'll dig in for questions. And for the folks in the audience, we do want to make it interactive. So if you do have questions, raise your hand, we'll make sure we'll get those questions asked and answered. So with that, let me turn it over to you folks.

Yes. Thanks, Chris. It's great to be here. Great to be in Chicago. And just coming in here this morning, it's a perfect day for railroading, not too hot, nice and sunny. And I think that reflects on how the operations are running right now. Very scheduled, very disciplined. And as I look at the fundamentals of what we're doing, both from a connection standard, from a terminal capability and how we're servicing our customers. Things are right on track the way we would expect them to be. Very, very proud of the way the team has embraced our speak-up culture and really driving safety performance. It's really the enabler that allows us to be on a scheduled rail path. And I would say that very, very pleased on how things are going right now.

Yes. And I think the momentum that we have on the operations side is really what's giving us a lot of confidence in some of the financial goals that we laid out from a perspective of $150 million plus of productivity and cost takeout, made really good progress on that in the first quarter and moving strong there. Our goal of 3% revenue growth. I know we'll get into some of the components of that. Obviously, we've talked about the uncertainty related to tariffs and just the general macro there, but still feel good about that on that front. And then putting all that together, 150 basis points of OR improvement year-over-year. So all in, I think we're feeling good where we are. The operations, like John said, are running really strong, and it's just given us a lot of confidence on where we're headed.

Great. So let's dig into that a little bit. So volume up kind of mid-single digits, I think, quarter-to-date. Carload has been moving nicely in that sort of high 130s, I think, on a weekly basis. So maybe we can kind of break down where you've seen the relative strength or where maybe there are some areas that are a little bit on the softer side.

Yes. So overall, like you said, volume, we're up about 4.5% quarter-to-date. So pretty good progress there. I think the key things to think about are, one, how does that volume growth manifest into revenue growth? And then two, what do we see here as we're moving through June. So on the first side, when we think about the volume growth going to revenue growth, that 4.5% volume won't translate directly to 4.5% revenue growth. And the reason is we've got some pretty big headwinds both from fuel that we've talked about as well as coal price. So those are 2 significant headwinds that we've laid out. To a lesser extent, we have some mix impacts that are also affecting that. So we'd expect a lower revenue growth than that volume growth. The second piece is then, okay, so first 2 months of the quarter in the bag, how do we think June is progressing here? And we are starting to see a little bit of softness more than what we expected probably. Chris, you mentioned 130,000 units a week, high 130s, which is where we've been in the last couple of weeks. That's a little lower than where we had been. And so it's a little bit broad-based. We're keeping our eye on it. It's something that we're definitely monitoring. But we'll definitely stay close to our customers on this and make sure we're looking at any leading indicators that point to any further degradation.

So when you think about kind of how we thought 2Q might shape up, you had the potential for some lull in activity in the immediate aftermath of tariffs being implemented and then maybe some pickup as China came back online after the tariffs were dropped from 145 down to 30. So I guess, are we seeing any of that manifest on the network, understanding you guys are on the veastern part of the United States, so a little less directly sort of exposed to that Western import market. But kind of how is that playing out?

Yes. I think what we're seeing there is kind of 2 things. One, you have some traffic that's kind of shifting back from West Coast to East Coast. We had the disruptions. I don't know how many months ago that was now, a handful of months ago related to potential port strikes. So some of that volume is coming back, and we feel like we're well positioned to handle that. From an air pocket or bubble, we're not seeing that as significantly maybe as what the West Coast is seeing, but it is there a little bit where our international volumes are ticking down a little bit there. So again, something to watch. I think the good side, John, is that when that volume does come back or if we have any kind of surge that folks have been talking about, we're well positioned to handle it.

Yes. I think the capacity that we created to take on more business is helping us through the ebbs and the flows. And the discipline on resources, the discipline on how we engage from over-the-road transit times and cranking the structural wheel on our zero-based plan has helped us get ready for the variability. So we've got the resilience built in with a huge amount of discipline around cars and locomotives and even people. At the same time, we're able to respond on both sides of that equation, which is a strong fundamental that I was talking about earlier.

So as you see carloads tick down a little bit, maybe a little bit of softness here picking up. So John, from your perspective, what are the sort of the near term or the immediate type of actions that you can take on the ops side to kind of help mitigate some of that?

Yes. Well, Chris, it's a strong continuation of the transformation we're under. Maybe it puts more emphasis on some aspects of it. But where we've seen ability to surge up, we've rallied the team around every opportunity for revenue so that we don't get lost in the macro. And staying there connected with the commercial team has helped us jump on opportunities, whether it's center beams or coal or other markets that are going to come up at the same time being ready in places like Chicago, where there's a high degree of interchange from the West Coast or to and from the West Coast. So I think those fundamentals and the discipline around that. And then we have the compounding value of the discipline around fuel and our energy management systems. We're seeing some really strong productivity on fuel. So train yield, weights, tons on top of new skills that we're building in to manage fuel a lot more fully. Those things are starting to really show up. And so we get ready by being really good at being ready. And that resilience philosophy is giving us the ability to surge when we need to and be disciplined around our expense structure.

So Jason, you had talked about some of the areas that there were areas of softness. Maybe we can dig into that a little. Anything specific jump off the page at you in terms of what we should be thinking about? We obviously understand the dynamics around coal yield specifically. But within the commodity set, what is -- what sort of work and what's not.

Yes. So I think maybe just kind of walking through. I mean on the coal side, you've seen our volume trends there. Utility coal is really strong right now. That's really due to a restocking phenomenon there as coming out of the relatively harsh winter into the summer. And then we've seen the forward natural coal or natural gas prices, what's happening there. So I think kind of building up those stockpiles as we move into the next winter season. So utility is looking pretty strong. On the export side, 2 things in the quarter. One, we have the comp versus last year with the Baltimore port closure there. That -- we didn't move as much volume. But actually, John and the team did a great job of pivoting. So we're able to mitigate that some, but that is still a comp issue. But the other thing we're seeing on export coal, you talked a little bit about price, Chris, but we're actually starting to see that price degrade production a little bit. And again, something we're keeping our eye on. We recently had one of the mines that we serve on our lines has announced the possibility of them closing down. So I think it's -- again, the price point has finally reached a place where some of that production is being impacted. So that's kind of the coal story from a volume perspective. Again, I think on intermodal, we talked a little bit about what we're seeing there on the international side. Domestic is probably relatively stable from the last several weeks. And then on the merchandise side, kind of some puts and takes there. We're seeing some pressure within the steel markets, within grain, within our aggregates markets. So that's -- there's definitely some pressure there on the merchandise side.

Okay. So in terms of some of what you guys have laid out, you talked about the operating ratio improvement. I think on the last call, we talked a little bit about the potential for improvement in 2Q and 3Q potentially getting those numbers down into sort of the maybe sub-64% kind of range. Maybe any thoughts around progress and puts and takes as you think about maybe getting that progress and hitting those numbers in 2Q, 3Q?

Yes. I think for 2Q, just like you said, we kind of laid out normal seasonality if you think about going sequentially from 1Q to 2Q, 150 to 200 basis points. We're definitely going to outperform that from the 67.9% that we had in the first quarter. But also the first quarter had some kind of unusual or onetime items with -- we had really bad weather that we had to contend with. And so we had costs related to that as well as fuel headwinds and some -- an incentive comp true-up adjustment. So you kind of take out those things as well as the normal seasonality and that really brings us to the sub-64% for the second quarter. So feel good about that. And then as we move into third quarter, really ready for any volume surge that we see there. And so again, I think those mixed with all the productivity initiatives that John and the team have working -- are working on that gives us a lot of confidence in that sub-64%.

Got it. And the $150 million of productivity improvements, I felt like that was a number you guys were highly confident on when we talked last, I guess, as we sit here kind of halfway through, is the kind of thing that you'll be sort of north of 50% of the $150 million as we get through 2Q? Is it how do we think about sort of the cadence through the rest of the year?

Yes. I'll kind of hit it high level and maybe John can talk about some of the specific components. But if you think about just the cadence of the year. Obviously, the back half of the year is a tougher comp. That's really when John and the team hit the ground running, started pulling out a lot of costs. So we had to get more than 50%. We have to get more than 50% of that $150 million in the first half of the year. So we're well on our way there. I think the only other thing I would say is that the initiatives that are in place are really absent any volume, right? We're just -- those -- we will hit those regardless of what happens on the demand and the volume front. We proved that last year. We had pretty much flat revenue, and yet we still took out almost $300 million of costs and improved productivity there. So again, I think we're feeling really good on that front.

Yes. And as we work through it, Chris, the flywheel impact of continuous improvement from the structure of terminal performance, over-the-road performance, we're seeing the discipline of accurate car management manifesting itself into lower rents. We're looking at better over-the-road capability by reducing our train stops through our war rooms and really digging into root cause analysis on why things are not moving the way they should and solving them in near real time. So eliminating waste and at the same time, creating value through our better cycle times for unit trains, better cycle times for over-the-road performance. That's allowed us to get into our zero-based plan, which is a huge crank of the wheel for structural improvement. And so taking out handlings, removing time from train schedules and putting more emphasis on the management of the plan and the teams responded nicely to the challenge. And then we've got other elements that we're just starting to come into their own returns through our mechanical discipline, the fuel initiatives, not only on how we burn fuel, but how we source it, the categorization of our resource management. So we just finished our 100-day review. Now it's into an implementation phase. That will start to bring yield across a wide swath of expense that we have. So I think that balanced approach that's creating more capability than we've ever thought of and at the same time, taking out cost is really pretty inspiring and people are really catching on to it.

So you're about a year-ish, a little bit more than a year into the process at NS. And so maybe you can give us your view of the state of the railroad in terms of maybe what you thought coming in and where you stand now in terms of maybe the bigger picture opportunity for not just OR improvement, but of course, we're interested in that, but just sort of in general, getting the network operating efficiently.

Yes. And look, when I came to NS, I had spent a lot of time in the East in Canada, particularly in the U.S. kind of Midwest. But I know it to be an industrial complex. So there's a lot of moving parts. There's a lot of discipline around how we serve customers and customer expectations. And layering on top of that, some of our biggest customers, you almost look at a product level because of the discipline around how we service first mile and last mile and really helping them compete. So while we're looking at waste reduction, we're also looking at service improvement. And we're stepping that up through our intermodal franchises, through our merchandise franchises. So it's not one or the other. It's several items at the same time being elevated. And I would say that the maturity and the capability of the team has really amplified our ability to do all those things at once. So I'm really, really pleased with the performance of the team, the environment that we're creating and the skills that we're fostering and able to sustain the improvements that we've got. That's why I'm really confident on the $150 million. I know Jason and I, we hold ourselves to a much higher standard than that. And we're going to push each other hard to get the most out of the network, create the most value we can, sustain really high levels of service for our customers because we want customers to be inspired to come to us that's how we really create value, and that's the agenda.

And so I guess when you think about you joined the firm, I think -- I don't know if it's fair to say you inherited some OR targets, I think the company had laid out. I guess, those still -- those seem right? Do they seem conservative, aggressive? I don't know if you could put a finer point on what you think about sort of that $150 million over a multiyear period of time.

Yes. Look, I'm completely confident in what we published. You're right. I wasn't a part of the authorship of that. But that's life, right? You have certain expectations that are -- that you can create yourself and others that are created for you. The nice thing is our entire management team is aligned to achieving those objectives, no matter what their genesis and beyond because we're committed for the long term in value creation for NS. And we see what our network can give. We see where the customers want to go, and we're in the right place, and we can be really highly competitive where we need to be, but also highly complementary and extending reaches of respective networks and even other modes of transportation that can really have a value plus plus when they work with NS.

I think, too, one of the other things John talked about, the team is completely aligned. The other thing that's really great about this team is productivity isn't John's responsibility. Growth isn't Ed's responsibility. Everyone is engaged and involved in hitting these targets. And so it's really nice to see kind of everyone aligned and working towards these common goals together.

So let's talk a little bit about price. Obviously, there's the coal piece in international export coal, and we understand that's a function to a degree of the commodity price. But maybe putting that aside for a moment and thinking about the opportunity that you see better service -- stable sort of backdrop from a freight cycle perspective. We'll see how that kind of plays out. There's been cost inflation in the last couple of years that the rails have probably underperformed in terms of capturing through price. Is this an opportunity this year? Do we need to wait to 2026 to start to see that pick up?

Yes. So I think when I think about price, for me, the easiest thing to do is to kind of break it into a couple of buckets, and I'll talk about this absent fuel, right? I mean we know we have some fuel headwinds, some significant fuel headwinds this year. But if we break it into components, we talked about coal, right? The seaborne coal price is going to drive a significant headwind there. On the intermodal side, heavily dependent on what's happening in the truck market, and that's really been kind of a gating factor for us this year, if you will, and feel like it's stabilized a little bit, but we don't have a lot of that upside baked into our plan, right? We're just assuming kind of flat going forward. But I think where you've seen and where we've really been able to achieve some good pricing is in our merchandise business. We've done that over time consistently. But I think with the service product that John and the team have created, it really helps, obviously, with those pricing discussions. And not just that, but it helps to bring share back onto our railroad, right? We had a period of time where we didn't have a great service product that was consistent enough for our customers to trust. And now I think they're seeing, hey, we can come back to NS, bring that freight back to them. So the service product is really a double coupon there from a standpoint of we're getting price because of it, but also being able to attract volume back onto the railroad. So I think what you should expect to see on the merchandise side from a pricing, core pricing, again, when you take out fuel is really inflation plus pricing. There's always going to be mix effects in there, but I think we're feeling good about where we are from a price perspective in the merchandise business compared to our plan.

And Intermodal was positive, I think, this last quarter [ ex fuel. ] So that I guess there is at least some degree to get -- and I don't know how much of that is mix. It's a little hard to tell through the way you guys report. But I guess that at least is it flat or down in the context of a truck market that's probably not super strong at this point?

Yes. Yes, that's right. I think the way to think about it, I think we might have been up 2% [ ex fuel ] in the first quarter, kind of again, flattish from here. So we'll see how it plays out, but we're not anticipating a significant rebound there.

Okay. John, I wanted to ask you about some of the potential regulatory FRA type of changes and maybe what that can open up in terms of productivity, whether it be on the inspection side or some of the other things that maybe there's going to be a bit more latitude for you to do on the op side. Can you talk a little bit more about that?

Yes. It's a great question. And we at the [indiscernible] committees are really aligned around how do we implement technology to augment what people do and then to really create more consistency and capability for the rail. So we embrace it at NS. I turn to our portals, which give us a really good snapshot of the health of our cars and how we've developed over the course of the last 8 months since our war room started on how do we deal with deviations. We've been able to energize the capabilities of not only the portals, but the technology around that. And we found things that I would never have dreamt possible in such a short period of time. And I'll give you an example. I was here at Christmas time and we had a broken wheel. And because I was in Chicago, I went to the derailment and let my team sit in Atlanta. And it really made me reflect on how do we get technology to find these things, not only on us, but on our partner railways much more quickly because this wheel came off of a short line. And we were able to develop an algorithm and start identifying broken wheels to the tune of finding almost more than a dozen over the last few months that prevent real-time derailments. So when I go to the FRA and talk about the implementation of technologies to inspect cars, it's not meant to replace people, but to identify things faster, protect our infrastructure and protect communities faster and use the people that we have to learn more about how we maintain cars, third-party ownership and to fix them a lot more quickly. And so that's the same approach we're taking with our engineering. We've deployed technology on locomotives that give us the same effect as a geometry car that's self-propelled and inspects the health of the rail and the rail infrastructure. Now we were regulated to inspect about 125,000 miles, 200,000 miles a year of track. Now we do 125,000 miles a month with these inspection vehicles. And we're asking the FRA to recognize the use of that technology to allow us to move away from something that is 1976 vintage regulation and get to modern time so that we can use our workforces to get out there and fix the rails faster and reinvest in capital in different ways. So that's kind of the environment we're in with the FRA. I've met with them a number of times as I always have. They're very responsive to acting in accordance with the science, and we're having really good discussions with them. And I think that's the approach that we need to take.

And when you maybe sort of widen out the lens and think more about technology, and we spent some time recently looking at what we thought opportunities could be on the rail space. Are there others beyond inspection? I guess, as you think about that, is it something that you think might have a real impact on sort of profitability as you get out, maybe it's not this year, maybe it's next year or the year beyond. I don't know how you think about sort of some of the stuff that's out there.

Yes. I remember distinctly having a mind shift as a result of PTC, positive train control. And here was a regulated imposition of a safety overlay and then realized that this opened up a whole new aperture for operations technology field-centric to back office. I think there's a tremendous amount of work we can do with the right regulation and the right structure to reap a dividend ROIC from that kind of capital investment as it reduces regulatory obligations that may be steam engine days, and we still have a few of those. And so I think when we can get an open mind on what's the real value, whether it's a better way to run trains, whether it's a better way to oversee crew capability or other things like that, there's a lot of places in that, Robotics included. So there's a number of things we think about. It's just the call for capital. He keeps me highly accountable to having a relatively high ROIC, which is good. We all want that.

And a lot of these projects that -- or technologies that John is talking about, it's -- obviously, from a safety perspective, it's a no-brainer for us. We should absolutely do these. But it's also creating a lot of efficiency and productivity, stopping line of road failures, things like that, taking our employees and instead of them being the ones that find all this stuff, they become the fixers and really enhancing that efficiency on their behalf. So John talks about return on capital, obviously, crucial. These projects are right in that sweet spot from a safety perspective, but also truly enhancing efficiency.

The topic of rail M&A has come up quite a bit more often. There's been some discussion in the press. And obviously, folks like me asked the question, folks like the people in the audience asked the question. So kind of curious your thoughts on what you think about the potential for maybe another wave of rail M&A and specifically maybe Transcontinental mergers. Is that something that you see as a possibility?

So I think the trains article that came out, whatever it was, 3, 4 weeks ago that we've all read and interpreted for ourselves, but I think that's kind of maybe what started this last round of questioning that seems to come up every handful of years. I think from a Transcon merger perspective, I think there's a lot of benefits in doing that. You think about the growth synergies that you could have between 2 Transcon mergers and taking out interchanges, things like that. So obviously, it seems like there would be a lot of benefit there. As I've said before, I think the regulations, the regulatory environment and really the political environment are kind of the 2 things that we have to work through there. But yes, I think it's -- there would be value there. But as I've also said publicly, I think it's -- we don't want to get distracted with this. Our focus is really on enhancing productivity, making sure we're providing a great service product to our customers and operating safely. So that's where our primary focus is on right now.

And John, from an operations perspective, anything that sort of stands out as you think about the potential of Transcon?

Yes. I think Jason said it best, that it's -- we all know that the story is out there. We all know the hypothesis. And we're really staying focused on the absolute and the transformation that we're under right now. And we've got a lot of value to create. But having gone through and testified at some of the merger hearings between CP and KC, obviously, as an operator, the more linear an operation is, the more repetitive it is. So there's a lot of points from a Transcontinental perspective that you could argue make sense. But like Jason said, I think there's time for thought and there's time for doing. We're in the doing zone and the markets do what the markets do.

Yes. Okay. That's helpful. Certainly, if anybody has questions in the audience, let me know, happy to get you involved while they think about that. Maybe to kind of summarize some of the opportunities in the guidance that you guys have talked about. So I guess from a revenue perspective, 3%, you guys talked about macro uncertainty. It sounds like you're seeing a little of that macro uncertainty here in the second quarter, but I think you also noted that there's maybe a possibility of a little bit of more freight moving in the third quarter. So I guess as you think about that, is that still the right way to say 3%, we'll see what the macro does. There's maybe a little bit of weakness here, but maybe potential strength coming?

Yes. I think that's the right way to think about it. That when we laid out that 3% revenue growth, it was really all volume related. We talked about the headwinds on the pricing side that kind of got us to a flat RPU perspective. So it's -- we still think that, that 3% is doable. But at the same time, we've got to stay really close to our customers, make sure we're understanding what they're fully seeing and looking at any leading indicators to figure out if something is changing there.

And we know there's a bathtub effect. There's some [ sloshiness ], right? We saw it after the longshore activity even from the uncertainty around the next iteration of what that [ CBA ] could look like in -- we're watching what's going on in the West. We're seeing what's going on in the East. So we can anticipate where that [ sloshiness ] is going to hit our interchange locations. We've got great relationships with our Western carrier partners. And we're prepositioning our resources in places like Chicago, in Memphis and New Orleans just to be ready for that surge and give us some elasticity in the event that we have a locomotive failure or something happens that we can get on things really quickly because it will be incumbent upon us to pull that [ sloshiness ] out and smooth it out as fast as possible. And we do that by having really reliable, engaged understanding of what's happening and delivering and executing as fully as we can. And that's how we're running the business, staying ahead of the market as much as possible and where we can't, just being ready to go as fast as we can.

Maybe my last question would just be on buyback. I think you talked about that in the first quarter. So maybe give us a little bit of an update of how you guys are thinking about the opportunity here for 2025.

Yes. So we had a lot of calls on cash over the last 2 years really related to not only the East Palestine incident, but we also purchased the Cincinnati Southern Railroad. So we're at a point where we feel like we've really kind of rebuilt our balance sheet, seeing strong profitability and got back in the market, which we were really happy to do. You saw we purchased around $250 million in the first quarter, maybe not as high as we have been in prior years, but we think that's a good rate to be at and taking that opportunity to continue to buy shares. Obviously, share repurchases, when we think about our priorities, we invest in our business, we pay our dividend and then share repurchases is kind of that last lever. But again, I feel good about where we are from a balance sheet perspective, done good work working with our partners and the rating agencies to get our metrics back in bounds and pleased where we are on a profitability perspective.

And CapEx tracking towards the $2.2 billion for the year? That's the right way to think about it.

Yes, which is a $200 million reduction from where we were in 2024. And a lot of that is because of the fluidity on the network that John has been able to create. So always going to continue to invest in rail ties and ballast and the safety of our infrastructure, but we don't need to spend as much on locomotives. We've got several hundred locomotive stores. We've got freight cars stored. So we don't need to make as many purchases there. So that's really what enables us to be able to take down that CapEx a little bit.

And I guess I misspoke one last question just on headcount. As we're just thinking about it, kind of rounding out all the guidance points, flattish from kind of 4Q exit rate, I think, over the course of this year. Is that roughly the right way to think about how the head is going to look?

Yes, I would say that. But I would just remind you, Chris, as we talked about it, we we're hiring. We are hiring conductors, we're hiring for attrition. We're hiring where we want to make sure that we've got the right number of people. We do not want trains waiting on a crew. And I think we've got 200 or 300 brand-new conductors that are out there running. We've just moved our field training, technical training over to our safety department. So our stickiness with our new hires is a little higher now. They're coming out much more capable, and we're really, really, really pleased with how we're progressing on that front.

Fantastic. Well, thank you, gentlemen, for joining us. Really appreciate it.

Thank you.

Thank you, Chris.