NORFOLK SOUTHERN CORP Q2 FY2024 earnings call

Management Statement and Operational Highlights:

• Safety: Leveraged NS leadership framework to strengthen field safety, reduced mainline accident rate, commissioned inspection portals and added field sensors, conducted safety summits.
• Operational Metrics: Improved core network performance indices. Reduced active online motor power fleet, increased GTMs for available horsepower and car velocity by 6% each. Delivered 6% improvement in car velocity by reducing handlings, extending train schedules, and improving connection performance. Addressed unscheduled train stops and dispatching practices, resulting in 18% reduction of unscheduled stops and 4% reduction in crew starts.
• Cost Takeout: Targeting $250 million cost takeout commitment. Crew expense per kGTM dropped 8% from Q1. Focus on fuel productivity, yard and local redesigns to drive out waste and rework.
• Service Product: Efficient operations and compelling service product allowed gain in service-sensitive markets like auto and intermodal. Launched NS intermodal reservation system in September to reduce rents and expenses and create service certainty.

Segment Performance:

• Merchandise: Revenue improved 4% with volumes up 2% and RPU up 3%. RPU less fuel set an all-time record. Automotive had record revenue and RPU less fuel, metals and chemicals also had all-time records for revenue less fuel. Revenue contribution from merchandise was significant.
• Intermodal: Revenue flat, volume up 8%, RPU down 8%. Excluding fuel and storage charges, revenue grew 2%. Contribution to total revenue from intermodal was a portion.
• Coal: Revenue declined 3% on 2% volume decrease, impacted by Baltimore port Francis Scott Bridge outage. Contribution to total revenue from coal was affected by this outage.

Guidance:

• Lowered full-year revenue growth expectation to around 1% due to continuing market cost currents and adverse mix headwinds.
• Reaffirmed second half operating ratio guidance in the range of 64% to 65% despite lower revenue outlook. Driven by productivity opportunities and continued momentum in network performance improvements.
• Expect sequential volume improvement in third quarter with continued productivity gains to help achieve the OR target.

Risks:

• Market mix headwinds impacting revenue per unit in various segments.
• Wage increase of $25 million in Q3 posing a headwind to operating ratio.
• Fuel price fluctuations affecting operating expenses.
• Potential impacts from port closures (like Baltimore port bridge outage) and regulatory actions on coal and other segments.

Q: Tom Wadewitz from UBS asked about intermodal yield, whether it's at a bottom and drivers for stronger pricing.

A: Ed Elkins said mix and price were headwinds in intermodal, with mix driven by premium segment and empty shipments. Thought intermodal yields were around the bottom and expected an inflection point with peak season.

Q: Scott Group from Wolfe Research asked about cost side, upside downside to OR target.

A: Mark George said sequentially expecting volume improvement and continued momentum in John's initiatives. John Orr added confidence from people engagement and field initiatives.

Q: Brian Ossenbeck from JPMorgan asked about sequential headwind into 3Q and confidence in hitting target.

A: Mark George said productivity would help sail through, with third and fourth quarters expected to be similar.

Q: Jon Chappell of Evercore ISI asked about past volume impact from port distraction and future customer resistance.

A: Ed Elkins said customers were supportive and focused on earning back merchandise customers by providing better service.

Q: Brandon Oglenski from Barclays asked about coal yields and land sales impact.

A: Mark George said coal yields expected to decline, land sales gains not part of OR outlook but expected to be down year-over-year in back half.

Q: Ravi Shanker from Morgan Stanley asked about East Coast port actions and customer behavior.

A: Ed Elkins said shippers hedging bets, West Coast activity rising, and demand for domestic intermodal out West.

Q: Elliot Alper for TD Cowen asked about purchased services cadence.

A: Mark George said purchase services would be no worse than first half, expected down year-over-year in back half. John Orr added focus on fuel and materials services.

Q: Daniel Imbro from Stephens Incorporated asked about winning back merchandise business and volume outlook.

A: Alan Shaw said leveraging improved service product and cost advantage over truck, Ed Elkins said focused on giving customers what they want.

Q: Jordan Alliger from Goldman Sachs asked about operational initiatives difficulty.

A: Ed Elkins said it's hard work but a blend of basic and major changes, Alan Shaw said leadership, plan, and execution are key.

Q: Walter Spracklin from RBC Capital Markets asked about Mexico opportunity.

A: Ed Elkins said discussing opportunities with Grupo Mexico and CPKC, including connecting Mexico to Southeast via Meridian Speedway.

Q: Stephanie Moore from Jefferies asked about OR improvements in future years.

A: Alan Shaw said they're executing on a multiyear plan to reduce OR to sub-60, with a road map and delivering on it.