NORFOLK SOUTHERN CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Safety: FRA personal injury rate increased, but serious injuries and total accidents declined by 40% and 20% respectively. Thoroughbred Academy invests in training, with over 300 operations leaders completing a multi-year curriculum and 2,300 frontline/operating officers to participate in safety curriculums.
• Service: Q3 car velocity 13% higher year-over-year, driven by 9% increase in train speed and progressive terminal dwell reductions. Service performance serves as a North Star, with gains in speed and consistency.
• Cost Takeout: Year-to-date reduced over 130 crew starts per day, 8% reduction in cost per start (including 20% reduction in overtime). Locomotive productivity up 18%, stored over 500 locomotives, and moved 8,000+ cars offline. Fuel efficiencies at record levels via precision energy management.
• Hurricane Response: Team responded valiantly to Hurricane Helene, recovering and serving communities within days, with responders clearing trees, managing outages, and repairing washouts.
• Financial Actions: Two significant line sales generated $380M gains and ~$400M cash. IT project rationalization and discontinuance of Triple Crown Road Railer assets resulted in $60M restructuring costs.

Segment Performance

• Merchandise: Volume grew year-over-year, led by grain markets and certain chemicals. RPU less fuel grew year-over-year for 37 out of the prior 38 quarters. Impacted by Hurricane Helene in the southeast, but volumes expected to gradually recover as affected customers' operations normalize. Revenue contribution: Significant, with consistent year-over-year growth in RPU less fuel.
• Intermodal: Revenue grew 4% year-over-year, volume up 9%, but RPU down 5% due to stagnant truck prices and unfavorable mix. Impacted by ILA strike on international volumes, but majority expected to recover. Revenue contribution: Noted growth but offset by RPU pressures.
• Coal: Revenue declined 2% year-over-year. Volumes up 11% year-over-year, but RPU down 11% due to declining export prices and unfavorable mix. Seaborne met coal prices a drag, but export thermal has demand. Revenue contribution: Experienced headwinds from pricing and mix.

Guidance

• Second half operating ratio guidance 64%-65%; Q4 expected sequential uptick in OR due to normal seasonality, Hurricane Helene cleanup costs, etc.
• 2025 cost reduction target of $150M, with potential to exceed; confident in share recapture and service product driving growth. Committed to $150M cost reduction in 2025, with ability to fast forward savings from 2026.
• Confident in meeting second half OR guidance of 64%-65% despite Q4 headwinds.

Risks

• Fuel price normalization remains a significant revenue headwind.
• Market trajectory and mixed impacts on sectors (automotive, metals) pose challenges to growth.
• Seaborne met coal pricing and domestic stockpiles impact coal revenue negatively.
• Hurricane cleanup costs and normal seasonality headwinds in Q4 contribute to OR pressure.

Question and Answer

Q: Chris Wetherbee asks about fourth quarter operating ratio and progress into Q4.

A: Mark, John, Ed, Jason discuss momentum in cost control, intermodal growth potential, coal market dynamics, and OR guidance for Q4.

Q: Brian Ossenbeck asks about capital intensity and buybacks.

A: Mark and Jason talk about locomotives off-line reducing capital needs, IT project rationalization, and CapEx reduction leading to potential share buybacks in 2025.

Q: Ken Hoexter asks about carload volumes and coal pricing.

A: Ed Elkins discusses coal price drift lower and volume recovery post-port strike and Hurricane Helene disruptions.

Q: Tom Wadewitz asks about 2025 outlook.

A: Mark, John, Ed discuss 2025 cost reduction targets, service product improvement, and market response to drive growth.

Q: Brandon Oglenski asks about organizational structure and 2025 OR.

A: Mark talks about sticking to strategy, execution focus, and two-way communication to drive network fluidity and growth.

Q: Jonathan Chappell asks about volume growth and spot market wins.

A: Ed Elkins talks about ag market spot opportunities, intermodal reservation system enabling agility, and operational improvements capturing volume.

Q: Jeff Kauffman asks about labor agreements and targets.

A: Jason talks about labor agreement predictability enhancing workforce confidence and aligning with PSR 2.0 goals.

Q: Jordan Alliger asks about network resiliency.

A: Jason and Mark discuss network health, asset efficiencies, and resiliency achieved while lowering costs during Hurricane Helene response.

Q: Ravi Shanker asks about pricing to counter inflation in 2025.

A: Ed talks about pricing to service value and outpacing inflation in core markets.

Q: David Vernon asks about seaborne met market and 2025 volume demand.

A: Ed talks about U.S. competitiveness in export thermals and geopolitical uncertainties impacting met coal pricing.

Q: Ben Nolan asks about premium intermodal green shoots.

A: Ed talks about trucking market trends and premium intermodal headwinds, but seeing signs of inflection.