Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

Got it. You guys have delivered a significant amount of productivity savings over the last couple of years, which honestly is a little bit surprising just given how much you took out during the PSR year. So you clearly have found more. Where do we stand there? And kind of what's the opportunity for '27?

Yes. So like you said, Ravi, we've harvested about $500 million, a little over $500 million in the last two years, productivity cost reductions. We're on track this year for another $150 million. I think the thing that's impressive here, it's really all structural, what we've done. It's not volume dependent. And in fact, the last couple of years, we haven't grown that much, but we've still been able to take these out. So lots of good things in our control there that we're working through. And I think we still have -- you still have runway there from a -- whether it's a locomotive modernizations fuel efficiency, terminal productivity, all things we're continuing to press on. And then you add volume absorption on top of that. And I think it's still a really powerful story. So I think we've got a good path moving forward on productivity as well.

Got it. I'll come to merger questions in a second and just how long-term focused you guys are at this point. But just given all of those moving parts, obviously, you spoke to headwinds on the OR side for 3Q and 4Q, but what are we thinking kind of you put all this together is that long-term sustainable OR level that you guys can target from [indiscernible]?

Yes. So I think when you think about OR, like you said, talked about kind of near term, our focus is really on safety, service, cost discipline and earning the trust of our customers, right? That is a winning model regardless of what's going on. We think that, that will really help to drive us on a long-term basis to an industry competitive operating ratio. So I don't know if Ed wants to comment on any kind of commercial things that we could bring in. But when I view it, I think two things that are really in our control. One is service, right? Safely delivering a reliable and consistent service product. That's in our control. There's always going to be hiccups, storms, other disruptions, things like that, but it's how quickly we respond to those and get things back on track. And that's what we've demonstrated here over the last couple of years now. So that consistent service product, that will drive growth. It also drives cost efficiency as well. So that's one thing. The second piece is, like we talked about, is on the productivity front, right? It's continuing to push on those things. Not everything in our cost structure we can control, talked about fuel price. But for the other things, we're doing a good job of controlling what we can control, continuing to push on productivity. So I really think those are two significant levers, both in our control that are going to help us to drive that operating ratio to a perspective of industry competitive. The last thing I'd add in there, the macro probably impacts the timing more than anything else, right? Obviously, if we have a strong recovery that's going to help improve margins more quickly. If we don't, it's really about execution and maintaining that core strategy.

Got it. So let's switch gears and talk about, obviously, the topic that we have dominated your Q&A so far, which is the merger. So congratulations to the STB obviously accepted the application, move the merger proceeding from [ Avance], and now is in the merit's phase. How should investors think of this development? And kind of what can we look forward to from here?

Yes. I think it's really, really good development procedurally as we move into this merit's phase. We're pleased to be in that phase of this process right now. I think about it kind of in three big pieces going forward. So you kind of have a comment period and request period. and you also have DoJ and DoT comments. Those are kind of like mid-November to early December time frame. Then you'll have our responses to this. kind of in the February time frame. And then sometime after March, you will go into the public hearing. So I kind of look at it in those three big chunks, and that's when I would expect to see big pieces of information coming out from there. So ultimately, the final timing is, of course, up to the STB. But I think just having the schedule out provides us a lot of visibility helps us from a planning perspective and really gives us a date to kind of drive towards forward on this path.

Got it. And obviously, we'll hear from Jim Mana tomorrow. But so far, how has the procedure gone versus your expectations at the point that we're in right now?

Yes. I think sure, we've all wanted it to go faster, right? But I think when you think about this, we kind of came out originally, and we were talking maybe 18 to 21 months or something like this, that would take. And I think at the end of the day, if this procedural schedule holds, it's not going to be too much longer than that. So not too far out of that. that total time period, again, there's been puts and takes in terms of when things were accepted and when we move to different phases. But all in, I think we're kind of, again, where maybe we thought we'd be on a conservative basis, but also right where we should be from getting near the merits of the deal now.

Got it. And from your side, I mean you've added several customer protections expanded committed gateway pricing, reciprocal switching protections and rate dispute resolution. Can you talk about kind of the process that drove you to offer those concessions? And kind of do you think that meets the threshold for what the STB is looking for?

Well, it's pretty simple. I think we're doing exactly what the STB wants to do, and that's listening to our customers, engage with them, be responsive to the stakeholders who are involved in this. And that's really where we came from when we made those additional changes. And so you think about doubling the amount of freight that's eligible, so to speak, for committed gateway pricing, adding unit train to that piece. Those are clear line of sight responses to what we were hearing from our customer base. You put together those changes with the other part of this, whether it's the service alternatives or the pricing pieces. And really and truly, I mean I'm biased, but I think it's a very compelling package when we think about offering a lot of value to the market.

Got it. And kind of speaking of agreements you reached, obviously, resin agreement with Canadian National that gives them access to certain 2 to 1 and 3 to 2 shipper facilities as well as some Norfolk Southern interest that have been transferred over to them. Should we expect additional agreements like this? Like do you think that was a one-off? Do you think that's kind of again, enough to kind of meet the threshold for the STB?

Now sounds really boring, but I'll go back to what I said a minute ago. I think we're doing exactly what the STB wants us to do and that is we're reaching out to other stakeholders, trying to find solutions that offer value, but at the same time, protect the value of this extraordinary opportunity that we have in front of us to deliver for our customers and for America. And I think it's strategically important that CN is going to be able to offer that additional access, so to speak, for those 3 to 2 and 2 to 1. They're going to help us in places like St. Louis and the terminal road and all that kind of stuff. And we'll see what else is out there. I would never foreclose opportunities that may help us solve problems for our customers and for the risk.

I would just add on that. I mean, I think it's a great development, right, in this process, but it's just one element of what we presented to the STB in terms of the value that this transaction brings on its own.

Got it. We briefly touched on earlier, the share shift that came immediately after the merger was announced. To your point, you start lapping that pretty soon. When do you think you guys can go back on offense and kind of start taking share back? And does that need the merger to be consummated before that happens? And kind of how do you think competitive dynamics might permanently change between the Class 1 railroads as a result of this transaction?

You're inferring that we were ever off office.

Well, Fair enough. Again, I think some things that happened that may have been shortly outside our control. So when can you go back there?

Yes. I think we're always on offense and defense. That's just -- that's the way of the world. It's a competitive landscape, and we're out there fighting every day for new business and to maintain what we have. The power of our network, that's our intermodal network, in particular. It is one of our superpowers, right? We service -- I think it's something like 100 million American consumers wake up within 50 miles of one of our Intermodal ramps. Some of them like up within 50 miles of like four of them. So we have a substantial place in the market in terms of the value that we can offer with that network. And I'm very confident as we move forward, merger, no merger as a stand-alone company, we're going to be able to deliver that exceptional value because of that network, and the way we execute on it.

Got it. That's super helpful. We have a few minutes left. I want to see if there are any questions from the audience. Yes, one up here.

I remember in the past that NSE was relatively strong, especially in automotive, given the location and a lot of cars coming from Western Europe. How is tariffs impacting that trade? And how important it is to still today in your business? I remember in the past about 12% of sales, also given public information market margins in automotive are relatively high. So what did they do with your business? And where have we touched the bottom and where are we with that all?

At the risk of making a bold statement, I would say, I think tariffs have been an event that has occurred and is now in the past. I don't think it has necessarily ongoing influence on a lot of those markets like the auto markets. We're very lucky by virtue of geography and the effort of past generations of railroaders. We have a superb automotive network, not only for domestic manufacturing from the Detroit 3, but also from a lot of European manufacturers. So we are in, I think, a very good place. The country is actually in a pretty good place with regard to being able to compete globally, but also be able to deliver values in that network that we have. So tariffs are a thing, but honestly, I think it was maybe a onetime event.

Questions?

Just wondering with the regulatory process potentially extending well into 2027. Just wondering how you guys are ensuring that management and employees remain focused on stand-alone execution. And if there's any investments, commercial decisions or capital allocation actions that become more difficult while the transaction remains pending.

Yes, sure. I'll start on that. Standalone execution is our mandate, right? And I talked about our focus on safety, service, cost discipline and building trust with our customers. that's key, and we're delivering. We're executing on that strategy. If you look at record second quarter revenue, continued productivity that we're delivering, the list goes on, second quarter decent OR but 5% operating income growth. So I mean, I think we're doing a lot of great things from a stand-alone perspective. When you think about investments, we continue to invest in our people. And in our infrastructure. This year, call it, just rough numbers about we're going to spend about $2 billion in CapEx, and that's to continue to support the network from a safety and resilience perspective, a growth perspective and continuing to invest in technology. So I mean, no change there from our strategy. And those are things that are going to be important as a stand-alone company, but also as part of a combined entity going into in that merger from a strong perspective.

Any more questions? And [indiscernible], I did want to ask you about autonomous trucks because that's been a big topic of discussion for us all year at this conference as well. I believe it's gone up in kind of every meeting that people have had. How much time are you guys spending thinking about what that means for the industry? Obviously, truck conversion is a big part of the value created by this transaction. So yes, how much time I spending on it? Kind of what do you think that means for the transaction for the industry over time?

I'll answer first, and you can go into it. I don't know what it means for the transaction itself, but I would tell you, part of my mandate is to look out into the future and try to create a future that outcompetes where we are today, right? In many ways, I would say that autonomous trucking or trucking at large has done a pretty good job of moving the ball down the field. Railroads in general, we've got a fair number of headwinds to some of those more innovative pathways that perhaps truck companies have. I personally think that autonomous trucking probably reaches some sort of scale sort of maybe in the next 18 months. It's just Ed talk...

Okay. We would agree.

But it also means that we have to figure out how we do things differently and how we deliver additional value to our customers in a way that makes it more compelling than what they can find on the other side of the road, so to speak. That's our job. And technology has to be a part of that. That's just my opinion.

Yes. I would just add, not necessarily from an autonomous perspective, but just technology advancement. You talk about what we've been able to do here over a relatively short period of time, we've got 11 digital train inspection stations that we have across our network, kind of think about it like a large car wash, but the train is going through there at track speed, 40-plus miles an hour, taking like 1,000 pictures per car. And that's finding things that the human eye can't detect and definitely not at that speed, right? So we're constantly looking at everything that could cause a problem down the line. So allows us to fix it quickly, address it right away. At to end to that, it's good for us, good for our customers, keeps right on its way to destination. So I think there's things that we're definitely doing in the industry that super proud of that we've been able to do, even going back to locomotive modernizations. We've just done over 1,000 of those now. And that's been great for our fleet. So really trying to, like Ed said, stay on that front edge of what are the things we can do to advance technology.

I will say. And this is -- I'm reflecting on your question. Look, at the heart of this transaction, this merger is the idea that we want to become the most user-friendly, most customer-friendly pathway out there. That's very difficult to do when you have multiple railroads with their own strategies and how they're going to become more customer-friendly. And you can only touch part of your customers with your own strategy and they have to live with all these other strategies or maybe not on other parts of their network. So by presenting a combined company that can service the entire array of freight that's out there on a nationwide basis, particularly when I think about the platforms that we have developed, the investments that others have made, we clearly need that kind of innovation to successfully compete. And I think that's one of the value propositions behind this merger.

Great. Gentlemen, thank you so much for your thoughts. I hope to have you at Laguna next year or maybe not either way, you'll be fine. So thanks so much for being here.

Thank you.