Q1 2023 Norfolk Southern Corp Earnings Call
Greetings and welcome to Norfolk, Southern's first quarter 2023 earnings call. At this time, all participants are in a listen only mode.
A 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, this conference is being recorded it is now my pleasure to introduce the Nichols Senior director of Investor Relations. Thank you. Mr. Nicholls you may begin.
Thank you and good morning, everyone. Please note that during today's call we will make certain forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1995. These statements relate to future events or future performance of Norfolk, Southern Corporation, which are subject to risks and uncertainty.
And may differ materially from actual results.
Please refer to our annual and quarterly reports filed with the SEC for a full disclosure of those risks and uncertainties. We view as most important our presentation slides are available with an S Corp Dot com in the investors section along with a reconciliation of any non-GAAP measures used today to the comparable GAAP measures turning to slide three.
It's now my pleasure to introduce Norfolk, Southern's, President and Chief Executive Officer, Alan Shaw.
Good morning.
And thank you for joining our first quarter earnings call.
I will begin with an update on east Palestine, and our ongoing focus on safe operations.
From the beginning we have been guided by one principle, we are going to do whatever it takes to make it right for east Palestine and the surrounding areas.
We are cleaning the site safely thoroughly and with urgency.
We are assisting families supporting local businesses and nonprofits and investing in long term projects for the areas future prosperity.
I went to use Palestine in the immediate aftermath of the derailment and.
It returned almost every week to meet with members of the community and monitor our work.
I've been in churches schools meeting halls businesses and living rooms.
Asking how Norfolk southern can use our resources to help the community recover and thrive.
I'm proud of our people and our progress.
I'm also proud of the crew and the locomotive that night.
According to the National Transportation Safety Board preliminary report.
They were operating the trained properly and took the right actions after receiving the alarm.
The wayside detectors worked and there were no track defects.
As the NTSB continues its work we have already begun to take actions designed to further enhance safety.
Such as installing additional safety sensors.
Accelerating the deployment of advanced early detection technologies.
And increasing safety training for first responders.
The firefighters and other emergency responders, who ran to the scene that night and east Palestine have our deepest gratitude and respect.
They are heroes.
We also appreciate the leadership of local state and federal officials and agencies in response to these events.
We share their goals of helping people affected by the derailment and finding evidence based approaches to rail safety.
We are a safe railroad.
2022 Norfolk, southern had fewer derailments than any other year in the last two decades and our rate of employee imagery was the lowest in a decade.
We strive to do better.
While events of the last few months of focus national attention on rail safety Derailments at Norfolk Southern in the first quarter decline from the same period last year.
Continuing a trend of improvement.
We're going to learn from this accident to become an even safer company.
I have been personally engaged in Washington support to support specific federal legislative provisions to enhance safety.
As the initial learnings from East Palestine, It made clear meaningful enhancements will require the combined efforts of the entire industry.
Railcar owners leasing companies equipment manufacturers and the railroad companies.
Norfolk, Southern intends to be a leader in that effort.
And we embrace that role.
Turning to slide four at our Investor Day last December we charted a new course for sustainable long term value creation.
We were the first railroad to launch a strategy that starts with safe reliable and resilient service for our customers.
<unk> with smart sustainable growth and productivity improvements.
With everything we do we will focus on long term priorities and value rather than just the short term.
Hi, I'm reaffirming my commitment to that vision and building the team to drive that strategy.
This new direction is even more important today and we have been working to execute our industry leading strategy.
Our customer centric operations driven approach.
Supports both service and safety.
It will enable us to grow with our customers sustainably for the long term.
Our powerful network desirable geographic footprint best in class Channel partners, our strong relationships with our valued customers.
Uniquely positioned Norfolk southern to deliver on our strategy.
When we spoke in January service was the best in two years customers. We're noticing in December volumes were at 52 week highs define typical seasonality.
Consistent with the long term vision after the east Palestine in Springfield Derailments, we made two decisions we knew we'd have a near term impact on service capacity and revenue.
First.
We're pulling up the tracks at the derailment site in East Palestine, and removing the impacted soil in response to feedback from the community and the E. P. A.
Since March 3rd.
We have had only one track at a time and service with trains running that restricted speed through this section of our busiest quarter.
This mainline segment linked Chicago to Eastern Pennsylvania, New Jersey, and New York and there was a strength of our franchise.
We anticipate completing the remediation and having both tracks in service by early June .
Second.
Out of an abundance of caution in early March we accelerated the analysis of trained makeup rules as part of our broader efforts to improve safety service and productivity.
Which we began implementing soon thereafter.
As a result of these purposeful actions on our part.
Train capacity was limited initially.
Paul will address this in greater detail.
We are restoring capacity as we dial in this new set of processes, we do not anticipate any meaningful long term impacts on service capacity or cost structure.
These were the right things to do.
They were also the best decisions to enhance our ability to deliver on our long term strategy of delivering resilient service.
It will take some time to build resiliency and we're making progress.
We continue to invest to ensure we have the right team and resources, where they are needed to provide our customers with safe best in class service.
As we shared when we announced our new strategy last December we aren't focused on managing short term at war with actions that will undermine our longer term goals.
We strive for more.
Our longer term commitment to competitive margins will be balanced with other important financial measures such as growth in revenue EPS and ROIC I see.
Putting that plan into action, we are making strategic investments in the near term that position us to deliver long term value.
One of those investments is to maintain the people and resources, we need through economic downturns.
This will allow us to respond more quickly and capture revenue growth when markets recover.
Even more significant.
Resilient service enables our customers to confidently build rail into their supply chains and supports highway to rail conversions.
We will use temporary downturns to invest in training, creating career opportunities for the craft railroad or <unk>.
Who are the heart and soul of Norfolk Southern.
I enjoy the time I spent in crew rooms, and have made it my personal goal to listen to my craft colleagues about what they need.
I won't stop working until our service and safety culture is the acknowledged model for the industry.
Our strategy is a better way forward for the industry, it's a better way to deliver value to shareholders and it's the right thing to do for our employees.
Our customers.
And the communities we serve.
Before I turn it over to Mark.
Like to take a moment and recognize our customers who have shown a tremendous amount of support throughout the challenges of the first quarter.
I received countless calls letters and emails from customers, recognizing Norfolk Southern's positive response, and dedication to making it right.
It's made me proud to be part of the Norfolk Southern team and truly demonstrates.
The deep partnerships, we have forged with our customers.
I'll now turn it over to Mark.
Thank you and good morning, everyone.
On page six you will see our key financial results for the quarter.
The top row represents the GAAP measures on the second row are the current cost estimates and impacts related to the eastern Ohio incident in response on the third row, you see the adjusted results.
The $387 million of expense that we recorded for the incident includes costs associated with the cleanup of the site community support and restoration payments legal and advisory expenses and a preliminary estimate of claims and settlements.
It is important to note that no insurance or other recoveries are assumed in these estimates and that credits associated with these recoveries will be determined and recorded in future periods. Similarly, as we learn more one can expect future estimates of costs will result in revisions to the accruals.
In subsequent quarters.
The two rose at the bottom reflect the variances versus Q1 of 2022.
GAAP earnings were down year over year due to the eastern Ohio costs that were recorded.
The adjusted variances at the bottom reflects 7% revenue growth that Ed will detail shortly along with adjusted net income growth of 8% and adjusted EPS growth of 13%.
Adjusted operating expenses were up 11% in the quarter and slide seven details the drivers, which I will walk through now.
Adjusted operating expenses were up $204 million or 11% with the majority of the increase being driven by inflation and incremental surface related costs.
Inflationary pressures are visible in pretty much all P&L categories, most notably in comp and Ben from last year's wage settlements.
Income from then we also saw an increase in head count as we continue to build our teeny resources.
To help us become more reliable and resilient in support over a long term strategy for growth.
Okay.
Purchase service growth was also impacted by inflation, but is also driven in part by technology investments, including projects aimed at improving productivity operational executability.
And enhanced safety.
The service disruptions triggered by the eastern Ohio derailment.
The associated shutdown of our mainline and a critical corridor as well as the acceleration of our enhanced trained makeup rules is having an incremental impact on costs, resulting in slower network speeds that inflates equipment rents, while also driving a meaningful increase in material costs in part.
Because we strategically worked to bring locomotives into service from our stored fleet to help accelerate our network.
Moving to depreciation please recall that we gave guidance on depreciation headwind. This year from a recently completed roadway depreciation study and that contributed $8 million of a headwind in the quarter and that will continue as a headwind in subsequent quarters.
We also drove fuel efficiency by another 1% improvement in the quarter versus last year.
Moving to the P&L results below operating income on slide eight.
And I'll talk to the adjusted variances here in the right hand columns operating income grew 1%.
Other income was $56 million aided by favorable returns on company owned life insurance.
And that helped adjusted pretax income grew 7%.
Net income grew 8% and EPS grew 13% in the quarter.
Turning to free cash flow and shareholder distributions on slide nine.
Cash from operations was $179 million higher in part from changes in working capital, while free cash flow was $140 million higher than last year.
And we remain committed to returning capital to shareholders with a strong dividend supplemented by share repurchases.
Let me turn now to Paul for his review on operations.
Thank you Mark I'll begin on slide 11 on my first earnings call as Chief Operating Officer. This January I shared my intention to begin every update with safety. This reflects the priority we put on the topic.
Everything we do starts with safety.
At the time my leadership team and I were in the middle of kickoff meetings with operations leaders across our network.
Alan joined Us for some of those meetings, our marketing leadership team participated in others. We started every meeting with safety discussing that it is an enterprise priority.
We are investing in our leadership this year with all of our Bell Science Supervisors and starting every conversation with safety.
As leaders, we set the tone and tone influences culture.
We are also investing in the development of community responders, including a new regional training facility in Bellevue, Ohio.
We are a safe railroad and constantly challenge ourselves to do even better we.
We will continue to work with our employees and community partners and safety related initiatives that further enhance our culture in these areas.
I'll note specific steps, we are taking to enhance safety. After reviewing the Ntsb's preliminary report on the east Palestine derailment, including adding 200 more hot bearing detectors onto our network expanding our network of acoustic bearing detectors and accelerating the deployment of digital train inspection portals are most advanced.
Safety technology, which we describe in greater detail during our Investor day.
On Slide 12, you will see our safety metrics as Alan noted in 2022 Norfolk Southern had the lowest rate of employee injuries in a decade with a 101 frequency ratio.
We began 2023 with a 0.89 injury frequency ratio and continuing to work. So all of our colleagues go home to their families in the same condition. They arrived.
We are also making strides to reduce our FRE accident rate, we were showing one additional graph this quarter, reflecting the frequency of accidents that occur on mainline tracks, while we strive to reduce all accidents mainline accidents than a greater impact of the communities that we serve.
[noise] have generally been flat with year over year improvement through Q1 compared to Q1 2022.
Our investment in infrastructure is paying off and we're confident our focus on equipment inspection technology will continue to drive our mainline accident rate lower.
Turning to slide 13, I'll provide an update on our overall service.
In the first quarter, we accelerated the analysis of trained makeup rules as part of our broader efforts to improve safety service and productivity.
We began implementing enhancements soon thereafter, resulting in a significant short term impact on velocity and the performance of our railroad.
However, these changes were the right thing to do and have increased the reliability of our network and also allowed us to become even more productive.
For example, we're now operating 50% more merchandize strains with distributed power than this same time last year.
This was only possible thanks to our continuing commitment to locomotive modernization. Another example of how we are investing in long term value.
As Alan explained we also made the decision to pull up the two mainline tracks of the derailment site and remove all impacted soil.
For March 3rd until the remediation is complete currently expected in early June we are only operating one track at reduced speed through that section of our busy Premier corridor.
We have everything we need to recover from this temporary setback to our momentum remember that prior to the Jerome and our service was the best it had been in two years as we dial in our train makeup enhancements we are already seeing improvements to our network. In recent weeks, we will continue to work through the backlog and do not expect any meaningful long term impacts we are.
We're eager to get back to the execution of our service oriented strategy.
Transitioning to slide 14, as we invest in the people and resources, we need to execute our strategy and become more resilient. We still have about one third of our high end locations below our minimum staffing target based on anticipated demand. We continue to hire at a strong pace and have a robust pipeline of trainees in place we are employing incentives.
To attract candidates in targeted locations and we are taking a series of steps provide immediate support where it is needed.
For example, we are leveraging our go teams and temporary transfers in critical areas as we continue to restore the network.
Moving to slide 15 for a productivity update starting with locomotives we maintained progress in the quarter on keeping locomotive velocity well above last year's levels. The overall train and engine workforce productivity metric remains below last year due to the elevated pipeline of conductor trainees as well as maintaining capacity in support of service and fewer.
Your growth.
As we have discussed in a central aspect of our balanced strategy for service productivity and growth is to provide resilient service through economic downturns and times of volume uncertainty. This represents a deliberate strategic investment to maintain capacity in support of service and future growth Lastly.
Lastly, our modernized locomotive fleet and fuel efficiency initiatives produced another quarter of record fuel productivity. This is another area, where we will continue to invest to drive benefits for our shareholders customers and the communities. We serve I'll now turn it over to Ed Elkins.
Thanks, Paul and good morning to everyone on the call.
I'm, starting on slide 17, where our results for the quarter speak to the benefits of our diverse portfolio and that we were able to leverage strong market conditions, and our merchandize and coal markets to offset weaker conditions in our intermodal markets.
This enabled year over year growth in revenue and revenue per unit in the first quarter. As you can see overall volume was flat, but total revenue increased 7% to $3.1 billion due to higher fuel surcharges and positive mix, which more than offset lower volume in storage revenue and intermodal.
I am in revenue were strongest in January when our service product was the best that had been in two years and the truck market is showing signs of rebalancing.
Volume and revenue decelerated throughout the quarter as service disruptions impacted our ability to meet customer demand in key markets and the truck market continued to deteriorate.
Our performance in January demonstrates that our customer centric operations driven approach can yield significant value for our customers and our shareholders.
Within merchandise volume growth of 5% was led by strength in sand automotive grain in aggregates markets.
These gains were partially offset by weakness in demand for plastics and for pulp board.
Volume improvement was the largest driver of double digit revenue growth and merchandise this quarter, followed by higher fuel prices and price gains.
Intermodal markets were notably weaker this quarter, particularly within our domestic lines of business, where a weak freight environment and a weakening truck sector combined to drive a 4% volume decline year over year.
International Intermodal was a bright spot this quarter with volumes, improving 9% year over year on higher demand for Ipi services, even as overall imports fell which helped to mitigate some of the domestic declines.
Intermodal revenue benefited from higher fuel surcharges and price this quarter, however, not enough to overcome the negative impacts of lower storage revenue and lower domestic volume, which drove a 5% decline in revenue versus the prior period.
Now I'd note that the combination of improving international Ipi volumes and declining intermodal storage revenue is a strong indication that supply chain congestion is rapidly unwinding in the U S.
Coal shipments in the first quarter up 5% year over year led by export which is currently experiencing continued high levels of demand as well as greater coal supply in our service territory to meet that demand.
Volume growth was muted somewhat by year over year declines in utility coal due to depressed natural gas prices and mild winter weather co.
Coal revenue was up 13% in the first quarter, driven by higher volumes fuel surcharge and price gains.
Now moving to slide 18.
As we look ahead to the remainder of 2020 three we expect near term headwinds to pressure volume and revenue throughout the second quarter. However.
However, we are optimistic that our service product will be much improved in the back half of the year positioning us to return to growth when market conditions permit.
Additionally.
We are walking onto the field today with the best marketing team in the business.
And this team is working hard to identify new avenues for growth in the form of new markets to serve and new products to deliver.
Even in a decelerating economy, we know that we can offer exceptional value to customers seeking to reduce their overall spend on transportation and reduce their carbon footprint.
As we look at the rest of the year merchandise growth will be led by automotive shipments supported by the forecasted 5% growth in U S light vehicle production for the remaining quarters of 2023.
Also contributing to growth in automotive shipments is a backlog of shippable ground counts that we will work through as our service improves.
We also expect strong volume improvement in our metals market, where improved equipment cycle times will enable us to serve unmet demand.
Partially offsetting expected growth will be weakness in our chemicals markets, where certain segments like plastics are experiencing weaker demand.
Facility downtime and increased pipeline capacity will also drive a year over year declines in shipments of crude oil and natural gas liquids.
Within our intermodal markets volume in 2023 will be largely dependent on economic conditions, particularly the health of the American consumer.
Currently we see headwinds from excess truck capacity replenished inventories and a challenging consumer economy and these headwinds are likely to persist throughout the second quarter negatively impacting volume, particularly in our domestic lines of business.
Looking at the back half of 'twenty, three clearly the economic conditions remain uncertain.
We see continued weakness in the housing market, which negatively impacts demand for furniture home appliances and electronics.
All of those things that want to move in a container.
The truck market has not rebalanced as we anticipated earlier this year with spot and contract truck rates continuing to fall throughout the first quarter.
So the timing of the rebalancing will have a large impact on our volume outlook.
Additionally, our domestic partners outlook for the second half of 'twenty three has them somewhat.
International intermodal shipments will be driven by demand for ipi, which is a function of port import volumes.
Is declining and supply chain fluidity, which is improving.
Fluidity has returned to supply chain faster than we expected, which would be a tailwind to volumes, but will negatively impact intermodal storage revenue for the remainder of this year.
Taken together, we are optimistic for our intermodal business to overcome these near term challenges and to finish the year with momentum to realize the long term potential of this market.
We have the best intermodal partners in the industry and our team is working hard to ensure that we are positioned for success with them as the market turns.
Lastly, volume in our coal business for the remainder of 'twenty three will be up versus 22 with growth in export coal shipments more than offsetting expected declines in utility coal.
Strength in export coal markets will be driven by new co production coming online at N. S served mines and sustained international demand for U S. Sourced coal. However, the expected increase in volume, but will be more than offset by anticipated lower revenue per unit due to lower seaborne coal prices and reduced.
Fuel surcharge revenue.
The utility outlook is highly dependent upon weather and natural gas pricing, which is currently expected to average less than $3 per million Btu and twenty-three are more than 50% decrease from last year.
In addition, stockpiles are currently at increased levels, which further pressures demand for utility coal shipments.
Overall, we have a cautious outlook for the remainder of 'twenty three.
Improving service levels will be a tailwind, but persistent market headwinds and a stubbornly loose truck market will temper our ability to grow in the near term.
Overall growth in 2023 will be dependent on the macro environment.
We continue to put our efforts on things that we can control to deliver on our customer centric operations driven strategy, we are making the investments required to deliver compelling logistics value for the long term through a simple reliable and efficient customer experience.
Lastly, on slide 19, I'd like to highlight a recent industrial development success that demonstrates the long term value of locating along Norfolk Southern lives Scout Motors and independent U S company backed by Volkswagen Group is locating a new manufacturing plant in Blackwood, South Carolina on our sites served by Norfolk Southern.
And phase one this new plant will produce more than 200000, new electric vehicles and create over 4000 permanent jobs.
The $2 billion investment by Scout will revive an iconic brand that last produce vehicles and 1980.
We couldn't be happier that scout selected a site served by Norfolk Southern.
Before I close I'd like to say, thank you to our customers who have supported us through the challenges of this first quarter. We appreciate every opportunity that they give us to participate in their supply chains and we look forward to successfully growing these partnerships.
We are confident in our ability to realize long term growth and we look forward to delivering results for our customers and for our shareholders.
And with that I'll turn it back over to Alan to bring us home.
Thanks, Ed.
This week marks the end of my first year as CEO .
As I reflect on the year more broadly and especially the last few months I appreciate that adversity reveals character.
That's true for people and it's true for organizations.
I'm inspired by my colleagues at Norfolk, Southern who are rising to the challenge of doing the right thing.
We are anchored by our values and driven by our responsibility to safely deliver the goods and materials that move the U S economy.
Moving forward Norfolk, Southern will be known for safe operations and for delivering service productivity and growth through our pioneering new strategy.
Our response in East Palestine will be a source of pride for years to come.
And we will be a stronger company setting the pace for our industry.
Whether it's our commitment to the citizens of East Palestine, our employees our customers our to all of the communities in which we operate every day when we do the next right thing, we deliver long term value creation for our shareholders.
We will now open the call to questions.
Operator.
Thank you we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys due to the number of analysts.
Joining us on the call today, we will be limiting everyone to one primary question and then please re queue for any additional questions to accommodate as many participants as possible.
Our first question is from Kenn Hoekstra with Bank of America. Please proceed.
Great Good morning.
Thanks for the rundown there just.
Maybe Alan or Ed you know you talk about rebounding service levels, yet volumes were down 8% quarter to date much worse than flat in the first quarter, maybe you could talk a little bit about the timing for when you get back to that normal seat through this quarter and then you mentioned you're still about a third of the target levels or below that target levels of of your.
Many targets in some regions third seems awfully big given the focus you've had out hiring people maybe talk about the sustained cost impact and the ability to get there. Thanks.
Hey, Ken Thanks for the question Yeah, we're in the process of recovering service an IDE.
And we remain committed to executing on that.
In the aftermath of East Palestine, we had some tough decisions to make.
And we we made those decisions knowing full well that it would have a near term impact on our service and our productivity and our growth, but there were the right decisions to make because they align with our core values and they along align with our long term focus.
As a customer centric operations driven service organization.
The same operating team and the same marketing team that has delivered an exceptional service product late last year and beginning of this year is in place now and.
We're in much better shape with our resources and so I don't think the climb out will be nearly as long.
We want to get the track back in place and and East Palestine and that as Paul noted will probably happen in the beginning of June and so I think as we move into and through the third quarter youre going to see us and in position.
Whatever that exceptional service product that customers have become.
Become accustomed to receiving from Norfolk, Southern and you want to talk about what you're hearing from customers on that sure and I. Appreciate the question. So really it's a story of a couple of different markets.
We've been very fortunate frankly that we've been able to preserve preserve a large amount of fluidity in our intermodal network. We think that's really important as we move forward here.
As we work off this excess inventory because bid season is happening right now and we will see our our customers come through this with some very strong performance later on the year. So we were we're banking on the come so to speak in terms of our customers' performance on the intermodal side the consumer market is clearly.
<unk> clearly still deteriorating you've heard that elsewhere read Wall Street Journal.
On the industrial side, there's still lots of demand out there for us to to meet with additional capacity as we improve our service where we're bullish on that front.
Our next question is from Amit Mehrotra with Deutsche Bank. Please proceed.
I mean, please check and see if your line is muted.
Okay, we will come back to him. Our next question will be from Chris Wetherbee with Citigroup. Please proceed.
Hey, Thanks, good morning.
There's two comments that you made.
Paired remarks that I wanted to just maybe see if we can get a little bit more color on Alan you talked about I think over the long run.
Mark you talked a little bit about the potential I think for future estimates of costs that could result in accruals I think that's obviously a very important dynamic as we're thinking about the long term impact of the Doral bank. So if we could just sort of thinking about the longer term outlook and what it might mean from a cost perspective going forward. So we can get an idea of sort of what the run rate earnings power of this.
This network is going forward that'd be very helpful.
Yeah, Chris as I talked about cost structure and service going forward. It was in the context of our new train marshaling rules, which didn't initially have an impact because we we can frankly, we got really conservative.
On our train Markman rules based on the environment and and recent events as we are dialing that in and analyzing each train symbol on each line segment, we're adding capacity back into the network and as Paul noted, we're using this as an opportunity to significantly increase our use of.
<unk> power, which will frankly, ultimately enhance our productivity and our train length. So I feel very confident that we did the right thing at that time, and it's going to generate long term benefit for NFS and our customers and our shareholders and that's kind of what our strategic vision is all about mark yeah. So on east.
Palestine.
Chris.
As of the first quarter point in time, we we made an estimate of the various elements of costs that we'd be facing and came up with that $387 million.
Preponderance of that really is related to the environmental cleanup efforts and future environmental remediation activities and also it's important to note that because of the P involvement in all of this there is likely to be.
Oversight costs that we have to reimburse the government for as well. So that's all part of the estimate.
There are things that we could not estimate and therefore could not recorded in the quarter.
Stuff really related to the legal I'll give you just one example, with the Ohio Attorney General and.
Oh, the three funds that are gonna be established there was no way to estimate that so that would be an example of something in the future that would come.
So as we learn new things and are able and realize that they're probable and estimable, we will record those but at the same time I remind you.
That.
There are no insurance recovery estimates that have been recorded at this point in fact of that 387 cash out the door has really been $55 million. Okay. So most of this is accrual based on estimates our insurance.
Filings will really be done as we incur the costs from a cash perspective, so down the road, we will be assembling our filings for the insurance companies and seeking reimbursement and we will record those in due course as a credit and so with regard to predictability are estimating those it's impossible.
If we could estimate them, we probably would've booked them already.
So we'll just have to keep reporting these out as we go in the subsequent quarters, Yeah and I'll add.
Nor does our estimate include any potential recovery from other parties as well correct correct Yep.
Our next question is from Scott Group with Wolfe Research. Please proceed.
Hey, thanks.
Mark the materials costs were really high and any color on where that goes from here.
Any thoughts on the operating ratio from here and then separately Ed the merchandise yields actually fell a little bit from Q4 to Q1, I think Q1 is a lot of repricing I just would've thought merchandise yields would have been better any any color there. Thank you.
So our materials Scott you know the impact from what we had earlier in the year you know I had a pretty profound sudden impact on the network, we needed to get locomotives to help dig us out so.
So we basically took locomotives out of storage status.
Some of them required a lot of work to get them rejuvenated. So they could help take us out.
You know I think there'll be some incremental material cost that will linger here in the second quarter and should ease in the back half of the year as we see our network fluidity improve Ed.
Sure.
Our core pricing remained very strong in the first quarter and as a matter of fact, we are.
Exceeded our expectations and in several markets, including in colon and in intermodal.
I think what you're really seeing on the merchandise side of the mix issue. We noted that plastics was weak in some of our other chemicals a lot of it goes into housing and everybody knows what's happening to the housing market is right now it's a challenge, but that's a mix issue or core pricing story remains very much intact and.
I am very bullish for it.
Our next question is from Brandon <unk> with Barclays. Please proceed.
Yes, good morning, and thanks for taking my question.
Paul can you talk to the train makeup changes that you guys discussed and how that had a near term impact, but you know what's going to change in the future that allows you to get back to your productivity targets.
Hey, Brandon I'm going to cover that because that's something that I discussed at length.
As I noted.
We had some tough decisions to make.
And the first quarter.
And try and make up rules was decision was based on you know the ongoing environment of recent events.
Paul and I had a discussion in early March and we decided we were going to get really conservative on our trained makeup rules.
Until we had an opportunity to deeply and thoroughly analyze each train assemble over each client segment.
That created some congestion on our network.
It had an initial impact on reducing.
Reducing capacity on our network.
Paul and his team are going through each train symbol each line segments doing the analysis looking at the physics figuring out the right configuration of the training the right configuration for the locomotives and as we do that we're adding capacity back in as as Paul noted that includes expanded use of distributed power, which is good to see.
Port and our.
Our productivity initiatives.
Initiatives going forward and ultimately we are convinced that it's not going to have an impact on service is not going to have an impact on capacity and in many cases, it's probably going to improve productivity.
Thank you al.
Our next question is from Amit Mehrotra with Deutsche Bank. Please proceed.
Thanks, sorry about earlier I'm, clearly still learning how to use the telephone. So I appreciate you calling me again.
Alan I wanted to ask about.
How the remediation efforts are going I think the E P a update.
The few pages that they put out a few weeks ago was pretty positive in terms of the progress that you guys are making and just related to that you know what do you think the volume impact has been because you were at this kind of 130 to 140000 weekly carloads. Obviously, that's dipped down just helpful to think do you think there's a snapback.
In early June .
And then Mark I'm also trying to understand the impact fuel has on yield and operating income.
It's been volatile to the downside and I'm just thinking that maybe it turns into a headwind on an oi dollars as you progress through the year or any any thoughts around that in terms of what the headwind or tailwind or neutrality is from few one on the operating income as we progress through the year. Thank you.
Yeah, maybe I'll I'll handle the first part of your three part one question.
Yeah.
When we when this happened we said we're going to stay true to our core values and we're going to do what's right and that means we're going to do what's right for the long term best interest of Norfolk, Southern and he's Palestine and frankly.
Our response in East Palestine has.
Reinforce my conviction and taken a long term view.
The best interest of your shareholders your customers your employees and the communities you serve.
As a customer centric operations driven service organization is the right vision and the right strategy for Norfolk Southern.
And so I met with the head of the EPA and I made my personal commitment that we were going to do more than less and that's what you're seeing.
We've got 300 people on the ground.
Whether they are employees or contractors seven days, a week and I sincerely appreciate their sacrifices and their willingness to do this and frankly, the sacrifices and their families as well.
And they were intently focused on the environmental remediation or Intel.
He focused on community assistance and are intently focused on helping the communities thrive and we've reached a major milestone in about a week and a half ago, where we finished the remediation under one track and has started out on another track and that that was something that we did didn't necessarily need to be done because we had an environmentally.
Acceptable.
Solution in place, but that was something that we did based on feedback that I received from the citizens of the community and from the EPA and you want to talk about what Youre seeing in the markets and the volume impact of the slower network, but also the macro trends sure absolutely and it's a kind of a I'll try to answer.
Two parts, let's go to the industrial side first.
Clearly as we accelerate our network work off the backlog of inventory or yards.
Gonna be able to present, our customers with more capacity. We know that there are customers that are ready to load that additional capacity right now whether it's in the steel markets, whether it's in the scrap markets.
Certainly in the auto markets and I would also mentioned our AG and our KOL networks, which also are going to benefit from increased fluidity and sustained demand. We believe going forward on the intermodal side was really a demand story there than what I would call a tremendous amount of demand destruction out there.
In the general economy, and we're seeing that manifest itself in our containerized volume opportunities, but look we're not sitting on our hands here, we got like I said, the best team in the industry working right now to figure out how to deliver more value for our customers in the form of additional lanes and additional products and services that we can successfully execute in the marketplace.
<unk> will be ready when the market rotates here and you're you wouldn't fall are also resize and the intermodal network based on.
Current demand that's right you know, it's like it's not a question of when the volume and the demand from the U S consumer is going to recover.
It's when it happens right and so that's part of our strategy is to invest through the downturn. So that we're there for the upside yeah. That's that's what makes it frankly, so important that we've been able to insulate for the most part the intermodal network from many of the disruptions that we've seen as a day and that is that's very purposeful on our part because we were.
Our customers have confidence as they go to their customers and sell Norfolk Southern's value.
Mark I think there is a yes. So just real quick on fuel we did have a lag benefit while fuel prices are coming down.
We had a lag benefit on the surcharge that provided some tailwind to us.
In this quarter, but that is going to quickly diminish and turn into headwinds as we go through the back of the year.
If if the fuel curves hold true.
Our next question is from Jordan <unk> with Goldman Sachs. Please proceed.
Yeah, Hi, I think you addressed this in some ways, but I'm just curious the derailment and the impact on the various service metrics as it had an impact on the marketing side of the equation as you go out and try to sell business and then sort of similarly in terms of the operational stuff you guys were trying to do as you went into this year around top SPG etcetera.
<unk> has had an impact on some of the initiatives away from the remediation efforts. Thanks.
Hi, This is speaking to our to the.
The customer siding business. You know there is we really have not had a more supportive group of constituents out there than our customers. They want us to get the network back up and running they know that we're doing the right thing not only for each policy, but for them and.
Frankly, we are looking forward to delivering that additional capacity of them very quickly at Jordan, both Ed and I referenced this in our prepared remarks, we certainly appreciate the support and the outreach from our customers.
Through this and they are proud of our response they see what we're doing they know what we're made of they know that we do what we say we're going to do.
They're seeing us follow through with that so we're gonna come out of this.
Stronger and better as a result, all you want to talk about the interaction between.
Our operating plan.
And current service Oh, absolutely.
We're seeing improvements over the last few weeks and I want to go back to the point that was made around top SPG tough SPG was implemented as a simpler more executable plan that will provide us a quicker path to improving service, especially when we have major service interruptions, we've seen strong improvements in our intermodal franchise as of late building on the momentum.
Out of the top SPG implementation last year that are referenced again right. Now. This is a this is all about pent up demand in inventory across the network and our merchandise space, we're going to continue to work after it.
Our next question is from Brian Ashton back with J P. Morgan. Please proceed.
Hey, good morning, Thanks for taking the question maybe to follow up with Ed First you mentioned you had some.
Stronger than expected results both in coal and intermodal argue when if you could give some thoughts on that as both of US can we have some distinct factors.
Factors in tier ones that have been effective and more recently in terms of the export market and the storage fees and.
And then Alan maybe you can just give us a sense of the timing for some of these other.
Public hearings or maybe miles mile markers that we should be keeping in mind.
You know for the NTSB.
Our investigation of the public hearing increased Palestine takes your view you know things that are you know pretty much unprecedented but it would still be helpful to hear if there's any sort of timeline, we should keep on our calendars in terms of you know when the next updates for these investigations are expected or at least.
What we should consider that.
The next and extra update when it comes to those things not just the numbers that you're recording but the more public facing side of it.
Thank you.
I think there might be a record for nested questions [laughter] Alright, Brian let's talk about cold first Oh, no. We're still seeing strength in pricing, but all the indices would come off the recent highs and as you know.
Our performance is predicated off those forward curves lowball sits at $2 50 is an API was about 140.
U S met coal forward curve still have the price above 200 throughout at least the third quarter. So we're feeling pretty good there I think the real story is on the demand and supply side.
We know that the.
China is reopening to Australian coal, that's going to reverse some trade flows anemia is ending which remains stronger all strained supply will come back.
But U S. Net production is increasing five metric.
The metric ton, that's new mines and incremental production.
And I think most of those tons are going to move export on.
On the demand side, we're still seeing.
Limited spot demand, but European production has increased about 14% month over month February and Thats due to blast furnaces cranking back up again.
And the met coal exports from the U S are forecast to increase about seven 5%.
Now, we can be bullish or we could be bearish about China I prefer to be bullish the Chinese manufacturing PMI index came in about 52, that's the highest reading in two years. So so I believe that there is some demand there we know that there's healthy demand from the auto sector. So we feel good about coal.
Forward on the intermodal side, there's no doubt, there's a headwind from the storage piece and as I noted in the prepared remarks, we're seeing those markets excuse me those congestion.
On one even faster than we expected, even though we predicted a year ago that they were gonna unwind faster. So as those normalized that's good for volume as I noted on the on the Ipi side and you know think about it this way.
Our international volume to grow 9% that was freight that was moving on the highway last year and we've talked a lot last year about how it was going to revert to the mean when markets normalize and that's what we're seeing right now.
And Brian with respect to hearings.
The NTSB has announced it may conduct a field here in the summer as you noted that date has not yet been finalized.
Don't really have anything else scheduled at this point, but that doesn't mean, others won't pop up.
I met with the chair of the NTSB, just last week and committed our full cooperation with their investigation and you saw as soon as the NTSB released its preliminary results.
We initiated a six point safety plan and I'll also note that I've been in D C.
Multiple occasions.
With our elected officials and with our regulators.
Offer in my full throated support for many of the provisions and the rail safety bills that are out there. We are gonna taken we have taken at an industry leading role in advancing the safety initiatives and we embrace that role.
As a reminder, we would ask that you. Please limit to one question every hill for additional questions. Our next question is from Tom why do it with UBS. Please proceed.
Tom Please check and see if your phone is muted.
Okay, we will come back to him and our next question will be from Jeff Kauffman with vertical research partners. Please proceed.
You very much and congratulations in a challenging quarter.
I've only got one question.
Everyone's trying to figure out is this recession is this not a recession or are we heading into a recession.
There's a lot of anomalies in your data because of the single track that Youre running and a key part of your line and the effect, that's having on traffic, but I'd love to hear your view.
In terms of what's the macro where do you believe we are headed and then kind of how do we back out the effect of your remediation.
The Asian efforts on on your own traffic volumes here.
And you're you're about as tight with our customers as can be why don't you talk about what you're hearing sure I think the one word that describes as best as you know murky and us and quite frankly, it doesn't matter, whether you're on the consumer side of the coin or on the industrial side.
There's clear line of sight I think on the industrial markets for a quarter or two of our demand we see that clearly.
We also see clearly that there is further deterioration in the truckload market is right now the real question in the second half of the year.
And you know you've heard from from other calls and other entities that probably their outlook has changed somewhat particularly on the consumer side, but.
But we know that Theres still pent up demand in many of these industrial markets. So I'm I'm with you in terms of Theres, a theres a lot of cross currents out there and a tremendous amount of again Mercury does but I think.
But one thing I want to reassure you of is we are positioning ourselves to be ready when these markets do turn and they will turn.
And we will come back to Tom <unk> with UBS. Please proceed.
Hi, Yeah. Good morning, sorry about that Mark I wanted to ask you. If you could help us think about operating ratio you've got a lot of moving parts right. Now you know it seems pretty clear when you look at second half maybe you're beyond June you could see some help from the network being more fluid, but how do we think.
About maybe he sees no you know patterning or relative to what's normal if you think about two key versus <unk>.
Or if you assume stability in volume or some pick up in volume how do you think about it in second half.
Given that you've got a you know storage charges you know revenue per car, maybe an export you know just a lot of moving parts, but any thoughts on on Oh are would be helpful. Thank you.
Yeah. Thanks for the question Tom So look I think inflation is going to be a consistent pressure point for our operating ratio throughout the year. So if we think about that is probably a primary headwind.
I'd say, that's probably fairly consistent throughout the year service has kind of emerged.
The first quarter as a kind of a bigger headwind and we were expecting that really to start unwinding here and the reality is it may continue to be a headwind for another quarter.
Before that starts to flip and become a tailwind in the second half assuming service does get back to where we know it should be kind of where we werent that January timeframe lets not forget we really did have a very good January .
And the pain, we're seeing here in the quarter was really a result of just February and March.
I do believe that you know we get some volume in the back half of the year that will represent some tailwind.
And then I think the third component to bear in mind as fuel has.
Touched upon earlier has been a tailwind here in the in the first quarter it might be modest tailwind in the second quarter and again, if the fuel curves hold constant it will become a more of a headwind in the back half.
Our next question is from Ravi Shanker with Morgan Stanley . Please proceed.
Oh, great. Thanks, everyone. So just a couple of follow ups here.
On the list that limit itself, yes. It is a message from you that the accrual that you made in <unk> is like the high watermark for how much it's going to cost you incurred but definitely come down as you get the insurance claims are going up do you think that as the settlements or kind of further legal action or something that takes place over the next several years and that number could go up you start dimension.
What do you see that number does all the time and also I think you guys have been the biggest proponents of using mixed freight train Oh, probably any of the U S class one railroads are do.
Do you think I'm ready to run that is gonna be slightly diminished. This thank.
Thank you.
Ravi I think Mark was it was pretty clear that there are some some moving parts and our estimate there are some things that we know that are going to hit that have not been estimated.
That includes additional charges. It also includes the potential for <unk>.
Insurance claims and also recoveries from other third parties, what we're giving you now is what we're able to accrue.
With respect to our mixed freight you know are our new train marshaling rules, which has really enhanced the use of DP are going to allow us to leverage that and and drive productivity into that network.
Our next question is from Jason Seidl with T D. Cowen. Please proceed.
Thank you operator, good morning, gentlemen, how should we think about head count sequentially sort of as we move throughout the years and you mentioned, you're you're below minimum staffing levels and revenue levels and a good part of your network and then you know I think before you mentioned this time around even in the downturn.
You were going to think about you know furloughs a lot differently than you have in the past I would just like to get a little color on that.
Well, Jason as we talked about as we articulated on our unique vision for the industry, we are going to invest.
Throughout the downturn, because we want to make sure. We're there for the upturn it's not a question of if.
Demand returns as it's only a question of when and we're taking a long term approach. That's the right thing to do for our shareholders and our customers and our employees and the communities. We serve you want at all.
More color on head count Mark well, Yeah, I think you'll see that we've got some trajectory and Paul slide on our TNT count we still have over 900 of conductor trainees.
And as Paul mentioned, you know we've got.
A fair amount of our key locations that are still below our targeted levels.
We want to get to resilient levels in our locations here because you know, we're feeling the pain of not being resilient.
We made a promise to be resilient and our new strategy.
And we're committed to get there. Unfortunately, we're not there yet and that's part of why you're seeing us.
Deal with a service challenge here again here in the second quarter. So there's more hiring to do I think you'll start to see once we once we get to the levels we determine.
Our appropriate at all of our locations will bring our trainee counts down.
Really by more than half of where they are today and that will help us just handle normal attrition, but remember that the targeted numbers for head count really is a dynamic number and it does depend on the volume outlook in the demand outlook.
By area by commodity type by lane, so there's really a lot more sophisticated modeling than ever we've put into trying to determine what our appropriate levels are so I think you will continue to see it go up throughout the course of the year.
Our next question is from Justin long with Stephens incorporated please proceed.
Thanks, I wanted to circle back to intermodal if if I look at your domestic intermodal volumes they've declined sequentially for three consecutive quarters and obviously, there's weakness in demand that you've talked about and that's well known but what's your confidence that first quarter is.
The bottom in terms of domestic intermodal volumes or is there potential we see sequential pressure to continue into <unk>.
Well I think it's really going to be predicated by what happens in the overall economy, particularly that consumer sector.
We continue to get very strong reports from our customers regarding their ability to win bids going forward. So we're bullish on that part I think you've heard in other places, though that many times those bids the volumes are not manifest themselves at the rate that they were advertised so to speak because the demand is not there are we keeping a very clear.
Sorry on the inventory sales ratio, which is about normal now.
There is still maybe a little bit replenishment to do in certain sectors, but we were close to normal on that front. So we're watching very closely what's happening in the macro economy I firmly believe that as the market rotates, we will be very well positioned to take advantage of that first.
Growth that comes out of the gate Yeah, you know we're aligned with the best channel partners in the industry right, they're investing for growth right now through this through this soft patch.
So we're gonna grow with them and and you were able to take share from truck and in the international market.
Right I I would also say you know where we're putting a lot of emphasis on the quality of our intermodal product at the terminal level and we are also focused on first and final mile markets and how we can deliver additional value. There. So we were we're very well positioned we believe.
To come out of this as the market rotation.
Our next question is from Walter <unk> with RBC capital markets. Please proceed.
Hey, this is James Mcgarrigle I'm on for Walter This morning, Thanks for taking my question.
I wanted to ask a question related to the new scope Motors EV plant in South Carolina are you able to discuss.
Any other opportunities like this that you have in the pipeline and I was looking at a little longer term, what's the strategy to bring in more of this type of business to the railroad is at utilizing excess real estate or selling off and eventually improved service product or anything else you can thank you. Thanks.
Sure absolutely.
We have over 600 active projects in our pipeline and while we can't talk about really any of those many of them under NDA. What I can tell you is that we're really well positioned to serve the EV battery ecosystems.
Including support for our additional battery manufacturing and as they search for plant sites for manufacturing.
The the recent Scout Motors Assembly plant and proposed reopening of the lithium mine nearby presents more unique opportunities for us.
Theres three opportunities really for us to participate in the EV space. One is moving raw materials. One is moving components from one is moving the finished vehicles. We're actively working on all three of those segments.
Our next question is from David Vernon with Bernstein. Please proceed.
Hey, guys. Thanks for fitting me in here so.
So mark can you talk a little bit about the trajectory for cost per employee as we kind of go throughout the year. The 140 level is that a good number to be modeling off of and then Ed. If you. If you wouldn't mind, maybe take it I want to take a run at asking you to dimension, how much the Apis oriel and surcharge revenue headwind could be inside of the intermodal RPE U I want to make sure we're not confusing.
Minus one in an RPX fuel with core prices as opposed to the essence of wells and if you could.
Help us dimension that that'd be helpful. Thank you.
Yes, David real quick on the comp and Ben per employee first quarter was pretty much like I had guided.
Last quarter.
And that $35000 range and I do expect it to kind of go sideways from here throughout the course of the year, we will have a step up in the third quarter just from the wage a wage increase that happens for the agreement folks another 4% here.
In the third quarter, but that should be mitigated by wind down and in some of these service related costs. So I'd say, it's going to be in that 35000 and change territory throughout the year per.
Per quarter.
Yeah and on the intermodal side, you know we've made it pretty clear I think we expect year over year declines in as real revenue.
Being a significant headwind.
Revenue for our view less fuel for the remainder of 'twenty, three and that's going to be offset by some positive impacts from price and volume at least at least our plan and then beginning in 'twenty. Four you know the revenue from Astral charges is likely to be much more in line with what we've experienced pre pandemic.
First quarter, we took a significant step toward normalization as I noted.
Oh.
Our next question is from Jon Chappell with Evercore ISI. Please proceed.
Mark in your slide seven when you lay out the Opex components I understand there is a lot of inflation associated with that but is there any way to talk about some of the costs associated with just running the one line and reduced speed you know from the beginning of March.
What we should think about that cost component to be in the second quarter. As you go through June and do you think that those will really be ring fence, then into the second quarter was kind of normalization starting in early <unk>.
Yes, John .
I'd say that the costs related to the service disruption we've had a.
They they show up a little bit in the comp and Ben with regard to re crews and overtime. They.
Show up in the purchase services as well.
You know part of that is related to drayage costs that we have to incur.
You know tax season, you know, we've even had to enter into some short term land leases.
Just to relieve some congestion in the terminals. So that's kind of where where do you see that play out and I think you know that will persist into the second quarter and diminish in the second half and similarly in materials is kind of where I'd say the bigger impact was and that's related to the locomotive raw.
Durations that we've had to do here just to try to provide some immediate relief.
To the yards.
And to our line of road to deal with this disruption so that again will probably.
We'll probably still have some incremental costs in materials and in that second quarter and start to diminish.
In the third and fourth quarter.
Yeah.
Our next question is from Ari Rosa with Credit Suisse. Please proceed.
Great. Good morning, So Alan you mentioned that the crew is operating properly and there were no track defects in the East Palestine incident, just curious to hear what do you think could have been done differently to avoid that incident and then with the six point plan that you guys have proposed just wanted to get a sense for what you think the.
Costs are associated with that.
And kind of what the steps are moving forward or is that included in the 387 million or is that a separate cost. Thanks.
Yeah.
Obviously as CEO I think about that every day.
What could we have done better what could we have done differently and I've tasked my team in the immediate aftermath to come up with some solutions and as soon as we got the preliminary results of the NTSB report you saw.
Six safety plan, which included adding 200, hotbox detectors across our network and I'll note that the spacing of our Hotbox detectors was already amongst the lowest in the industry, but you know what we can do better.
Many of that and so we're adding about 25% more hotbox detectors, we're partnering with the Georgia Tech Research Institute on next generation machine vision inspection portals and the first one is going to go up outside of East Palestine.
There are a couple of things that we're doing there.
They're all to enhance safety because we're gonna be continued we're going to continue to focus on on doing better that that's our goal.
And are the costs related to that six point plan, it's really largely the capital associated with those incremental hotbox detectors, which we said would be in.
And that $50 million neighborhood over the next couple of years so.
I'm not a meaningful impact to our overall capex budget.
Got it okay. Thank you for the thoughts.
Yeah.
Thank you we have reached the end of our question and answer session I would like to turn the call back over to Mr. Alan Shaw for closing comments.
Yeah. Thank you for your interest in Norfolk, Southern and your time this morning.
Good morning.
Thank you.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
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