Norfolk Southern Corporation ($NSC)

Good morning. It's my pleasure to welcome Norfolk Southern to the conference today. Thank you guys for being here. I'm Fitz Middleton. I'm on the BofA specialist sales team. I look at industrials given the pending transaction, I'll be sitting in and hosting the Q&A instead of Ken Hexter this year. BofA has the privilege of welcoming Norfolk conference for the 22nd year out of the 25 years that Ken has hosted the event. Pleased to have Jason Zampi, CFO; Michael Bar, VP, Treasurer and IR, are both here for their second time and Luke Nichols IR is here for the fourth time. Here we go. We appreciate the partnership and your participation in the conference over the years.

So Jason, let me turn it over to you maybe for an update on some of the key takeaways you want us to learn from today.

Yes. Thanks for having us here. As you mentioned, we've got a long and great history with Bank of America and coming to this conference. So we're pleased to be here again this year. I'd say we've really got a situation here where we're working very well with our customers to help them grow. And we're obviously right in the middle of a very transformative merger to unlock additional value. So it's an exciting time for us as a company. I think 3 key takeaways, I would say, is first, we're executing on the plan we've laid out. So that's really focused on safety, service and cost discipline. And you saw that play out during the first quarter. We had, I'd say, kind of mixed demand environment in the first quarter. We had some challenges operationally due to weather and some other things. But it's how we performed during those things. And it's -- it really shows our ability to, again, to execute on that plan. So I think very strong execution there, whether it be safety, service and obviously, costs. So happy with that. I think the second thing, obviously, is the merger and where we stand on that. So we've resubmitted our application. We think we have a materially stronger application with the STB addressed all of the concerns out there. And we're anxious to get them looking through to the merits of this and feel like the point of this all along throughout this application process has been to have a fact-based, data-driven approach, and we feel like we've done that. So we think we're in a really good place with the application. And then third, I think just from a value creation standpoint, it's kind of what we call our operating flywheel with safety service and again, costs. So we -- you have to have a really good service product and that earns us the ability to grow. -- you take safety and reliability, and that enhances the trust and confidence that our customers and regulators have with us. And then on top of that, you add in productivity. And that really just generates this kind of self-reinforcing flywheel that we're seeing. So again, executing on the plan, making strong progress on the merger and then that operational flywheel is what really drives kind of long-term value creation.

Great. Maybe if we follow up and talk about the [indiscernible] and the recent refiling with the Service Transportation Board of the merger application with E&P. Can you talk about some of the changes to the first application, particularly some of the CapEx down shifts, maybe decreasing of the revenue synergy target thoughts on any of the more obvious changes that were in there?

Yes, sure. So obviously, the big change was implementing the 3 key areas that the STB called out. So that was forward-looking market share data, the TRRA ownership railroad there in St. Louis as well as some of the merger appendices. So we feel like we've addressed all of those. And another piece, though, is we've now used 100% of traffic data from Class I railroads. So that's kind of above and beyond what normally happens in these things. And when we put in the initial application, we had some sample data in there. Now we have 100% of the traffic data. But what that resulted in is some changes, as you might imagine, in traffic flows, the diversion model shows maybe a little bit more on the intermodal growth side, a little bit less on the carload side. So the combination of that is really what impacted the revenue synergy side. And then on the CapEx side, again on a when you look at where that traffic is going to be flowing you see that you have different needs from an infrastructure perspective. And so maybe a little bit less CapEx spending on things like sidings and stuff like that. But all in, even going from that, that sample of data to the 100% data set, it really did not change the overall thesis for the merger and in fact, just reinforced what we knew to be true.

Great. And then one of the things that you guys kept the same and committed to was the gateway pricing commitments as they were. Can you talk about some of the benefits of the CGP and why it should be viewed as enough to get the merger through?

Sure. So at its core, the committed gateway pricing is really -- it extends the enhanced benefits to local interline lanes, right? So you take BNSF or CSX, and it allows them the ability to offer an end-to-end rate to a customer. And that obviously increases optionality for the customers and the ease of doing business. So that's a great outcome here. What I would say, too, there's a whole host of pricing and rate mechanisms that exist today. This is incremental to that. So this is additive to what currently exists. And then I think the other benefit from this is it's kind of aligned with the STB themes and policies. It's a practical solution on the front end versus after the fact, try to remedy some potential issues. So we think that those are all -- you put all that together, it's a pretty powerful provision that we have in the merger agreement here. But what I'd say is also the committed gateway pricing is just one aspect of how we view the benefits from this transaction. It's really about providing better service better route options for our customers, really ease of doing business. with this combined coast-to-coast railroad. So those are what the real values are and being able to unlock this watershed market that we've talked about. And all of those things are really what enhances optionality and competitiveness for our customers.

Right. same topic. You and Jim Vena have both talked directly about no need for concessions of any major scale. given the commitments that you're making and that this is an end-to-end merger. What do you think the pushback is to that? And why are you guys confident that no major concessions after all the discussions you've had to do.

Yes, sure. I mean I think it's understandable. You see all the maybe the pushback and noise from some of our competitors out there, not unexpected even before we filed the application, there was positions people were taking out there. So again, not unexpected. I think what we're really excited about is moving to this next phase where the STB can focus on the merits of the deal. And we can really get into looking at that, again, reviewing the data, the fact-based set that's on the record here and moving past some of the noise that's out there. But again, from a concession perspective, we think that this deal on its own provides a ton of value, enhances competition is in the public interest. And that's kind of where we came out from a concession perspective.

Great. If we kind of talk about the system and trends that you guys are seeing, I think volumes quarter-to-date are trending up about 2.8%, that kind of trails CSX at 4.6. Is this indication of some share loss, but still positive carloads -- is it a good run rate number for the quarter? How would that lead you to adjust above breakeven volume for the year? Any thoughts there?

Yes. So if you think about first quarter, we were down a little bit from a volume perspective, but it was really lumpy, I would say. So January, we started off pretty strong from a volume perspective. February had a lot of winter weather and you saw volume kind of crater during that period and then a pretty significant rebound in March, and we're seeing that saw that really through April here. So we're kind of in that 140,000 carloads per week range. I think we've been there now 9 or 10 weeks in a row. So really strong performance on the volume side. And again, speaking to kind of the resiliency of the railroad, we're able to handle that. So I think we're in really good shape there. We kind of see that probably continuing for the remainder of the quarter, and we'll see where the rest of the year shakes out.

Great. And you guys have noticed some enhanced competitive environment, given the merger announcement will have an adverse impact on volumes in the short and maybe medium term. Is that quantifiable at this point?

Yes. So we put that right around 1% of our total 2026 revenue. So we started to see that last year. It's primarily within our -- obviously, our domestic intermodal business. but we kind of quantify it in that 1% range. I will say we've seen -- outside of that, we have seen some pretty strong performance in our domestic intermodal franchise that we're really pleased with here and coming out of the first quarter and into April. So international remains weak, but pretty good progress on the domestic side.

Awesome. And then kind of from an economic backdrop, you guys have talked about that improving something like 8 of 9 commodity areas have had green circles or kind of half green. Where do you think the economy is in that backdrop?

Yes. Maybe not surprisingly, that we take a lot of time thinking about the colors of those circles. So -- but I would say where we are right now is probably cautiously optimistic. I think it's still a little bit mixed bag out there. But I think we're starting to feel -- for sure, feeling better than I did a handful of months ago. If you look at a couple of things. I mean, I think from what you're seeing from an energy price perspective, we think there's some opportunities for modalshift. -- probably not surprising to anybody. We've seen that in prior cycles when fuel prices become elevated. We see those motor ships, and we're ready to handle that. I think the second thing in utility coal, has really been an outperformer for us running well ahead of where we expected. Utility coal was up from a tonnage perspective, over 25% in the first quarter and attribute that to the energy demand that exists out there. So I think 2 bright spots for us there. We're looking at all the same economic indicators, as you guys are, I think 2 things for us to watch out for is, one, what's the break point for the consumer. The fuel prices hit a magnitude and a duration that that impacts consumer spending. I mean, the consumer has been very resilient. So we'll see how that shakes out, but that's something to watch. And then our business is obviously highly tied to the housing market. And unfortunately, we don't see a big turnaround there in the near future. But with what's happening with rates, but definitely something we're looking out for them.

Makes sense. And then if we think kind of about spending, so I think you've set adjusted OpEx to be in the range of $8.2 billion to $8.4 billion for the year?

Right.

Could you just walk us through some of the highs and lows within that target? Is it holding employees flat? Do you need to add back with carload growth, kind of how do you think about cost per employee, fuel exposure, any lag benefits? Is kind of what are the puts and takes within that range?

Sure. So if you think about it from a year-over-year perspective, we kind of talked about this at at year-end, but the 82% to 84% is really informed by a couple of things. One, we've got some pretty significant inflation coming into this year, more in the 4% range, which is higher than maybe you think in the 2% to 3%. But that's wage inflation, health and welfare benefits, insurance premiums, things like that. So that's a significant headwind for us. The other thing we're experiencing on the cost side, again, just year-over-year compare as fewer land sales than we had last year. Fortunately, we've got a lot of productivity initiatives in the hopper. We're targeting another $150 million in productivity savings, this year, and that's on the back of $500 million over the last 2 years. So that's kind of how we got to that 82% to 84%. You take those 3 things and then you kind of slide that based on what we think volume is going to be. Now the uncertainty in the kind of wildcard that's presented itself, obviously, is fuel. And we'll see how that shakes out, but very, very significant increase in our fuel price. If you think about kind of our price at the gallon that's -- excuse me, price we pay at the pump, that's up 45% in March, and it was up another 80% in April year-over-year. So very significant increases there. So that's something we're watching. I think when we get to the end of the second quarter and report earnings, we'll be able to provide a little bit better range and where we think that's going to come out. Sorry, just thinking about some of the other components. So I think from a headcount perspective, we're down about 1% in the first quarter from where we finished 2025. I think that's a pretty good run rate for the rest of the year, kind of staying flat from that point. We're hiring for attrition in some of our key areas and making sure we have a good conductor trainee pipeline, but kind of holding that flat. And I think the last part of the question there, just cost per employee per employee. We think about that in the $38,000 per quarter range. So that's as puts and takes, first quarter is usually higher. Moving to the second half of the year, you've got wage inflation that takes effect July 1, but we've got some productivity initiatives. So I think that 38,000 is a good range to think about.

Great. And then maybe we think a little bit about the quarterly cadence. I think historically, you guys improved operating ratio about 250 bps from 1Q to 2Q. So you did 68.7% in Q1, kind of what would lead to underperformance or outperformance versus a normal target? And would it be a fuel lag benefit weather in 1Q -- just kind of what are your thoughts on that?

Yes. Yes, sure. So we think about historical sequential our improvement from first quarter to second quarter, more in the 200 basis point range. And again, it depends what period of time you look at and everything. But in a recent history, we're thinking about 200 basis points. And we flagged that we will achieve that or are on track to achieve that going from first quarter to second quarter this year. So you always have weather and first quarter, you always have step-ups in incentive comp and things like that, and this year is no different. But what I will say is, even with those fuel headwinds that I talked about, we still feel like we can hit that 200 basis point improvement. So that's a pretty big deal, and we're able to do that through the productivity initiatives that we have in place.

Right. And then on those, I think you've delivered $30 million in productivity in Q1 of this year and reiterated the $150 million plus of efficiencies for '26, which is on top of $500 million over the last 2 years. Kind of thoughts on how much of that remaining cost opportunity is structural? How much is volume dependent? How should we think about that?

Yes. I think we're really proud of what we've accomplished over the last 2 years, like you said, over $500 million of productivity savings. But I would tell you, it's really the initiatives that we have in place are really structural versus volume dependent, and you saw that in 2025. So we had flat volume basically in 2025 yet, we still achieved over $200 million that year, and this year is no different. So the $150 million in productivity initiatives that we have in place this year really you think about labor productivity, not just T&E, but on the mechanical and engineering side, fuel efficiency and then the work we're doing in purchase services, materials and on the G&A side as well. So really kind of agnostic to the volume profile. Now that volume comes through. We've got capacity to move it and should have good incrementals.

And so then as you think about how that productivity compounds and kind of matures with PSR 2.0, how do you think about NS's long-term operating ratio potential kind of maybe on a stand-alone basis and then a combined basis, if you can talk about both of them.

Yes, sure. So I think the PSR journey is never done, right? And it's something that we're continuing to focus on, and I laid out kind of focusing on safety, service and productivity. And those things together will generate growth and cost savings, and that will improve your operating ratio. Now I will say the focus right now is truly on getting the merger across the finish line here, and that's what our investors have clearly signaled that is important to them. So that is our focus. And I think when you think about the combined entity from an operating ratio perspective, I mean, we've laid out significant revenue synergies of this combined entity. You asked earlier a couple of small tweaks to those estimates, but really strong revenue growth. And that's what this merger is about, about growth. And on top of that, there's $1 billion in cost synergies as well as we combine these 2 entities and gain more efficiency. So I think all in, you put that together, it's a pretty powerful both financial benefit but also an operating ratio story as well.

Right. And then if we think about kind of volume and carload growth lately, chemicals have been robust, I think, kind of up single digits. Is that sustainable? Do you need an industrial turnaround? Is there new partnerships kind of -- is this a U.S. versus the rest of the world when it comes to petchems? How do you think about those volumes?

Yes. So you're right, Chemicals was a kind of bright spot for us in the first quarter within our merchandise business. We're really seeing that growth in kind of energy-related markets. So sand, frac sand, NGLs, petroleum products, things like that. And those have really picked up since the conflict in Iran have started. So we'll see how that plays out. But I think just as the impacts of those higher energy prices flow through the global economy, those will probably be sustained for us. I think overall, though, just taking a step back, putting the macro side, what makes growth sustainable is really a strong service product and a reliable service product that we can provide to our customers. And so we're doing -- making good progress there, and we feel like that will allow us to gain share in any macro background. The other thing that I'd point out, just kind of in this merchandise space, when you think about our industrial development pipeline, have a really strong pipeline. But in 2025, you really saw that kind of stagnate from a standpoint of starting projects. So there are a lot of things in the hopper, but people kind of sitting on the sidelines standpoint of starting projects. In 2026, kind of towards the end of '25 and now into '26, we're seeing a lot of those projects actually start. And so that's a really good sign for us. And something we're pleased about, and those -- that pipeline will provide a lot of volume growth for us. Kind of moving into the future.

Curious your thoughts on coal. We get asked this question a lot at -- it's kind of up single digits in 1Q. I think trending double digits in 2Q, kind of how do you think about the drivers of this? And how should we -- is it pushing out retirements? Is this growth increasing sustainable? Do you think it should flip to declines later in '26 domestic versus export. And then kind of same on pricing. How do we think about revenue per carload sequentially and through the year?

Yes. So I'd say I think it's easier to kind of break out the components. I think like I talked about earlier from a utility coal perspective. up significantly in the first quarter. We're seeing that continue here into April. And it's really energy demand from whether it's AI or just kind of what's happening from an inventory rebuild perspective. So I expect that to continue on. We are hearing from some of our customers that their plants are staying open longer than planned. And so that's a good sign there. I think on the export side, it's a little bit more mixed. We saw that kind of in first quarter flat. Flat performance overall year-over-year. So we're kind of watching the export side as well. But I think really good strong progress on the utility side. I will say anyone that's followed us, you've seen pull can be pretty volatile quarter-to-quarter. So I don't want to call it for the full year, but at least for second quarter, things are looking pretty strong. From an RPU perspective, I'd look at it, we've seen now 4 to 5 quarters in a row of kind of sequential degradation in price. And that's really the utility and export benchmarks. But what I think we're finally seeing is some stability there. So I'm not ready to call kind of a steep inflection point there, but I think we found some stability. And that's a good side for us as well.

Great. And then you mentioned intermodal in the beginning. Can we just talk on that one for a little bit. So there's increased competitive environment, but there's also elevated fuel prices. Kind of are you seeing any of the secular growth opportunities return in intermodal, and kind of how do you think about competition, whether it's some of the stuff going on in Baltimore and I-95 traffic? And kind of maybe some of the MRIdian big B traffic. What do you think about Intermodal?

Yes. So again, I think intermodal is kind of tele 2 cities, if you will, on the domestic even with those competitive pressures that we talked about, I think the domestic market is really performing well, and we see potential upside from some modal conversion due to due to higher fuel prices, and we're seeing that. We're hearing that from customers. On the international side, still a depressed market and really, I think, more of a trade tariff kind of impact there. see that probably continuing. But just as a reminder, we kind of started to see that last year in the July -- June to July timeframe. So back half of this year, you'll see some easier comps on the international side. I think from a competitive standpoint, our approach is, right? We want to provide the best service product that's out there. I also think our advantage, we have a great intermodal franchise. Fantastic routes, really hitting a lot of the key markets. And it's really capitalizing on that. So that's kind of how we think about it from a competitive perspective.

Great. Does anyone in the room have a question? Okay. I'll keep going. I think last week, you guys did 145,000 carloads. Peak, I think, is 147,000, kind of what's capacity look like? What are you built to handle? How do you think about it?

Yes. I mean we've, in the past, have moved well in excess of that $147 million. I think what's important for us is sustaining a level over time, like I talked about first quarter, it was kind of lumpy from a volume perspective. that's tough to manage through, right? It's easier when it's obviously more stable. So from a capacity perspective and when you think about that in different fronts, whether it's people having conductors and engineers out there, whether it's infrastructure, whether it's locomotives and equipment, I think we're good on all fronts. Like I said, we're continuing to hire in key markets to balance that attrition to make sure we're able to serve growth. From an infrastructure perspective, we've done a lot of work over the last several years. specifically a lot down in kind of our 3 corridor down in Alabama, we're now reaping the benefits of those things. And from an equipment perspective, we've got -- we still have locomotives and certain freight cars in storage. So we're kind of -- we're poised for that growth. So the capacity is there to move quite a bit more. And again, like I mentioned, that's all comes through its strong incrementals.

Great. Maybe a little bit on pricing. It's probably the biggest theme we get asked about across all of industrials over the last 2 months. Average revenue per carload sequentially kind of considering fuel increases and mix. How should we think about it up sequentially for 2Q and 3Q? Is that an okay framework?

Yes. So again, maybe like let me separate this a little bit. First, on the fuel side, a good chunk of our business, merchandise and coal is on a 2-month lag from a fuel perspective. So the prices that you saw in kind of March and April are what come through in May and June. So those elevated prices now intermodal is more real-timish on a 2-week basis. So I think just if you looked at fuel, I think you'll see an uptick there from an RPU perspective. Now if you strip out fuel and just think about kind of core pricing, maybe, again, splitting this into different components. From a merchandise perspective, we've done really well from a kind of pricing to the service products out there and are getting, I would say, kind of inflation plus type pricing. So really proud of what we've done there on a core price perspective. Intermodal and coal kind of based on more underlying benchmarks, if you will. So intermodal, kind of more tied to the truck market. But what we're seeing there is maybe some uptick there finally after 4 plus years of rate recession. So hopefully, we see that come back a little bit. And then I mentioned on the coal RPU side, maybe not a quick recovery, but at least maybe past the bottom and now a little bit more stability from a price perspective. So it kind of helps me to think about it with fuel, without fuel and then amongst those 3 categories.

Helpful. And then maybe a little bit on metrics like velocity and dwell. Maybe a little shy versus last year's numbers. Does that indicate anything? Is there a cost story there? How should we look at that?

Yes. I think, again, we talked a little bit about the weather we had in February. We obviously have weather every year. Last year, we talked about we had, I don't know, 17, 18 named storms that hit us, but I think those were more there were more discrete impacts. The storms that hit us in February are really broad-based and impact our entire network. So -- we kind of had that as the first hit, if you will. As we were coming out of that, we actually had a derailment in a pretty key corridor for us in Pennsylvania. And while fortunately, no injuries and the damage related to that was not that significant from a cost perspective, it did kind of delay things on that corridor. And so trying to come back from the storms with that on the back of that caused some of the degradation that you call out kind of in speed and dwell. So I'm not expecting any significant impact to costs. There'll be things like you'll see maybe some increase over time in some recrew expense that we have, but to get that back on track to where we need it to be, but no like sustained structural increase in costs.

Great. And then if we focus on CapEx maybe for one, you've targeted $1.9 billion. I think it's down 14% year-over-year. Then there's also maybe a new locomotive order and some refurbs you talk about those decisions? And is the right spending level as a percentage of revenue, 16% .

Yes. So like you said, we're at $1.9 billion -- around $1.9 billion for this year. The -- a significant chunk of what we do from a CapEx perspective is really focused on the safety and reliability of the network. So like I said, a very large piece. We put in 500 miles of rail last year, 2 million crossties. We're going to do the same this year, right? It's -- we have to do that every year, and it's important for the safety and reliability of the network. So those things don't change. the way we've been able to bring down the capital spend a little bit is through 2 things. One, like I mentioned earlier, we're able to now kind of reap the benefits from some of the growth projects that we've had in the past. We don't have the need for as many of those this year. And two, when the network running really well and the kind of operations flywheel that I talked about, you've got better asset utilization and higher velocity, you just don't need as many locomotives and freight cars and that type of thing. So that's kind of how we've got to that $1.9 billion envelope. From a locomotive perspective, I just mentioned not needing as many locomotives. But what we're doing with the DC to AC conversion refurbs that you call them, we are not adding to the fleet. We're just replacing kind of maintaining that same locomotive count and able to get rid of older, less efficient locomotives. So the modernizations that we've done really very fuel-efficient, highly reliable, more attractive effort, and they're less expensive than buying a brand-new locomotive. So really good story for us there on that front. And again, it's about having a more reliable fleet versus adding to the fleet.

Okay. Great. Helpful. We have a couple of minutes left, maybe close it out with more on the pending transaction. Can you just remind us on the process with the STB from here? I think 30 days to decide if the application is complete and then 250 days for hearings comments, environmental reviews, 90 days for ruling that pushes us to mid 27. Is that a right time line? And any pushback to that?

Yes. I think obviously, the focus right now is getting this application approved through the process. I think from a longer time line perspective, the STB has been pretty clear about -- they've got rules in place, and they're going to follow those rules. We saw that very clearly with the first application that we put in and hitting the deadlines that they laid out there. So this application has gone in. They offered people to respond to the application that's happened. And now the combined SUP response will go back in today to those comments. And hopefully, by the end of the month, we'll know here one way or the other on the acceptance of the application. I think the good thing is when the application is accepted, what we'll get is a definitive time line. Right. again, that the STB has kind of laid out that they will commit to follow. And I think that's important for a lot of different stakeholders, most importantly, our employees to kind of know kind of what to expect over the next half. So I think kind of that first half of the year is a good target, but we'll see kind of when we get this final time line, how it exactly looks.

Great. And then maybe lastly, how should we think about any of some of the public pushback or comments that are out there whether it's from peers or labor kind of -- how would you guide us to think about that?

Yes. I think on the labor front, you see probably 2 camps there. We've got some folks that are maybe not yet supporting the merger and other unions that have that see the value and see what we're doing. So different schools of thoughts there. I think you've got some coalitions that have come together to speak out against this again, not unexpected. And -- and it's all of these voices out there. We obviously listen to all these things and take them seriously. But at the end of the day, what's important is for the STB to look at the merger application. And I think when they see the fact-based, data-driven approach that we have out on the record and the benefits that this brings. It's clear that this is really -- it's good for customers and good for the country. So we feel pretty confident about the benefits of this.

Great. Appreciate it. Anyone in the room before we wrap up? Okay. Great.

Yes. Thanks very much.

Thank you very much. I appreciate you guys being here.

Thank you.