Norfolk Southern Corporation Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Weather Impact: Faced 18 storms, incurring $35 million in storm restoration costs, but network resiliency was evident; quickly restored network fluidity.
• Safety: FRA injury ratio down 13% year-over-year and 15% sequentially (lowest in over a decade); train accident frequency reduced 43% year-over-year.
• PSR 2.0 Transformation: Zero-Based operating plan rolled out, simplifying train plans, tightening connection standards, and strengthening competitive resource and cost structures; Enterprise Resources streamlined materials management, improving fuel efficiency (HPT up 13% year-over-year, fourth consecutive quarter fuel efficiency record).
• Productivity: $55 million in labor productivity savings contributed to 8% EPS growth on an adjusted basis.
• Customer Service: Commercial agility staying close to customers, driving share gains through improved service and better anticipation of market and customer needs.

Segment Performance

• Merchandise: Volume fell year-over-year, with gains in Chemicals and Ag businesses offset by weakness in Metals and Construction; Merchandise RPU less fuel increased 4% for another consecutive quarterly record.
• Intermodal: Achieved 3% year-over-year volume growth, with RPU less fuel up slightly for the second consecutive quarter due to stabilization in truck pricing.
• Coal: Lower export coal prices drove RPU less fuel down 3%, but volume gains in the utility business partially offset this decline.

Guidance

• Reiterated full-year 3% revenue growth guide and 150 basis points of operating ratio improvement.
• Acknowledged uncertainty around tariffs and macroeconomic conditions but remain committed to achieving $150 million in cost takeout.

Risks

• Weather-related disruptions and associated restoration costs.
• Uncertainty regarding tariffs impacting end markets.
• Macroeconomic risks such as potential GDP slowdown or recession.

Question and Answer Q: Good morning. Maybe I wanted to ask about yields. So merchandise stepped up. I know we have a record there. Intermodal was up year-over-year for the second quarter in a row. Can you talk a little bit about what you're seeing in the pricing environment?

A: Thanks for the question. This is Ed. We've been successful taking price in the merchandise side of the business, really on the back of improving service. And for us, that's been the headline for the last three quarters. Our customers are trusting us more and more and really offering us more opportunity, both on the price side as well as on the volume side to expand our portfolio with them. On the intermodal side, we're taking what the market will give us basically, and that's really a sideways price right now that it's very flattish, and we'll see where it goes with all the uncertainty going forward here. But we're still taking price predicated off the value of the service that we're providing, and we feel good about our trajectory there.

Q: Hey, thanks. Good morning. zJust to follow up there. The merchandise yields up 4% ex-fuel is that more about mix? Or is that sort of core price accelerating? And then I understand the point about just all the uncertainty. So I guess I just want to get your perspective in an environment where volumes start declining, if that's what happens, what's your ability and willingness to start to further reduce costs? Like if volume -- if we wake up and volumes are down 5% or something like do you think you can reduce head count and costs in line with that?

A: It's hard to remember it now. It's been a long. On the merchandise side, it's a function of both. We've been successful in taking share in a couple of key markets. Notably in chemicals, and that's coming from a variety of sources. That's good for the portfolio. At the same time, we're beating our plan for same-store price right now. I feel good about that. And all the indications that we see from our customer base are that, number one, they're seeing increasing value from the product that we're delivering. And number two, they're looking for ways to save money, and we're clearly in a great place to do that. To your second question, I'll start and then I'm going to -- well I'll hand it off to Mark here. Go ahead.

Q: Good morning. zJust to follow up there. The merchandise yields up 4% ex-fuel is that more about mix? Or is that sort of core price accelerating? And then I understand the point about just all the uncertainty. So I guess I just want to get your perspective in an environment where volumes start declining, if that's what happens, what's your ability and willingness to start to further reduce costs? Like if volume -- if we wake up and volumes are down 5% or something like do you think you can reduce head count and costs in line with that?

A: Yes. No, that's a hypothetical, if you get a 5%, that's a 5% decline. It's pretty cataclysmic scenario. We are not fully volume variable as an enterprise, as you know, you'd have to go and do some draconian things if you wanted to be volume variable, I think we learned a harsh lesson when we tried doing that in 2020 with the onset of COVID and then was unable to respond quickly. So the reality is we're going to keep our eye on the external outlook. Meanwhile, we're doing really great stuff looking at being more productive and efficient. And you see the way we've been handling the volume last year while actually dealing and absorbing nutrition in our direct headcount, we're continuing to do that. That's part of the math this year as well. I'm not going to respond to a 5% scenario, 5% decline scenario, but just know that we've got a lot of productivity runway left. John and the team are doing some great stuff and others are doing great stuff inside the organization, including in IT and technology where we're trying to drive and find productivity savings. So we're keeping our eye on the volume trends right now. We hear a lot of the same stuff in the marketplace about potential for recession. We felt really bad last -- we felt really good last week. We felt pretty bad yesterday. Today, we feel a little more encouraged. That just shows there's no way to predict where we go right now. We're in a really uncertain spot, but we haven't seen negative trend yet that really alarm us or cause us to do anything. That said, we're scenario planning and just stay tuned.