Q1 2021 Norfolk Southern Corp Earnings Call
Greetings and welcome to the Norfolk Southern Corporation first quarter 2021 earnings call kind of earn.
The call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as.
A reminder of this conference is being recorded its now my pleasure to introduce your host Megan Agonizing Senior director of Investor Relations for Norfolk Southern Corporation.
You may begin.
Thank you and good morning. Please note the during today's call we will make certain forward looking statements, which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties.
We view as most important.
Our presentation slides are available at an S Corp, the dotcom and the investors' section along with a reconciliation of non-GAAP measures used today to the comparable GAAP measures.
Along those lines recall that in the first quarter of 'twenty 'twenty, we launched the rationalization of our locomotive fleet by 703 units, which resulted in a noncash charge of $385 million. So we will speak to the corner of the results excluding that charge a.
A full transcript and downloads will be posted after the call. It is now my pleasure to introduce Norfolk, Southern as chairman President and CEO, Jim Squires.
Good morning, everyone and welcome to Norfolk, Southern's first quarter 2021 earnings call.
Joining me today are Cindy Sanborn, Chief operating Officer, Alan Shaw, Chief Marketing Officer, and Mark George Chief Financial Officer.
Norfolk Southern started strong in 2021.
Our successful implementation of precision scheduled railroading translated into solid financial results.
Our team delivered all time records for operating ratio and free cash flow and achieved first quarter records for earnings per share and operating income.
Norfolk Southern employees accomplished this despite significant supply chain disruptions brought on by severe weather nationwide in February.
For the quarter revenue increased 1% due primarily to volume growth up 3% year over year.
At the same time expenses declined 3% or $48 million compared to our adjusted first quarter 2020.
Throughout the quarter, we continued to streamline resources, resulting in impressive gains in work force asset and fuel productivity.
Looking ahead, we remain intent on achieving strong revenue growth and deficiencies to propel the bottom line and create shareholder value.
Investments in technology, and sustainability will be critical and I'll provide some recent examples of these after we review the quarter.
But first let me turn the call over to the team to go through the quarterly results in more detail starting with Cindy.
Good morning.
I'm excited to share our first quarter achievements and what we have in the Hopper looking ahead.
Our team on the ground is proving its capability and motivation to move quickly on advancing efficiency and restoring service reliability.
We've also introduced a few new team members with P. S. Our experience who are leading initiatives alongside our field team to increase productivity inside of our major hump and flat switching terminals.
These actions are having an immediate impact for our shareholders and our customers.
Yeah.
Slide six shows our operational indicators, while volumes were variable on the quarter efficiency gains were consistent.
By absorbing additional volumes within our existing train network. Despite how those volumes vary during the quarter, we were able to realize substantial gains in train length and train weight and improve fuel efficiency.
Productivity initiatives, such as locomotive horsepower of optimization.
And additional usage of distributed power were key to the success.
Execution of our efficient scheduled railroading plan enabled us to handle more freight with fewer resources compared to a year ago.
Let me add some more color on train length.
We are committed to improving productivity by running longer trains and accomplishing that involves targeted investments within certain parts of our network.
During the quarter, we completed in the initial assessment of incremental infrastructure that will aid our long train initiative.
As a result, we've begun construction on a long siding extension and the Chicago Atlanta corridor that will be complete ahead of this year's peak season, and then we have identified two others that we will begin construction on this year.
We will quickly identify and address the opportunities to efficiently deploy capital to support both train consolidation and organic growth.
Moving to slide seven.
Weekly carload fluctuations tell an important story of the quarter.
Volumes rose quickly coming out of the new year's holiday and were running several percentage points higher than last year until severe winter weather arrived in February.
This affected both railroad operations and our shippers with Chicago being hit the hardest by both snow and extreme cold.
Well, we kept mainline fluid overall supply chain congestion slow traffic through terminals.
I would like to especially recognize our field operations engineering and signals teams for ensuring a safe and efficient operation Despite historic cold deep into our network.
Their work is critical to the success of N S and our customers.
Beyond the weather episodes, we continued to adjust our yard network to handle volume increases expected during the year, we are focusing on driving improved efficiency and reliability at our key terminals, which in turn creates the capacity dividend that enables us to absorb both volume variability and overall growth we are.
Continuing our yard in term of focus in the second quarter.
Slide eight shows that to start the year network fluidity was comparable to 2019 levels.
But of condensed winner of that followed in February impacted our velocity and terminal dwell and snarled supply chains in general.
As you see by the network performance trends over the past seven weeks, we continue to progress and are committed to further improvement to get our servicer of liability to where we want it to be.
The additional progress, creating consistent fluidity leads to enhanced railcar velocity, which in turn benefits our shareholders and customers.
I'll finish on slide nine by explaining how we continued Norfolk Southern's operating transformation during the quarter and how it showed up on the results.
We've undertaken a series of focused initiatives to improve capacity and drive down dwell at our major terminals, including current homes as well as flat switching operations.
These improvements support the longer and heavier trains, we're running allowing us to operate efficiently with fewer resources.
Finally, Q1 reinforced the benefits of effective interline cooperation and we are building on that even though the winter weather has passed.
The results show in both productivity and asset usage. These trends have been improving since we implemented top 21 in mid 2019, but the team has been able to both accelerate and extend the improvement and we are very well positioned to continue these trends leveraging our efficiency initiatives with rising volumes.
Thank you for your time and I'll turn it over to Alan.
Thank you Cindy and good morning, everyone.
Beginning on slide 11, we experienced significant volume volatility on the first quarter.
We delivered a strong start to the year with January volume exceeding last year.
While February was challenged with winter weather events that disrupted supply chains across the country.
Progressing in the March business levels improved the supply chain fluidity started to recover and we adjusted two dynamic shifts in the freight environment.
I will now turn to slide 12, highlighting our revenue and volume performance for the first quarter of 2021.
Despite the difficult operating conditions overall revenue improved 1% year over year to $2 $6 billion well.
While volume grew 3%.
Revenue per unit, excluding fuel improved in each of our individual business units this quarter, reflecting our commitment to grow yield as part of our long term strategy.
The total revenue per unit and revenue per unit, excluding fuel were down slightly due to the mix of intermodal volume growth with declines in merchandise volume.
Merchandise revenue fell 4% from prior year levels on a 3% volume decline.
This segment faced difficult pre COVID-19 comps in the energy sector.
Partially offsetting these declines were gains in soybean steel and automotive shipments.
Mark U S light vehicle sales surged to a $17 7 million unit.
Seasonally adjusted annual rate the.
The second highest mark ever.
While inventories are at a 10 year low.
Merchandise revenue per unit, excluding fuel reached a record high for the quarter delivering 24 consecutive quarters of year over year improvement in this market.
Intermodal revenue and volume both increased compared to the first quarter of 2020.
Volume growth was driven by a continuation of the inventory replenishment cycle combined with the tight truck market and strength in consumer activity as retail sales grew nine 8% in March the largest sequential increase since may 2020, when sales initially rebounded.
<unk> reopened from shutdowns.
Intermodal revenue per unit, excluding fuel improved 6% year over year supported by continued strength of the L. T O market driven by growth in E Commerce.
This marks the 17th consecutive quarter of year over year improvement in this metric and a record high.
Our coal business delivered 5% revenue growth in the quarter.
Volume gains were driven mostly by export thermal shipments as the global economic recovery continued as well as tailwind from China, Australia.
Trade tensions.
Domestic met and Cook volumes continued to improve as demand for finished product accelerated utility demand was down as it continued to be pressured from product substitution at lower industrial load.
Revenue per unit improved 3% year over year inclusive of a $9 billion incremental gain from volume shortfall revenue.
We have an unrivaled consumer oriented franchise that continued to benefit our customers and shareholders throughout the quarter.
Although severe weather certainly impacted business levels, particularly in February our diverse industrial franchise serves the improving manufacturing economy, and we saw gains from rising commodity prices.
We are delivering sustainable revenue growth in line with our long term strategy the capitalized on the strength of our franchise and provide value added solutions in the marketplace.
Moving to slide 13, our outlook for the remainder of the year of strong consensus for U S. GDP growth is north of 6% the highest in the last 40 years.
PMI rose to $64 seven and March hitting the highest level since 1983, while inventories remain low.
These are expected to be key factors driving robust economic activity for the rest of 2021.
We remain confident that our markets will achieve volume growth in the high single digits. This year and our franchise is poised to capitalize on the expected growth that will drive value for both our customers and our shareholders.
Merchandise growth will be driven by continued expansion in the manufacturing sector.
Elevated demand levels, coupled with low dealer inventories in the automotive segment will drive volume gains. However, the current semiconductor chip shortage creates uncertainty as to the timing of the recovery.
U S light vehicle production currently is expected to exceed pre pandemic levels in 2020 one.
That production growth along with the return of total industrial production to pre pandemic levels will drive steel demand, which is another market, where we expect the generate volume growth as the year progresses.
We also anticipate our energy markets within merchandise will benefit from the return of gasoline demand in the consumer travel sector as the economy fully reopens.
Our intermodal franchise will continue to build on the momentum associated with the ongoing U S economic recovery.
An expected rise in consumer spending low inventory levels and continued tightness in the trucking sector are all key factors boosting growth opportunities.
Spending on durable goods is expected to grow 15% in 'twenty, 'twenty, one, which bodes well for our domestic intermodal franchise that is closely correlated with consumption markets.
The international intermodal will benefit from the resumption of global trade activity.
Coal business will remain challenged in 2021.
The export thermal market continues as the near term strength, although with the lower ARPA you than average.
Domestic met and Cook volume is expected to improve in line with the economic recovery.
Natural gas and renewable energy source conversions will continue to negatively impact the utility markets.
Decisions on stockpile levels will be determined by summer weather and gas prices.
Okay.
In summary, we expect to generate revenue growth in 2020, one as economic conditions continue to improve.
As of the needs of our customers constantly evolve we remain diligent and delivering valuable transportation solutions to the marketplace.
We continue to focus on initiatives to drive growth margin improvement and a strong service product.
We are confident in our ability to leverage our value in the marketplace to secure new opportunities to support our customers' growth and grow our margins.
I will now turn it over to Mark who will cover our financial results.
Thanks Alan.
As Jim mentioned the O R. On EPS Records, we achieved in the quarter came through disciplined cost control, while handling additional volume in the midst of pretty challenging operating conditions.
On slide 15, walking you through our summarized results compared with an adjusted first quarter 2020.
We reported of no or of 61, 5%, which was a 220 basis point improvement.
And on earnings per share improvement of eight cents.
I will note that the eight cent of improvement in EPS was dampened by the absence of the gain recognized last year from of 2012 income tax refund that equated to nine cents.
So of core EPS improvement in the quarter was 17 cents.
Moving to slide 16.
Revenue grew 1% in the quarter.
Due primarily to the 3% increase in volume year over year with growth in intermodal and coal more than offsetting declines in merchandise.
At the same time.
We drove operating expenses down by 3% as we harvested additional benefits from work force and asset productivity.
The volume growth coupled with the productivity.
Drove the operating ratio down to a record low 61.5%, improving 220 basis points year over year, and 30 basis points sequentially versus Q4.
This produced operating income of $1 billion, another record up $62 million or 7% year over year.
And we generated first quarter free cash flow of $750 million also a record of.
$161 million or 27% versus the first quarter of 'twenty 'twenty.
Moving to a drill down of operating expense improvement on slide 17.
The reduction of $48 million of 3% comes with improvements in nearly all expense categories.
Material and other were collectively down $15 million or 9% as we continued to see lower spend associated with fewer but more productive locomotives. Thanks to the rationalization of equipment last year.
Fuel expense was down $12 million with benefits evenly split between price and reduced consumption. Thanks, largely to a 3% improvement in fuel efficiency.
Comp and benefits declined $11 million or 2%.
From lower employment cost related to our work force that was 12% smaller than a year ago, and 2% smaller than the fourth quarter.
Partially offsetting these tailwind or headwinds this year from higher incentive and stock based compensation.
Purchased services and rents were collectively down $10 million or 2%.
As reduce freight car expenses more than offset higher spend associated with technology investments.
And increased intermodal volumes.
When matched two of 3% volume increase the 3% decline in Opex provides another quarter of additional productivity building on the work we've done over the past several quarters as you'll see here on slide 18.
From the quarter that we launched our top 21 operating plan, we have made meaningful progress on our workforce productivity with G. T M <unk> per employee up 16% since the third quarter of 2019 and of 340 basis point improvement in our operating ratio.
And we remain intensely focused and committed to drive further improvements.
Turning to slide 19 for the remainder of the P&L below operating income.
You'll see that other income net of $7 million is $15 million or 68% unfavorable year over year.
Due primarily to lower net returns on our company owned life insurance investments.
Our effective tax rate in the quarter was just over 22%.
The recall last Q1, we have the 2012 of the tax refund that resulted in a lower effective tax rate.
As a result, net income increased by 1% compared to pre tax earnings growth of 5%.
Earnings per share rose by 3% supported by 2.3 million shares that we repurchased in the quarter at an average price of $254.
Wrapping up now with our free cash flow on slide 20.
Free cash flow.
At $750 million was buoyed by strong operating cash conversion and a relatively modest $265 million and property additions on the quarter, which was below our annual targeted run rate for the year due to timing issues, including weather related delays in capital spending.
Shareholder distributions totaled $840 million, an increase of $132 million versus prior year. Thanks to our recently increased dividend and a meaningful increase in our share repurchase activity to nearly $600 million.
With that I'll turn it back over to Jim.
Thank you Mark.
You've heard this morning about all of the productivity improvements stemming from our adoption of the P. S. R.
Our company is also in the middle of the digital transformation.
We expect the investments in technology to drive the next phase of improvements in service service growth efficiency and sustainability at Norfolk, Southern and we're already making great headway slide 22 shows a few recent examples.
The introduction of new mobile apps and a redesign of our customer portal are giving customers a more user friendly and truck like experience delivering real time shipment of intelligence facilitating truck to rail conversions and reducing emissions.
We're putting an easy to use mobile application in the hands of our train conductors streamlining internal workflow and improving shipment visibility for customers.
We're digitizing, our internal and external communications through a new CRM platform, enabling better faster decision, making.
We're using new information systems to promote intermodal equipment utilization and efficiency at our intermodal terminals.
We are using predictive analytics to reduce locomotive failures and planned maintenance proactively.
Machine vision technology is creating a path to automated track and freight car inspections with medical benefits to safety inefficiency.
On slide 23, we show that N S has been of sustainability leader for over a decade.
Years ago, we recognize the importance of of reducing our environmental footprint beginning in 2007, when we first established our sustainability program.
We've been reporting on our results ever since delivering on the goals. We set forth here, we highlight a few key milestones and also show a few examples of external recognition, including recently being named by the Wall Street Journal as one of the 100, most sustainably managed companies in.
In summary.
We have a track record of leadership on sustainability, which is good for business and the right thing to do for all our stakeholders.
Yeah.
Although we don't generally update guidance given the unusual circumstances of the first quarter with February as extreme cold in our global supply chain disruption, let me wrap up by restating our confidence in our ability to meet the mark for full year 2021, with the expectation that strengthened consumer oriented and manufacturing markets will drive nine.
Percent revenue growth year over year.
For the full year, we expect to achieve more than 300 basis points of or improvement versus our adjusted Twenty-twenty of result.
And we expect the end 2021 with a 60% run rate or <unk>.
As we've said before once we achieve these targets we won't stop improving.
So we're optimistic about growth in the year ahead in all of the initiatives, we have underway to create long term sustained value for our shareholders.
Before we open the call to Q&A I want to quickly address the proposed transactions involving another class one railroad.
We're watching the situation closely but we won't be discussing the proposals or the industry speculation generally.
As the regulatory review process unfolds, there will be opportunities for further discussion.
As our first quarter performance demonstrates we remain focused on enhancing operational efficiency and delivering value for our shareholders from customers and we look forward to addressing your questions about our results and outlook. So with that we'll open the call to questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on the telephone keypad of confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue from participants using speaker equipment. It may be necessary to pick up your handset before pressing.
The Ms Darcie.
Due to the number of analysts joining us on the call today, we will be limiting everyone to one primary question and one follow up question to accommodate as many participants as possible.
Our first question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.
Hey, Thanks, good morning, everybody.
Wanted to see if we could start with the outlook, particularly the operating ratio. So strong performance from the first quarter. If you look at normal seasonality. It actually it seems like you're on kind of the 60 or maybe even sub 60 run rate as it stands right now based on what you've been able to achieve you know first quarter through the rest of the year in the last five years. So maybe you can give us some thought.
And sort of your view on that progress towards that 60 run rate of Theres. Some things from a cost perspective that we should keep in mind as the year progresses or maybe is there the opportunity to potentially exceed your expectations.
Good morning, Chris.
Let me begin by pointing out that while seasonality certainly hasn't been repealed it was a strong first quarter and somewhat anomalous given the the surge of of volume we've experienced both of the first quarter and in the fourth quarter.
Due to the the economies reopening.
And also we were out there with some some bullish guidance of pretty bullish outlook on the economy.
During 2021 early in January we.
Forecast of 9% volume growth for the year. So we got ahead of this we were feeling bullish about the the economy of the business opportunity wave.
The way back in January so here, we are now we've posted a great first quarter. Its good start to the year, where we're often running and we remain optimistic about the year to come I'm sure. We'll talk a lot more about the specifics during the call.
But we remain optimistic we're going to continue to push.
We we expect to be where we said we would be back in January.
By the end of the sheer in terms of or.
Okay. Okay. That's helpful. I appreciate it and then maybe just to follow up on sort of the progress that you're making in the workforce productivity you highlighted on slide 18, and some of the other efforts that you're making around CSR. It seems like the process is unfolding quite nicely. So can you talk maybe about sort of the bigger picture maybe beyond 2021.
What maybe the opportunity is for you to continue to improve the cost structure of the business.
Yeah, Chris This is Cindy and I will answer your question I. Appreciate the question you know as we talked about it and you saw on marks on notes.
Slides around G T m's per employee that was a record for us.
Quarter, even with all of the challenges that we faced and we're going to continue to see opportunities. As we you know consolidate trains get longer trains, we're making some investments that I called out in my remarks to help us with train length by investing in some sidings so.
Part of CSR and as I've learned it through through the last few years you know it is about getting your plan right size for the time and then continuing to tweak of continuing to find efficiencies in places that maybe you don't expect I think well be able to see continued improvement in locomotive utilization fuel.
Head count all of those areas.
Beyond 2021, I mean, we're not as Jim described when we were thinking about where.
Where we should be at the end of this year, where we're not going to stop with where we ended up we will continue to find those opportunities. So I feel very very good about what the team has accomplished so far in the end even with a very challenging very volatile first quarter of this year and I think that gives me great confidence that we will not continue.
Through 2021 and into 'twenty, two with very good efficiency performance.
Okay, great well, thanks very much of the time appreciate it.
Thank you. Our next question comes from the line of Justin Long with Stephens Inc. Please proceed with your question.
Thanks, and good morning.
Jim I know you said you werent kind of comment on the proposed mergers from the Canadian rails, and Casey asked but I did just wanted to ask generally if you had any thoughts around rail mergers and your willingness to participate in further consolidation if the opportunity were to present itself.
Well, Justin I recognize that the the decision the situation is kind of dominating the airwaves right now in the there are a lot of interested industry stakeholders are focused on the proposed transactions, including on us and we will be protective of our shareholders' interests in our customers' interests, we will be active participants in.
Any transaction that may transpire out of this.
With that said I really think it would not be fruitful for us this morning to focus on other people's deals.
You know hypothetical knock on effects, what the STB made may do et cetera, but rather rather let's focus on.
Our first quarter, which I humbly submit was pretty spectacular and our outlook for the rest of the year.
Fair enough maybe from my follow up just to circle back to the guidance.
The guidance for the or improvement of 300 basis points or greater than 300 basis points. This year is somewhat open ended Mark I'm curious has anything changed in terms of your expectation on head count this year.
And then maybe you could comment on on yields and what Youre thinking from <unk> as well.
Sure with regard to head count you may recall back in January Cindy and I reiterated that we would expect head count and unemployment levels to be.
Glad to down over the course of this year.
Spite the volume.
Guidance that we gave which was high single digits, leading to revenue that would be roughly 9%.
You know, we're tracking to that right now and we actually believe that.
We will continue to stay on that guidance for the balance of this year. So we're feeling we're feeling good about the way that's unfolding in transpiring, Alan you want to talk a little bit about yields yes P of Justin.
We had talked about.
To expect a reduction in revenue per unit in the first quarter, and then year over year growth in quarters two through four.
That's still our anticipation and I expect that we will see RPE of growth through the remainder of the year and full year.
Sticking with our 9% revenue guidance for the year.
<unk> of that is associated with volume increases so RPE will improve slightly.
It's more of a reflection of mix with intermodal growing pretty rapidly and strengthen the lower ARPA you export thermal market.
It is with respect of price.
Okay I appreciate the time.
Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Yeah. Thanks, Good morning, guys I just wanted to start just a couple of things on the on the cost side compensation per employee was up a lot and any thoughts on on how the model that and then we've just.
C N of little volatility in purchase services costs, just any thoughts on on how to model that if that stays down year over year, if that starts to trend higher. Thank you.
Yes, Thanks, Scott for the question yes.
Yes comp and Ben per employee was up 11% on the first quarter.
And really what roughly half of that was related to the incentive and stock based comp headwind that we reported there on the slide on the first quarter and you can expect that that kind of headwind will persist throughout the balance of this year.
The the other half of the headwind is really split between.
The increase we saw on the first quarter on overtime, which shouldnt persist throughout the balance of the year.
As well as the normal couple of few points of wage inflation headwind.
As well as some little uptick in payroll tax that should also persist so.
There'll be some level of comp headwind it wont be 11% and the balance of the year, but maybe a little bit more than half of that is.
The good way to model it.
So the purchase services.
Low quarter for us for sure I think the rest of the year is going to depend on kind of the volumetric pieces that we.
Continue to work on but engineering remember engineering spend.
That will step up during the summer months.
And also <unk>.
A lot of the it investments are going to really start to hit us more in the back half of the year second third and fourth quarter. So I do think that you'll see purchase services up from this level.
Probably back to where we were in the fourth quarter.
<unk> probably be a good good way to model it quarterly going forward.
Okay.
Okay. Thanks, and then Alan just quickly for you.
Can you just talk about the the underlying pricing environment and on what Youre seeing there.
Yes, Scott, it's improving as the wood as you would anticipate we're saying of commodity prices move up.
Steel prices are at record highs, you're seeing strength in lumber seeing strength in grain products.
Seeing strength on plastics ad.
As we progress through the first couple of months of the year. We've raised our plan on our transactional business within intermodal now recognize I think very small component of our franchise.
However, we are seeing continued strength in the trucking market and some of the things I'm reading Scott.
Our point of the fact that truck capacity is actually projected to tightened throughout the year from a.
Very robust environment right now so.
Feeling pretty good about the pricing environment for the remainder of this year and as we move into 2022.
Yeah.
Okay. Thank you guys.
Thank you. Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Good morning.
So you know some of the other rails that have.
And the likes of <unk> provide the trip plan compliance metrics for the carload and intermodal network is this something that you guys look at closely.
So could you just sort of give us a sense for where you might be tracking on this metric.
On or whatever metric you think is most relevant.
We're really trying to understand how network reliability has improved and where it stands today outside of I was looking just at the public.
Service metrics that we can physically.
Yeah Allison thank you.
But I will say is what we share with you is what we're really working on.
And you've seen since I've been here, we don't necessarily service related but we added train length of some of the measures that we provide some color on on the service piece. We did have service delivery index SDI and found that that wasn't something we were really managing to what we're managing to Moore is as we put in <unk> with car velocity.
And so that's going to be the area that we're focusing on and have developed that measure broadly of created the ability to drill down for accountability at local levels.
Looked at it beyond just the geographic component also the.
Car types component of of car velocity, what car types from moving faster than others, and that's really what we're going to be headed.
And how we think about that and talk about that and in time to come we will also share of that.
Okay perfect.
Cindy you also you talked about the they used a distributed power obviously that I'm sure is contributing to the improvement in fuel efficiency.
Could you give us the like what percent of the trains are now equipped or running with D. P is and then just in terms of closing the gap with some of the appears in terms of gallon per G. T M.
You know when you sort of think about the the ways that you can improve.
Improve that R. R D P use.
And expanding the use of them are big driver or is it more increased.
Train length and weight.
You know if you can sort of speaking to the different drivers.
And if you expect the fuel efficiency too.
Or the improvements of accelerate as we move through 2021. Thank you.
Okay, Allison I would say that.
All of the above that you mentioned, including energy management are levers for us to continue to improve and our locomotive utilization and therefore fuel demand.
So I see very very strong opportunity to continue to.
Run of our trains at full capability of the locomotive locomotives, we call that full pan of talked about that on earlier calls on our manifest network. We're at full Penn maybe 13% to 15% of the time at this point on the district by district basis. So we see some opportunity there you.
You talked about distributed power we.
Have actually we increased distributed power utilization of our trains that we didnt use distributed power by 11.
The almost 12% in the quarter of first quarter.
It is a record for us in the last record was fourth quarter. So we have real good trajectory with the distributed power, which to your point is also beneficial to us from a fuel perspective. So we are we've got a lot of work to do on fuel and and there was of those are the areas that we're working on to get us there.
Great. Thank you Cindy.
Yes.
Thank you. Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.
Thanks, Good morning, everyone.
The question is on intermodal maybe looking out.
Little bit here.
So Cindy maybe kind of what percentage of your carload volume. The do you think will be intermodal are about maybe three years from now kind of just looking at the growth trajectory there versus the other end markets and also how does the mix in intermodal today compared to where it was a few years.
The go kind of just starting to see if that mix GAAP that is traditionally existed at sales going on.
Ravi.
We're expecting the intermodal to lead our growth.
For the next couple of years.
Actually I should point of consumer oriented products you know, we've got an unrivaled intermodal franchise in the east. We also serve more U S vehicle production than any other.
Railroad in North America, and we've got a consumer oriented merchandise franchise, where we're actively focused on providing a truck like product.
There to compete with truck. So we're really intent on providing the simplicity of trucks, coupled with the efficiency of rail and that that revolves around a very highly reliable and predictable service product with very good digital tools for our interface with our customers.
So thats, where youre going to see the the growth markets from US and then we will.
We will participate in the ebbs and flows within the commodity markets.
You don't have to go back that long 22011, we had $3 $5 billion of coal revenue on about.
The 45% of our overall revenue was associated with the energy markets now we've got about $1 billion of coal revenue and we've got about $2 billion on the energy markets and so despite that mix and despite that shift we've improved our margin profile as well. So we're very confident in our plan going forward.
We've got a robust franchise that faces the fastest growing segments of the U S economy, which is going to benefit our customers and our shareholders.
Got it thanks for that update on and also kind of just following up on the the kind of digital.
Digital update that you gave us at the very useful.
I'm wondering if you guys of spend much time at all of the thinking about.
Autonomous trucks and cars.
And of how that might.
Coming to the network or kind of.
It influences the truck market over the next several years.
Just kind of what's your view there is.
It's the threat and we view it as such.
Im horizons somewhat uncertain, but it's certainly something to.
Be aware of and to be planning for and we are.
And we are doing so through efforts to automate our own operations and to.
Go down the path of more efficient and productive railroading via.
While automation via digital investments ourselves.
That said, we've we know that in our industry. We've got a much more attractive sustainability profile, even if trucking goes on on automated fashion, we still provide a better sustainability solutions.
Okay.
Great. Thanks, everyone.
Thank you. Our next question comes from the line of Thomas <unk> with UBS. Please proceed with your question.
Yes, good morning.
Wanted to see if you could comment I guess this is probably for Cindy just.
Obviously, you of some constraints across the system I think we've seen it in some of the intermodal terminal of some of it you know kind of in your control probably a lot of it is not but how do you think about.
Where you're at from a fluidity perspective, and some of your key intermodal terminals and kind of what needs to be done to way to see that improve.
Alan why don't you take that one Tom.
For me I'd like to cover that because it involves that intersection between our network and our customers network.
What you've seen and what you continue to see stress across the entire supply chain.
That can be with warehouses, which are having trouble with productivity associated with the with COVID-19 protocols, they're also having trouble with labor staffing.
You see that in the drayage community as well.
And.
And so that could back things up despite that we delivered 13% increase in intermodal revenue ex fuel surcharge and the in the quarter on top of 11% improvement in the intermodal revenue ex fuel surcharge in the fourth quarter.
We've got a great franchise, we've got the best channel partners in the industry, we are collaborating with them on how to solve some of these issues and help them grow even more.
And I'd add to that Tom from a from the network perspective, we work really closely with intermodal the intermodal terminal folks to make sure we are.
Moving trains appropriately for of support with the customer freight to.
It can actually be offloaded, so theres good coordination so that the any challenges within the terminals do not spillover on to the line of road.
Right Okay.
And then for a follow up.
Cindy you had implemented some changes in the southeast part of the network I think I believe it was fourth quarter.
When you make changes sometimes there I guess the.
The adjustments to the new schedule of new flow of traffic.
And then you've also had weather and growing volumes, how do you think that that you know.
That work well.
And how you think about kind of additional schedule changes or do you think you kind of stick with the current schedule and just execute against that.
Yeah. Thanks for the question. So the the southeast plan that you described we actually started implementing in November.
Very beginning of November and we're largely through some of the adjustments that we needed to make as we came into the first part of the year. So so that was working well then we kind of hit this volatility that I described in the in my prepared remarks, it was induced by weather.
That was and also volume and so I have to step back from the southeast playing on almost go all the way back to the changes with top 21, and our terminal footprint and how it's changed the consolidation of trains to make longer trains and how that's been beneficial to us and we really pressure tested it with volume.
And we had to make some adjustments.
In the southeast plan certainly across the North and you saw our service product maybe as we came out of March we're starting to really see some improvements in and dwell and and train velocity, but we did have to do some tweaks we have to get back in there and make some changes there were highly productive they helped us be more effective in <unk>.
Fishing.
And and I think we'll continue to see the service related measures improve real pleased with some of the work of particularly at Bellevue in Elkhart that has taken place over the last couple of weeks and months and I think we are I think we're really on a good glide path.
Also say that.
That.
All of the changes we made the volatility that we worked through on the quarter.
We didn't see cars on line jump up we were able to continue to move continue to work with our customers. So that we didn't see a drag on.
Additional car volume that was sitting on the network. So I feel really good about where we are in a lot of good work went into getting us to this point very very pleased with the team.
Great. Thank you for the perspective.
Thank you. Our next question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.
Thanks, Good morning, everybody I'm, Mark you provided that.
Cost structure slide in the past of fixed versus variable cost structure.
And kind of the the implications for incremental margins the.
Cost structure, I guess is obviously evolving.
As you implement DSR, but there's obviously a lot of revenue growth.
You're on your on your on the second quarter and hopefully beyond I know you guys have this all of our target out there that's helpful. But whats the right calibration for for Incrementals on that growth.
On that outsized growth in <unk> and beyond just relative to the cost structure.
Some of you provided in the past.
Thanks, Amit so look our outlook is to generate strong incrementals throughout the balance of the year and Thats how we.
We're going to accrete and grow our operating ratio or sorry, shrink our operating ratio.
Our goal here is on pretty much all line items two to absorb.
Hold the vault absorbed the volume and hold the costs as flat as possible and Thats kind of the challenge on the mandate, we've given to the organization and the.
That's going to really translate into the or.
Or improvement that we're projecting so as I mentioned, you'll have some geography purchase services really started off strong.
Probably going to see that pop a little bit for the reasons I just cited.
A few minutes ago.
But when we look at some of the other line items like like rents and.
Comp and Ben et cetera, you know our goal is really to just try to hold firm and absorb volume.
So.
I think youre going to see good incrementals the rest of the year.
So sort of if I'm misinterpreting your comments kind of just $1 6 billion dollar Opex space is kind of the neighborhood youre going to be in over the course of the year.
As revenue ramps is that correct.
That's that's kind of where we're targeting I mean, I'm not going to get more precise than rounding to the hundreds of millions but yeah.
That's our goal is to sit there and.
And try to hold costs, while we absorbed the volume.
But of course, one of the one of the variables on that of course is fuel fuel will go up.
Throughout the balance of the year, we are projecting that.
But we should have some hopefully some lag on fuel.
Surcharge should should help mitigate some of that too.
Okay. That's helpful. Thank you and then just one quick follow up for Alan I guess you know.
The coal yields.
The consistently kind of surprise to the upside the and I'm. Just wondering if you had and kind of your best of gas in terms of where you think coal yields will shake out as we progress through the remainder of the year.
Yes.
Good morning, I would prefer to surprise the upside on the downside on yields.
We did call out a specific volume shortfall accrual.
On the quarter that was $9 million ahead of last year. So.
And with that respect.
Of that helped.
We had a lot of cross currents with respect to our overall yield and coal as well.
Yes, I talked a lot about export thermal for us of acts.
Southern we were able to deliver 66% growth in export thermal.
Coal in the quarter and that's due.
Very specifically to the the great service product that we've had into any of that market.
That's we're happy to have that business, it's accretive to our margins our bottom line and helps or however, it does come with a lower overall.
<unk>.
Then.
Within the utility franchise, we actually had.
More growth in our utility North pardon me of utility south franchise than utility North which is positive for our overall RP years. So there's a lot of things going on within coal.
With export thermal is the growth driver of that going forward, that's primarily going to put pressure on overall ARPA, you and frankly, we'll see what happens in the utility franchise.
We've got a number of plants right now who's stockpiles have deteriorated over the winter of very few of our in the process of rebuilding stockpiles, now, which which is frankly, what you would expect.
They are on shoulder months so that.
That's a point of caution going forward as the utility volumes and how that shakes out and then what.
What's the impact that has on overall ARPA you.
Yes, Okay makes sense. Thank you very much congrats on the good results I appreciate it.
Thanks, Amit.
Thank you. Our next question comes from the line of Jordan <unk> with Goldman Sachs. Please proceed with your question.
Yeah, Hi, good morning, just a quick question on the intermodal and.
The pricing it seems like the yield up maybe its training of real corner of 6% ex fuel I'm, just curious specifically on the intermodal yields given.
Given the truck tightness and hopefully service getting better as you alluded to I mean is this is just the yield number of sort of on a core of yield number that we could think about going forward from here.
Yes, Jordan.
We had some positive mix associated with our intermodal franchise, we saw domestic volumes increased more than international volumes through the quarter domestic.
It's generally on a 53 foot containers relative to a 40 foot containers that has a higher <unk> and then even within that you see that supercharge L. T L premium market, which.
Which is benefiting the <unk> yeah.
I'll remind you and everyone else that we've got 17 consecutive quarters of overall <unk> improvement in our intermodal franchise through cycles in the market there was.
One of the contract rates in the truck market went down last year and yet our intermodal <unk> ex fuel was up three 4% of truck recession in 2019, and yet our intermodal <unk> ex fuel went up to 4%. So we take a very steady approach the valuing.
The the quality of our product and our approach with our channel partners, we really want them to be able to grow and compete.
And so what they're looking for from US is rate surety over the course of the year as they go into their bid cycles over time.
Our intermodal ARPA you ex fuel on our pricing has outpaced that of the contract market and the spot market.
And we're leading in growth. So I think we've got the right strategy going forward to deliver value for our intermodal channel partners and our shareholders.
Okay. Thank you.
Thank you. Our next question comes from the line of Brian Austin back with J P. Morgan. Please proceed with your question.
Hey, good morning, Thanks for taking the question.
Maybe one for Cindy can you just give us a sense as to how you see resources in terms of head count out in the field if any of the different regions all require a little bit more attention or not.
How the recall from furloughs going on retention is going you know that's sort of.
Thing, especially when you look at the <unk>.
On growth, you're expecting and you mentioned theres, a few sounded like leaders and maybe a little bit higher up we saw one announced are there any other folks with maybe a bit more psa of experienced theyre looking to bring on board.
Yeah, Brian so on the on the head count side on <unk> you know I mentioned are you saw in the.
Start with as you saw it in Mark slides that we are continuing to improve and are on our productivity.
We are in we are guiding to be flat to down from where we ended December all all of that is still in play. We are however, we have recalls furloughs and many of our locations.
Well, we're out of furloughs and we are doing some spot hiring it's not broad based and frankly, it's the help all its the help offset attrition slightly we do have attrition that continues quarter by quarter of year by year. So we are doing some hiring we want to make sure we provide a good service product to our customer.
We're very integrated with what the forecast looks like with Alan's team and have spent a lot of time.
Working on training plan that gives us a lot more agility and being able to respond when we need to in places, where we do see attrition and we need to backfill.
We've kind of decentralized our training and gotten it down to a short.
Sure much shorter period of time of about eight weeks, where were actually training folks in the places where they're going to work so they're still going to be a very safe employee.
But we are we are able to condense the amount of sort of speed I guess improve the speed to market. If you will and respond to the needs of service.
We've got we've got to provide a good service product to our customers.
With the volume that we're seeing we will we will need to hire but I feel really good about the.
The process that we have and the ability for us to continue to manage that and overall still improve our productivity.
Around around the teeny productivity, so I forgot your second question <unk> Alan.
Yeah, Peter sort of talent.
So yes, we did publicly announce on carry joining from Upenn had worked together over several different stops in our career and different railroads he's been a real good add integrated well with the team.
And there are several others.
No.
And the organization that.
We have brought on an.
If we have a need we will we will continue to find good fits.
For them within an S and I think part of it is the integration of it.
And that's gone very very well and I think of the tenant long tenured and his folks are are happy to have the additional support and helping them make through the changes that we need so feel really good about where we are and will always be looking for places, where we can bring external folks and with our experience that can help us get there.
Some of our goals right.
Alright.
Thanks, Cindy one quick one for Mark can you just obviously, a very strong quarter, but can you give us some sense as to if you quantify the impact of weather or I guess more specifically on fuel with the with the timing lags how that impacted the quarter would be helpful. The put into context as well. Thank you.
Yes, we didn't really quantify weather I mean, certainly it did have an impact we felt it in the form of higher over time.
Certainly higher re crews we had some snow removal costs as well, we just didn't think of it was material enough to break out.
Look overall fuel was a headwind in the quarter.
Because the we didn't really get the lag benefit of the fuel surcharge coming through here on the first quarter. So we had $34 million of headwind in fuel revenue.
But we did have very good fuel efficiency performance that provide a good tailwind for us on the expense side and I think you saw the numbers on the slide for sure.
Alright, Thanks, Brian Alright, Thanks, Mark.
Take care.
Thank you. Our next question comes from the line of Brandon <unk> with Barclays. Please proceed with your question.
Hey, good morning, everyone. Alan I wanted to come back to intermodal pricing because I think on the January call you did.
Imply that you weren't going to get a lot of pricing benefit from the tight trucking market till 2022. So I think you did mentioned a few mix impacts on yield, but I think the suggestion was of those yields are going to be sustainable throughout the year, but can you talk maybe more explicitly on pricing in that market and any differences between domestic or international.
Yes, Brandon.
What we are what we're seeing is the pricing environment continues to improve.
On the truck capacity tightness, we expect is going to last through this year and into next year. You know I was looking at something last night.
No it makes sense.
Warehousing of trucking are pulling from the same blue collar pool out there and you know what's going on on the warehousing market rates are up 8% year over year.
People are.
Four of positioning of inventory next to the end markets. That's a that's the tight market.
So in our transactional.
Modal business, we are updating our price plan. However, as I noted that's a relatively small component of our of our overall price.
Our.
I've talked through our rate structure with our customers.
And so.
You can see that over time, we're going to exceed contract and spot rates.
As I noted it's over time, we of long term contracts, we want to make sure that we provide our channel partners, who are phenomenal of growing.
With surety on their rates as they go through bid season.
We take a measured approach it takes time over time, it's the right thing to do for our customers and our shareholders.
Okay. So just to clarify it it's mostly mix than that we saw on the acceleration of the yields.
Yes.
Okay, and then one quick follow up for send you. Cindy you mentioned that you guys are really focused on car velocity, which I think I can understand from your perspective, but.
Ultimately don't your customers care about our service delivery index or it might just not understanding that correctly.
Well I think.
I think we all agree that moving the car faster is good for both asset utilization and our customers. So that is really kind of a happy medium.
With solving all of those issues and we have look we have we measure our local delivery processes are in transit processes as well, but ultimately.
Any of those break down youre going to see that car velocity. So so that's why we're focusing on that but we're very we feel very we have very we have quite of bit of focus in general on serving our customers well on Alan and I talk about that quite a bit and make sure. We are aligned on that on that topic.
Cindy is focuses on running a highly efficient highly reliable.
And fluid network.
And within our interactions with our customers. We have shared kpis that are individual one of those customers. It's not an index of we're having conversations every day with our customers that our metrics based on the quality of the product that we're delivering and the value we bring into the market.
Much more granular than STI, yes.
I appreciate it thank you.
Thank you ladies and gentlemen on our final question. This morning comes from the line of Ken <unk> with Bank of America. Please proceed with your question.
Great. Thanks for squeezing me in congrats on solid job here. So Cindy you know a lot of information on on <unk>.
On the improvement where do you think you are on on the path here in terms of the when you step back of the humps. The flat switching is the major stuffed on and now it's the incremental improvements do you still see when you look at this the opportunity for capital investment you mentioned some of the sidings.
Is there any other kind of projects that you look at that that still need to be implemented to get any more step function gains or is this just kind of maybe incrementals and then just a side question of any real estate gains in the quarter on.
Our plans for the year.
Alright, Ken I think that we still have some structural work that we need to do whether that's from train size perspective, or continuing to move forward with some terminal efficiencies.
Beyond the footprint that we have today, but that's going to depend on on volume and where traffic wants to go we wanted to make sure that we serve our customers well and we do it in an efficient reliable way.
I think there is still more structural work to be done.
And then we will.
To your point continue to tweak and refine from there.
But the but I think I see I see I see a great opportunity ahead of us.
And Ken Let me answer your question on real estate, we had a pretty light quarter, we only had about $4 million of operating gains. This year from the sale of real estate in the first quarter and that was versus 11.
<unk> Q1, so it was actually down $7 million year over year.
And again, we would tell you the guide.
Bookmark around $30 million to $40 million over the course of the year.
And we'd stick with that I mean, there are there are years, where we do have out.
Outsized specific items, where you know when that happens we'll call it out and let you know, but for the time being I'd book, Mark $30 million to $40 million for the year, even though we're a little shy of that run rate here on the first quarter.
Okay, Thanks, Andy and Mark So and then my follow up.
Jim You mentioned I would love to ask about M&A in terms of the impact from the industry doesn't sound like you're going to answer but on the technology side the.
Autonomous track and car inspections or are there anything new that you're working on as we prepare.
<unk> kind of go into one man crews is is the next step in this space. You know you were asked about autonomous the before just interested in kind of you mentioned a lot of step up in tech investments. It seems like an opportunity to keep making some strides. So maybe you can.
Maybe you can follow up on the tech side.
Sure happy to I would say broadly that our focus when it comes to technology led productivity and efficiency gains has been on the asset base on the on the track structure in particular, we've put a lot of time and attention into automate.
<unk>.
Digitizing of our track inspection protocols and <unk>.
Accumulating that data and using it to more efficiently maintain our track the huge part of our asset base. So you can understand easily why we would start there.
We have had begun to extend out into other other parts of what we do.
We're working on automating freight car inspections using machine vision systems, we are working hard on automating our crew room reporting for duty, how we report out.
The conductors work.
In the yard and on line of road.
That gets automated and so many aspects of how we how we do our work in the field will.
It will be automated put on the handheld.
And we're leveraging the PTC network and a variety of ways as well the communications network.
Two to think about automating train operations too.
The next generation automated train operations presents a terrific opportunity for us to operate more efficiently and more safely.
And so I'll close on that note and I want to thank everyone for your questions. This morning, and we look forward to talking to you next quarter.
The Carol.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.