Q2 2024 Norfolk Southern Corp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to Norfolk Southern.
Second quarter 2024 earnings call.
At this time all lines are in listen only mode.
During the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero.
This call is being recorded on Thursday July 2020.
24.
I would now like to turn the conference over to Nichols Senior director of Investor Relations. Please go ahead.
Thank you and good afternoon, 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 <unk>.
These statements relate to future events or future performance of Norfolk, Southern Corporation, 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 disclosure of those risks and uncertainties, we view as most important.
Our presentation slides are available at Norfolk, Southern Dot com in the investors' section along with a reconciliation of any non-GAAP measures used today to the comparable GAAP measures, including adjusted or non-GAAP operating ratio.
Please note that all references to our perspective operating ratio during today's call are being provided on an adjusted basis as referenced in our earnings release.
Speaker Change: Turning to slide three it's now my pleasure to introduce Norfolk, Southern's, President and Chief Executive Officer.
Alan Shaw.
Thank you Luke and thank you everyone for joining us.
Here with me today are John <unk>, our Chief operating officer.
Ed Elkins, our Chief marketing Officer, and Mark George Our Chief Financial Officer.
Earlier, we reported our second quarter financial results and.
Including adjusted operating income of $1 $1 billion.
Net income of $694 million and diluted earnings per share of $3 six sets.
Notably, we delivered 480 basis points of sequential margin improvement.
On our adjusted operating ratio.
Oh are was 65, 1% in the second quarter.
First half <unk> of 67, 5%.
Making good on our commitment to our shareholders to our first half operating ratio in the range of 67% to 68%.
Our strong progress over this quarter demonstrates our ability to close the gap to our peers by executing our balanced strategy of service productivity and growth.
Speaker Change: With safety at its core.
The Thoroughbred team delivered significant margin improvement in the quarter, despite revenue headwinds by accelerating productivity initiatives.
As you will hear from John Ed in March.
We were able to overcome market weakness through increasingly strong progress on our six key operational metrics by responding to market opportunities and growing volume and remaining laser focused on controlling costs.
We also take seriously our commitment to being the gold standard of safety in the industry and continue to make progress on improving our safety culture and metrics.
This is the strength of our strategy driving operational excellence and discipline that will deliver and we will continue to deliver productivity gains and create the foundation to onboard significant growth when the market returns.
This is a flywheel effect that is delivering tangible benefits for customers and shareholders.
Efficient operations with a compelling service product allowed our teams to gain share and service sensitive markets, such as auto and intermodal while participating in spot opportunities in coal and agriculture.
As a result, we posted record performance in several key merchandise measures.
Our work continues our second quarter results represented an encouraging inflection point in our operating performance.
We have plenty of runway in front of us IMAX.
I'm excited for Norfolk, Southern as opportunities ahead, we're committed to our strategy and delivering the results with pace and urgency that demonstrate the power of a better way for our employees customers communities and shareholders.
I'll now turn it over to John to further discuss our operational progress.
Thank you Alan.
It's a pleasure to provide an update on our progress.
Turning to slide five.
N S safety enables performance and our commitment to safety is unwavering.
During the quarter, we leveraged our NFS leadership framework strengthened our field safety.
We continued our efforts to focus on mainline accident reductions and we commissioned three additional inspection portals and added field sensors.
These have contributed to our best in class mainline accident rate.
We also conducted two cross functional leadership safety summit's, strengthening our capabilities and reinforcing safety from the ballast to the boardroom.
Turning to slide six our metrics improved across all of our core network performance indices. Our balanced approach proved safety service and cost improvements work best together.
Year to date, we have reduced our active online motive power fleet by 320 locomotives and have targeted an additional 100 reductions in the second half.
As we store locomotives, we use reliability metrics to remove the worst performers.
Driving up overall fleet reliability, and driving down maintenance materials and fuel expense.
Quarter over quarter, we increased our GTS four available horsepower by 6%.
Our car velocity by 6%.
Both improvements are the result of design processes that drive out time and cost closing terminals and over the road.
Our strategy includes structural improvements in fuel procurement.
<unk> management purchased service optimization.
Crew cost efficiency and productivity enhancements.
So let's take a look at a few of the initiatives in the pipeline that are closing the gap as we track for the $250 million cost takeout commitment.
Turning to slide seven.
We have delivered a 6% improvement in car velocity by reducing handling.
Extending train schedules and improving connection performance.
Car velocity is something I monitor it closely.
It captures improvements in our operating plan terminal execution and over the road performance.
For example, <unk>.
During the quarter, we eliminated over 700 unnecessary car handling each per day.
Driving car velocity and response to overall train speed improvements includes working with our customers to right size the inventory in their pipelines.
Train speed car velocity improve fewer cars are required to service the current volume.
In the quarter, we delivered a reduction of 3% of cars online.
We are improving safety train speed and service reliability by addressing unscheduled train stops and dispatching practices.
For example, our mechanical war rooms root cause analysis every unscheduled train stops has resulted in an 18% reduction of these unscheduled stops in Q2.
We have a new network operations watchdog team.
Bringing extreme discipline to planned adherence.
They challenged the root cause for every extra training.
This isn't still network wide visibility and accountability to execution and planning.
I'm really encouraged that this has increased connections and train yield and it's driven out extra train starts.
From 200 in March to June.
Just 50 in June.
Speaker Change: These improvements to our operating plan and terminals discipline have resulted in a 4% reduction in crew starts.
The combination of crew and overtime reductions has dropped our crew expense for T. G T M by 8% compared to Q1.
As operational effectiveness grows.
We are recalibrating, our standards and sweating the network resources even further.
This is the path to at least 7% to 10% improvement in car velocity.
Yard and local Redesigns are underway.
We're driving out waste and rework in the first mile and last mile operations.
We are unlocking the capacity to take on additional work within the same footprint.
Efficiency in this space is really important to me.
Since we allocate approximately 50% of crew starts here.
Over the next 24 months, we will continue to improve fuel productivity.
We will continue to push the locomotives.
Leverage trip optimizer to assertively manage horsepower per ton.
Speaker Change: <unk> power more quickly.
Improve fuel distribution and vendor accountability.
An increase train size.
We are targeting locomotive productivity improvements of an additional 8%.
One of my personal objectives is to develop the next generation of skilled P. S. Our railroad yours and to build the bench strength to sustain the improvements that I'm, leaving.
We are structuring the organization to drive the daily and strategic outcomes and I am proud and encouraged by the engagement of the people in every department and across the entire organization.
The team is working collaboratively and with confidence.
Our team is energized and motivated to build upon the strength of the quarter and deliver the next wave of initiatives that will yield savings in our P&L categories beyond just coughing Bang.
But in materials rents and purchase services.
Success breeds success.
I want to close up my remarks on slide eight and nine with two flywheel examples are balancing service and cost.
In automotive our car velocity increased by 16%, creating the platform for growth as our carloads increased by 7%.
Within intermodal.
Shipments and service performance simultaneously increased by 8%.
This following the 15% lean rationalization, we discussed earlier this quarter.
And what's really important to me is that we are launching our N S intermodal reservation system in September.
This smooth stream demand.
It reduces rents and expenses.
<unk> service certainty.
Our customers are enjoying some of the best sustained service ever.
At the same time, we have consolidated train starts.
Streamlined our service plan.
Reduced handling complexity and have driven out cost.
We are unlocking tremendous value within our franchise, adding new capability urgently, eliminating waste and driving to a sub 60 or.
Now I will turn it over to Ed.
Hey, Thank you John and good afternoon to everyone on the call let's.
Let's go to slide 11, and I'll review, our commercial results for the second quarter.
Ed: Overall results were driven by a notably more fluid network that delivered a better service product to our customers'.
Revenues came in just above $3 billion.
A 2% increase versus last year volumes rose, 5% led by an 8% increase in intermodal, while RPM fell 3% driven by unfavorable impacts from intermodal mix merchandize revenue improved 4%, while volumes increased 2% and <unk> rose three.
R P less fuel increased 4% versus last year, which once again set an all time record alongside a new all time record for revenue less fuel.
This marks the 36th of the prior 37 quarters, where merchandize <unk> less fuel grew year over year in intermodal revenue was flat volume increased 8% and <unk> declined 8% in.
And in coal revenue declined 3% on a 2% volume decrease now these were impacted by the outage of the Francis Scott Key bridge in Baltimore.
I do want to take a second here to reflect on Cole's performance in the face of extraordinary challenges around the unprecedented closure of the Baltimore Port complex in April.
We and our customers demonstrated extraordinary operational agility and creativity to keep global supply chains intact by our Lamberts point, Virginia until service was restored in Baltimore.
I'll note that propelling our record merchandize less fuel in the quarter was our automotive book, which set a record for total revenue and our P less fuel metals, which achieved an all time quarterly record in revenue less fuel and chemicals, which marked an all time record for RP you less fuel.
Intermodal revenue was flat in the quarter. However, if we exclude pressure from fuel and storage charges revenues grew by 2%. Despite the mix some price headwinds all of these superlatives are supported by a strong service product that John and his team are delivery.
Let's turn to slide 12, and review our outlook for the rest of 'twenty four we're lowering our expectations for full year revenue growth to around 1% based on continuing market crosscurrents and we expect overall adverse mix headwinds to continue in.
And merchandise new industrial activity may be constrained by higher interest rates and borrowing costs, but we expect to see continued benefits from ongoing infrastructure and manufacturing projects underway.
Our improved network fluidity will also deliver growth and unlock shareholder value.
Intermodal volumes remain a driver of overall volume growth as international shipments rise through import and export demand, while excess capacity and weak truck prices are expected to remain headwinds to domestic volumes.
And finally in coal, we foresee a challenged environment within the utility space, continuing while export markets see some momentum from the reopening of the Baltimore channel and new production.
Alright, let's finish up on slide 13, I'm going to take a minute to highlight a recent win win with a large met coal producer in the U S.
Set to be developed in 2025, our rail lines will link this new coal production facility with the global market.
This mine will produce nearly 5 million short tons of premium grade in met coal annually. When it reaches full production. This new partnership is a concrete example of our strategy to grow high quality carload revenue.
Those the gap to peers in key markets and significantly enhance our met coal portfolio for years and years to come.
This win also demonstrates our customers confidence in Norfolk, Southern and our service and our commitment to our strategy.
We're grateful to be chosen for this project and we're excited for the future of this opportunity.
Investing in strategic capital to support regions of our network with economic growth is also in motion.
The state of Alabama is an example, where our investments include terminal and mainline infrastructure projects that support customers as they invest and expand their businesses.
These investments are a key part of our balanced approach to deliver top tier revenue growth over the long term and finally I just want to thank our customers for their partnership and for their business I'll now turn it over to Mark to cover our financial results.
Thanks, Ed and good afternoon, everyone. Let's start on slide 15, with a quick reconciliation of GAAP results on the left and the adjusted results on the right.
You'll see that the eastern Ohio incident column is actually income in the quarter of $65 million as our $156 million of insurance recoveries exceeded the additional costs that were accrued.
And the restructuring column you will also see income as we booked a favorable true up to our Q1 separation cost accruals, but also realized an associated favorable post retirement curtailment adjustment within our other income line item.
We also highlight under the advisory cost column expenses incurred in Q2 associated with the proxy contest.
Ed: Adjusted results, including a $65 one O R was in line with our guidance range.
A $3.06 was aided by <unk> below the line from a favorable state income tax adjustment.
On the next chart Slide 16, I will go through the year over year and sequential variances compared to the adjusted results.
Our second quarter performance was a function of a dose of revenue lift combined with the team, making excellent progress on network performance and providing strong service that enabled us to remove costs from our structure.
Speaker Change: Year over year revenue was up $64 million or 2% with volumes up 5%, but <unk> was down 3% as Ed discussed adverse mix remained a headwind to <unk> in the quarter.
Speaker Change: Operating expenses were down $7 million year over year, despite inflation headwinds, reflecting strong momentum on cost takeout, which drove 160 basis points of or improvement.
The cost reduction momentum is especially evident when looking at the sequential decline of $119 million or 6% on $40 million more revenue combining to drive up the large 480 basis points sequential reduction in our operating ratio and we will most certainly result.
And a sharp narrowing of the O R gap with the industry.
Drilling into the revenue change on slide 17, focusing here on the sequential increase in revenue from Q1 of $40 million.
That was driven by merchandise volume growth.
Yet despite what appears as a favorable mix shift at the high level with a 2% rise in merchandise volume <unk> to Q1 was only flat and that's because mix within each business line was adverse as Youll see illustrated in the Gray box.
Where volume growth of below average RP business lines exceeded volume growth in the above average business lines.
Speaker Change: Shifting to a sequential look at operating expense on slide 18.
I'll start by saying, it's nice to see all Green on this chart.
Opex is down $119 million versus the first quarter.
Speaker Change: Dramatic acceleration in our network velocity has allowed us to drive out the remaining service mitigation costs in the quarter, which shows up in several categories, including comp and Ben most notably overtime, but also in equipment rents purchase services as well as other.
The ops team did a terrific job speeding up the network and improving service to deliver on these cost savings as well as fuel efficiency improvements.
You will also see savings in the comp and Ben from lower employee levels.
Largely driven from the previously announced downsizing actions that we took in our management ranks, but also sequential attrition of nearly 2% of our teeny workforce.
Property gains in the second quarter totaled $25 million compared to zero in Q1.
So the first half is pretty much on a normal annual run rate.
Real estate transactions are lumpy and some of you may say that the $25 million in the quarter was to exit theoretically smoothed amount but.
But either way you choose to evaluate our results are or performance in the quarter was in line with our commitment.
Speaker Change: So we are very encouraged at what is clearly an inflection point in our cost structure, allowing us to meet the commitment we made on or despite a weaker volume environment than we had been planning for demonstrating organizational agility.
As we look to the second half there are various headwinds and tailwind to consider Ed.
Speaker Change: Ed noted that the revenue will be softer than we previously expected with some sequential volume improvement, but adverse mix.
And the industry's next contractual wage increase that took effect on July one creates a $25 million step up in comp and Ben here in the third quarter. However.
However, John talked about our actions of momentum on productivity side within operations and that will help neutralize the wage impact.
Speaker Change: All that said the key message I want to leave you with today is that despite softer macro conditions, we are reaffirming our guidance for the second half operating ratio in the 64% to 65% range.
Before I hand, the Ellen I'll make a comment on capital. Many of you have seen that with P. S or there is often a liberation of excess capital assets that blue sufficiency and creates incremental cash flow streams, adding to shareholder returns.
We've had some of those in the past several years with some larger asset sales.
And we continue to evaluate opportunities and have a robust list of properties for which we are pursuing sales that will simplify our network and generate cash over the next several quarters.
Alan.
Thanks Mark.
Let's turn to slide 20, as you heard from Ed we lowered our full year revenue guidance from approximately 3%.
Speaker Change: <unk>, 1% growth.
And you heard from John and Mark that we're overcoming the revenue drop with a focus on the significant productivity opportunities in front of us, which gives us the confidence in reaffirming our full year <unk> guidance.
Despite the lower revenue outlook.
The momentum demonstrated in the second quarter is a testament to the strength of our strategy.
I want to thank all 20000 mine Norfolk Southern teammates for all they have done and are doing every single day to deliver on our shareholder commitments and accelerate our operational improvements.
John and Mark have identified specific actions and outcomes to deliver improved results and workforce TL.
<unk> you.
Your.
Mechanical.
<unk> services and rents and capital productivity.
As well as smart growth in merchandise intermodal and coal.
We have a clear line of sight on multiple initiatives and our roadmap for margin gains in several key areas over the next 18 months as we close the O R gap.
I am proud of our progress in the second quarter encouraged by our trajectory.
Confident in our team's ability to execute and deliver results in the quarters ahead.
We will now open the call to questions.
Operator.
Ladies and gentlemen, we will now begin the question and answer session.
Should you have a question. Please press star followed by the one on your Touchtone phone.
Europe.
And as been rates.
Which declined from polling process. Please press star followed by <unk>.
Speaker Change: If youre using a speaker phone please lift the handset before pressing the keys.
Out of consideration to other callers on the line.
Please limit yourself to one question.
First of all we have is wait with UBS.
UBS.
Yeah good afternoon.
Ed you you highlighted a number of the.
Yield ex fuel our records and the performance in merchandise. So I wanted to ask you about.
Intermodal yield.
Are we seeing intermodal yields at a bottom or you know.
Are there potential drivers that they go down further and how do you think about the opportunity and the timing to see.
Stronger pricing and revenue per unit in the intermodal business.
Thank you and let me let me walk you through the really the price and mix story in intermodal.
Mix and price make up around six or seven points and weakness that you saw there and that mix is really driven in the premium segment, where lower parse through counts or are really pressuring our carriers to keep their unionized road fleet employed the.
And the other mixed pieces, we're seeing a lot of empty shipments.
On the intermodal side, we're seeing them and have seen them really all year long in the intermodal segment or excuse me in the international segment.
Where carriers are really trying to push empties back offshore. We're also starting to see a lot more domestic empty repositioning moves back to the West Coast. We think that's in anticipation of a possible I L. A action.
East Coast ports, there and then.
The second part of your question is when does the Ritz really when does the highway rates get better and when do we start to see some of the capacity drop out from the highway carriers that are putting a lot of pressure on rates I think we're around the bottom I really do from what I've seen from what I read and from what I hear from our customers.
We're kind of bouncing along the bottom and I think we're getting closer and closer to an inflection point talking to one of our biggest customers today.
They noted that they're expecting a real peak season. This year for the first time in a few years and I think that bodes well both for our international customers as well as for our domestic customers.
So it sounds like maybe stability in second half looked at 25 or maybe some growth in revenue per unit is that a reasonable way to think about it.
Yeah, I think ARPA you on the domestic side is moving sideways.
Tom: Thanks, Tom.
Thank you.
Okay.
The next question will be coming from Scott group of Wolfe.
Scott.
Hey, Thanks, good afternoon, so Marc maybe just some help on the on the cost side.
$25 million, we get from the the wage increase in Q3, but obviously there were some good sequential cost progress so any way to just help us think about that.
The overall it cost X fuel trend and MLR in Q3, and then maybe just separately the mix.
Chart.
A couple of quarters is really helpful. Do you think this is a is this a cyclical phenomenon of negative mix or is there something that's maybe more structural about where the growth is coming from.
Thanks, Scott for the question I'll ask Ed to help tag team on that second part of the question.
On the mix, but you want to go first with that.
Sure I can do that very talking about some of the some of the mix challenges that we're seeing in intermodal and I will tell you.
We see the same story, that's been playing out in the second quarter going forward into the third and fourth.
We're seeing significant volume growth in some of our lower rated merchandise commodities like aggregates and finished vehicles and both of those move at kind of the lower end of that <unk> spectrum.
We are focused a lot on earning back merchandize share and the additional volume that we are seeing is really attributable to the better velocity and car supply that we're seeing out there I mean think about think about what happened in the automotive market, where we actually use the less equipment.
A record amount of revenue.
It's a real sea change from where we've been and you've got the same same thing going on in intermodal.
We're leveraging the most powerful intermodal franchise in the east, we rationalized, 15% of our lines Johns providing the best service product, we've provided in years and volumes up 8% and it gets right down to the basics right. We sweat the asset efficiencies moving the most car miles per day that we can driving the efficiencies.
Of our locomotives and creating creating resiliency.
Really low cost by eliminating waste, creating more capacity. So we can onboard more customers and lengthen our trains and really drive out the service reliability for our war rooms, and our and our drill down and that transitions into the first part of the question.
Speaker Change: We're going to see more incremental volume growth here in the third quarter, that's one of the tailwind for sure.
Even though we will probably have some mix.
The benefit from that adverse mix I guess.
I'd say another tailwind as you touched on Scott, we've got really good momentum here on the productivity side.
I expect we're going to see continued.
Reductions in crew starts and over time, despite higher volumes.
Fuel efficiency should continue to improve.
We're attacking or in the very very early innings attacking purchase services. So we've got some broad based initiatives. There. So we're going to see some some really good tailwind here I think in the third quarter, but as you touched upon headwinds are there. We've got that four 5% agreement wage increase that takes that takes effect in July one on data.
One of the third quarter $25 million step up in comp and Ben comes from that and that's 80 basis points of sequential or headwind.
And on top of that fuels the way we're modeling it it seems like fuel is going to be probably 50, 60 basis points of sequential or headwind as well.
So we'll see how it all shakes out here, but ultimately where we're really happy with our position going into the third quarter, we're really confident in our guidance.
<unk> in the second half of the year of 64%, 65% despite.
Revenue headwinds and it's because of this flywheel effect that we're seeing.
And productivity or a faster network is generating a lot of opportunities for John and his team to unlock savings.
Okay.
The next question will be coming from Kenn Hoekstra from Bank of America, Ken go ahead.
Hey, great. Good afternoon, I know that was recorded but that seemed like you were on super speed.
It was pretty good.
Kenneth Scott Hoexter: Just talking.
Just following on Scotts question, there with the sequential performance.
It seems like the five year would suggest that it doesn't move much.
<unk>.
But youre looking at 64 65 from 65 or $65 nine if you exclude the real estate and again when you just ran over with with Scott but.
It seems like given the steps youre, taking Alan you kind of said you're really confident in those savings.
Should we be taking I guess bigger steps down with with some of the things you're doing maybe just talk then what is the upside downside to that target right. If you're confident in that 60 40 65, what do you need to.
To happen on John side to maybe get you a little bigger step up versus versus the counter costs you have.
Well look at it again, you are right that sequentially Q2 to Q3, when we look historically you have some years, where you have improvement in the or you have other years, where some level of degradation I think on average it's probably slow.
<unk> degradation.
Sure.
In this year, which is somewhat of a unique period of time and this is if you exclude 2020.
But in this year. If you look at this period of time, we're expecting sequential volume improvement.
So that's really going to help us in the gravy on top of that as continued momentum in what what John is doing in face of all the headwinds that I laid out so that's where the confidence is coming from I.
I would say Ken my confidence comes from the power of the people and the engagement that we're delivering in the field.
In the early days of my Onboarding I would go into major terminals and see opportunities engage the team inspire them to totally change and now as we build the team and reframe how are how our management structure is in the field really focused on the day to day as well as strategic intent, we're doing that to scale more people.
Kenneth Scott Hoexter: Seeing more things and we're creating the flywheel to finders and increased capability. Just just today I signed off on the service design that eliminates 42 starts a week and Thats. The result of four or five people just being out in the field doing safety purchase seeing other things happening and finding ways to improve safety synthesize.
Our train starts.
Elongate trains and create more compute capability in the field.
Kenneth Scott Hoexter: This is the power of the flywheel and we're doing it based on safety and service sustainability and I'm very confident we build people and structure are going to keep delivering.
Getting also to the essence of your question on why not better I'm, just going to repeat what I said to Scott. There is some headwind here in the third quarter from the second quarter related to the wage increase of 80 basis points and also the way we see the fuel curve playing out theres, probably another 60 basis points of headwinds. So we're talking about overcoming that.
And.
Those are bigger or maybe maybe fuel is not doesn't end up being as bad that could be some upside, but honestly, we got to see where volume shakes out too.
I think he is going to be a lot of hard work to overcome.
We are doing to meet our guidance.
It's going to be sweat equity all the way and we are targeting more revenue I mean, we know the macro environment challenge, but look let me give you. Two examples of recent wins that are only possible because of higher velocity and better cars supply we converted a coil lane from the highway with our largest medical customer between Indiana.
And that's in a challenged metals market.
We grew organically inorganically off the highway we also converted a large highway to rail in the state of Georgia with our largest aggregate shipper, all because we're able to handle more tonnage with less equipment.
The next question will be coming from Jeff Kauffman from vertical research partners.
Thank you very much and congratulations in a tough environment.
I just kind of wanted to get your big picture view on some of the changes with the STB and the hearings that theyre, having and how that may or may not impact the rail.
Okay.
SCB, he's got a hearing coming up about growth.
That's that's part of our balanced strategy. The STB is focused on service. So our way and were delivered right. We are improving service for a decent cost we're growing revenue and.
And we're announcing safety.
So we've got a good story to tell here and we're aligned.
Just to add Alan when we were in Washington.
Two weeks ago meeting with the STB commissioners, there were really reinforcing that.
Our business plan and resiliency as being an enabler of service and driving the U S economy and they were they were rate locked.
In lockstep with our vision. So I think it will it's always going to challenge this sector when when commercial regulator wants to talk to the sector, but one world leading in front of all of that I think it serves us well to continue what we're doing.
Okay.
The next question will come from Chris Wetherbee of Wells Fargo Chris.
Yeah, Hey, thanks, good afternoon guys.
Christian F. Wetherbee: We're thinking about the progress that youre, making John in particular as we move through in the back half of the year I guess, how do we think about head count what resources are sort of require given the progress that you're making here I guess in other words should we be able to see further reductions in heads as we move sequentially through the rest of the year.
Well I can tell you. This while it is true there are fewer teeny head counts. This is not a head count reduction exercise. This is right sizing the service and aligning the asset efficiencies with with the customer and the customer requirements. So sequentially. We did we did show a 2% improvement on.
<unk> <unk> <unk>.
Frozen hiring except where there is.
A really substantial reason or an acute scale that we need to bring on.
But it really is working with labor to address outliers right size, the organization and where we're long on people are getting the flexibility to move them, where they need to be and I I really watch our expense.
And the cost for TNA <unk> head count in our <unk> and <unk>.
<unk> made that clear in my opening remarks that despite the fact that we're improving service.
Providing some of the best operating efficiencies in the network.
We're doing it at a lower cost overall, and that's why I really focus on eliminating the waste associated with overtime taxes hotels, those sorts of things that don't give you any value.
So that's that's where I think you can look forward to seeing more of Hey, Chris I would tell you. We are on track to be down 2% like we had guided previously by the time, we get to the end of the year versus the end of last year.
And that's all I'm carrying a little bit more volume right.
Thank you.
The next question will come from Brian <unk> from J P. Morgan Brian go ahead.
Hey, good afternoon, thanks for taking the question.
So mark just to maybe come back to that sequential headwind of about 140 basis points.
Speaker Change: Into <unk> from <unk>, certainly in pilot with more of a.
Fourth quarter weighted impact to get to the target or are there. Some other sort of big ticket items, you're counting on coming through the next quarter and I guess to that point.
Gave us a couple of examples but.
Volume environment has been tough to call it's been a little softer than expected. So what gives you the confidence that some of thats going to come through especially.
Sequentially. The hope you hit that target <unk>.
Yes, I think that actually the profile in the back half you have a typical.
Difficult challenge in the fourth quarter being a later, one where you see where you.
You'll see the or float up I actually think because of the momentum, we're making there'll be continuous productivity that we can.
Throughout the year, so while we might get a little bit more volume in the third quarter and a little bit less as you typically would expect in the fourth quarter. The productivity is going to help us sail through and I would I would imagine that both third and fourth quarter are going to look somewhat similar here.
Yes.
The next question will be coming from Jon Chapell of Evercore ISI.
Got it.
Thank you good afternoon.
Ed.
Kathryn future first in the past is there any way to quantify if there was any.
Any potential volume impact from the distraction. If you will of the last several months any customers, who maybe had some negative muscle memory from cutting into bone.
And putting in contingency plans ahead of final certainty and then the second part of it would be for the future. I know you mentioned some of the wins that you've had from these new service metrics that youre, putting up do you feel that you have a long list of customers who've been resistant to moving to the rail given a pass.
Past service, who are now a little bit more open to switching back to the rail network given some of these vast improvements you've made.
Yes, I'm trying to remember the first part of your question.
Any volume yes.
Look our customers I think you guys know this our customers. We're one of the most supportive groups of our strategy out there as we move through this whole first half of the year and they they they were rooting for us and they are behind us and they are helping us unlock additional value from the supply chain right now.
And moving forward.
Look we've got a lot of confidence in growing our volumes across the board, but really we're focused on it.
One area in particular, where we know that we have lost share that's in our merchandise markets and I would say it is not customers that are resistant to coming back to us. It is customers that we have to earn back because they had to find a different supply chain solution, which probably cost more money. So we're working really hard every single day.
John: To earn those customers back and that's what we're focused on look our service product sales in this market are two most service sensitive markets automotive and intermodal grew 7% and 8% respectively because of the great product that John <unk> and his team are putting together and because of the alignment between marketing and operations. They will look at.
For every opportunity to secure additional revenue and additional margin, we were able to pick up spot opportunities in weak coal markets and weak agricultural markets because of.
The great product, we are delivering and the capacity dividend that John has created and the relationships that we built over a long period of time with our customers, who like I said supported holding great point.
The next question will be coming from Brandon <unk>.
For Barcodes random goal.
Hey, good afternoon, and thanks for taking my question Ed.
Ed maybe just a very quick point of clarification are you still expecting core yields to decline in the back half, especially on export because I think that was the prior expectation.
And then Mark I think in your recorded remarks, you ended your statement talking about hey, like we had prior big land sale transactions. We think we've identified a few more I think that's what I heard so should we be contemplating that in the forward or outlook I think thats, maybe where you were going and you also made a comment that.
You should expect about $12 5 million a quarter. So should we be thinking annualized 50 million gains are you, saying, there's potentially bigger sales coming thank you.
I'll answer that second part first.
So the large land gains that I was referring to.
Would be things that we would typically call out.
Referred to is kind of probably more of the non-GAAP size and that's really in terms of trying to augment our balance sheet. So no.
There are not any in any way part of the path on the ore going forward. It was really more of a conversation on capital and restoring our balance sheet.
John: Typically we guide to $30 million to $40 million a year on real estate gains in the normal course.
We absorbed within the or.
And.
There are years, where that's 'twenty there are years, where that 50%, but it's kind of in that $3 40 range. So I was making a more general smoothing commentary.
Talking about call it $50, but it could be it could be in that neighborhood.
$40 million to $50 million range this year.
Okay, and then you'd add about coal pricing as well.
There were a few global supply chain disruption during the quarter that caused the.
Get lift in prices, but you know those those gains have mostly <unk>.
It away and the expectation is that rates are going to continue to drift slightly lower the experts that we talk to and there are several of them are really expecting those seaborne prices to stay north of $200, but but we'll see we'll see what happens.
Yeah.
The next question will come from Ravi Shankar from Morgan Stanley Robin go ahead.
Thank you good evening, everyone. I think you said earlier that.
There was something around the east Coast Board actions and some customer behavior. There can you unpack that a little bit more and give us some more detail there what are you seeing already.
Some of the timeline for this.
And then Gulf before that settles out.
Sure I'll take that one.
I think everyone knows the Iowa has it done lot of September 30th.
Speaker Change: <unk> agreement with the port operators.
We are talking to all of our steamship line customers as well as our domestic intermodal partners and.
Shippers are starting to hedge their bets a little bit we see a lot of west coast activity on the rise for for a number of reasons.
That includes what's going on in the Red Sea.
But as that happens.
Customers the <unk> have to get their freight the market so they're deploying.
To the West coast as well as the east and I really believe and this is.
Just me observing the market I think with the shortage of containers seaborne containers that are out there because of the elongated supply chains or are you going to see us.
Steamship lines will not want their boxes coming inland off the west coast.
So theres going be a lot of demand for domestic intermodal off the west coast. That's that's the way I think this thing evolves.
The next question will be coming from Elliot Alper from TD call Elliot.
Great. Thank you this is elliott on for Jason Seidl.
So you brought up.
The next lever for margin will be some of the broad based initiatives on purchase services, helping you could.
Robert on that you talked about some of the opex items that will be headwinds through the back half of the year.
How should we think about the cadence of purchase services as we progressed through the year.
Hey, Thanks for the question Elliot, Yes. It is.
Obviously, it's a big spend amount that's gone up a lot from technology in the past handful of years largely subscription based.
Cloud base.
Services. So you see a lot more software costs showing up now in purchase services as opposed to capital.
But at the same time about probably about a third is related to the volume variable costs associated with intermodal activity.
<unk>.
Intermodal grew 8% year over year, but we actually limited.
Purchased services increased to around 3% and actually sequentially it was down slightly.
Speaker Change: So this is an area that we've spent a lot of time, John and I in the past couple of months talking about.
We're going to be focused pretty aggressively on trying to find opportunities to bring this down and certainly a lot of the other areas of purchase services outside of the volume variable pieces, John do you want to yes.
We look at just take fuel for example.
John: We're really driving hard to pull locomotives out.
Our exposure there, but at the same time looking at our fuel distribution process.
We've been able to streamline that reduce some detail trucks.
And reliance on that similar to how we're pruning the intermodal franchise, we're pruning some of the.
More expensive.
<unk> and fuel distribution and at the same time, then looking at how do we create more vendor accountability and visibility. So we've got some really short term midterm and long term views on fuel and.
But even putting locomotives down cascades into our materials and the services associated with maintaining locomotives that were able to put down.
One other point on purchase services, because you did ask about how it will look the balance of the year I would tell you. It is going to be no worse than what you're seeing in the first half I would expect it to be down year over year in the back half.
John: We've got broad based.
Our focus on productivity right purchased services, a big part of that but we've got clear line of sight, and a roadmap drive productivity and workforce and fuel.
Purchased services and equipment rents and at the same time really focused on leveraging this great service product to drive more merchandise.
Revenue and then leveraging our powerful intermodal franchise as the truck market responds to drive more revenue there as well when you think about one of the biggest crew costs recruiters.
How much that drives services in one of the great job you've done.
Jason that in overtime, so were knocking not increased re crews out reducing our exposure to over time reduce your exposure to taxi cabs hotels, all the all the associated costs with that and that that is just a winning proposition because as you reduce re crews grading service stability.
Ed: In the in the wheel house of Ed and being able to sell.
That's the power of the resiliency that we're creating at the lowest cost possible and the flywheel of mobility.
Speaker Change: The next question will be coming from Daniel <unk> from <unk>.
<unk> incorporated David go ahead.
Yeah. Thanks, good evening guys.
Wanted to circle back to <unk>.
Winning some of that merchandise business back from the disruption earlier this year it sounds like service isn't a good play its the flywheel, turning and you have the ability to absorb that volume.
What do you think it takes to catalyze and start winning back some more of that more profitable merchandize volume and then on the guide does it include some pace of market share win back where volume went back that embedded in that volume outlook for the back half. Thanks.
Yes, a lot of it is just leveraging that improved service product and also the capacity that we have to bear as we increase the utilization of our equipment and our customers' equipment, we can put more capacity up against up against the market and frankly, even in this freight environment.
<unk> wanted to save money and rail has a cost advantage relative to truck exactly.
Let's be clear.
The erosion in our merchandise volume didn't happen in the first half of this year, it's happened over a fairly extended period of time.
Right.
We've worked really hard to get to where we are right. Now. So they are varying levers, we're going to pull with various customers, but the first one that we're going to pull with every customer has given them exactly what they want which is a conveyor belt that runs at the same speed all the time.
That's fundamentally what our customers need first of all and we're out there right now demonstrated improvement in tone.
That's why our approach customer service facing is better and we're still getting productivity, reducing resources, reducing capacity, creating capacity without impacting service.
The next question will come from Jordan <unk> from Goldman Sachs. Joining go ahead.
Yes, hi.
Afternoon, just sort of a question.
Sort of from an operational standpoint.
Bunch of operational initiatives that you've talked about to close the margin gap I'm just sort of curious as we think about all of them how.
How much of the plan this year and as we flow into next year is what you would consider for lack of a better word basic blocking and tackling fine tuning versus major see changes just trying to assess the difficulty of execution as we go along from here. Thanks.
Well, let's see.
There is no secret I mean, its hard work and it's running an efficient effective railroad every single day and that stability lends itself to opportunity whether it's in asset utilization crew utilization fuel efficiency all of those things Ive made a solid commitment on the path.
Taking out 450 overall, our $450 million in the.
To make this happen.
And.
That's a series of small wins bigger wins.
But we've got line of sight to AR.
Big pipeline of opportunities.
We're just growing through and they'll come at different points today.
Today is what we would consider an inflection point and as we move through that create stability and drive forward.
It will always be there so I would say, it's a blend of those things and we're going to drive hard its leadership its plan its discipline of execution.
What John and his team are producing.
Acceleration of our operational improvements allows us to have the confidence to reaffirm our guidance and overcome the market weakness for the second half of the year.
The next question will come from Walter <unk> from RBC capital markets Walter.
Yes, thanks, very much operator, good afternoon, everyone I'd like to turn that market opportunity focus too.
That.
It hasnt been in your wheelhouse before and Thats Mexico.
And Union Pacific Kevin mentioned it.
On their call several times, obviously, a big focus for <unk>.
We're shoring and onshoring being a big big trend.
I know when you gave access to <unk> AC gave.
Gave meridian Speedway executed Casey you may have.
<unk> been a little bit.
Contentious at the time during the debate, but I think.
Correct me, if I'm wrong, what Theyre, saying is that this now opens up a route.
Speaker Change: A new destination for Mexico product into the southeast buyer.
<unk> and into your network and <unk> network and that the opportunity.
It presented has never been there before.
Is that validated is that true do you see that as an opportunity could this be a new source of business for you.
Getting rescue Mexico product into into the southeast via your routes as described or would you would you put more of a challenge on that.
Hello.
Here's what I would say, we know that near shoring or onshoring, how everyone described that is occurring.
There's two kinds of manufacturing that I think is going to come back to North America advanced manufacturing, which is high value add and probably is very automated I think thats going to come back to the U S. But basic manufacturing is probably go into place.
In North America. That's that is that is Mexico. So we're talking really every week with.
Grupo Mexico as well as.
CPE Casey on opportunities one of those opportunities is connecting Mexico to the southeast via the Meridian Speedway that's for sure.
Speaker Change: Our other opportunities that will emerge in the near future.
<unk> will be will be very exciting opportunities in products for various segments of of U S manufacturing.
We just at general Motors in the opposite yesterday talking about.
Some of the supply chain and it wasn't lost on me that Mexico was part of that conversation, it's going to be a part of the conversation and I've just spent the last three years.
In that part of the world and really understand where the connection opportunities are and you're right. We've got a great opportunity in both major railways.
In Mexico, as well as the short sea so.
Think thats, a real opportunity in the immediate and near term, yes, I would say standby for for future developments.
The last question from this call will come from Stephen Moore from Jefferies Stephanie.
Hi, good afternoon. Thank you.
Stephen Moore: I wanted to I wanted to touch on just the increased productivity that you're seeing this year does this kind of load. This spring so to speak going forward for even better or improvements in the years ahead.
Speaker Change: Hey, kind of maintaining that or guide this sharing with bell lower revenues simply rolled that forward to 2025, and 2026 and hopefully more constructive rate background or backdrop does that mean kind of accelerating our expansion in the years ahead love to get your thoughts. Thanks.
Speaker Change: <unk> at the beginning of this year, we set out a pretty aggressive long term or targets.
And we are doing.
Speaker Change: Everything we said, we would do and we are delivering.
Despite a weak freight environment, we are in the first year of a multiyear plan.
To reduce or to a sub 60 rate and then we'll keep going.
But we're executing we're improving service and reducing costs.
Growing revenue in a tougher environment and we're enhancing our safety we've laid out a roadmap and we are delivering on it.
And I think if you see outsized top line opportunities that on the Horizon I think you know in this industry. It usually generates outsized drop through opportunities and maybe you end up getting there faster.
So thank you very much everyone.
There are no further questions at this time I would now like to turn the call back over to Alan Shaw, President and CEO for his final comments.
Alan H. Shaw: Thanks, So thanks for your interest in Norfolk, Southern and we'll look forward to continuing the conversations over the next couple of months.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.