Q3 2024 Norfolk Southern Corp Earnings Call
Speaker Change: John Orr, Mark George, John
Speaker Change: Good morning, ladies and gentlemen, and welcome to Norfolk 7 3rd Quarter 2024 earnings conference call. At this time, all lines are in listen only mode.
Speaker Change: 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 uncertainties and may differ materially from actual results.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Please note that all references to our perspective operating ratio during today's call are being provided on an adjusted basis.
Speaker Change: Turning to slide three it's now my pleasure to introduce Norfolk, Southern's, President and Chief Executive Officer, Mark George.
Mark George: Good morning, everyone and thanks for joining US here with me today are John or our Chief operating Officer, Ed Elkins, Our Chief marketing Officer, and Jason Zombie, Our recently appointed Chief Financial Officer.
Mark George: I've had the privilege of working closely with Jason during my five year tenure at Norfolk, Southern and he brings incredible talent experience and leadership to our executive team.
Mark George: Over the last few weeks, it's been energizing to connect with labor leaders regulators customers and my fellow Railroader is cross the Norfolk Southern network.
Mark George: We have a strong franchise with diversified markets high quality customers and partners as well as skilled employees, who are committed to successfully executing on our strategy and delivering for our shareholders customers colleagues and communities.
Mark George: Speaking of colleagues and communities I want to thank our amazing team of role rotors, who planned for and responded valiantly to the devastation of hurricane Helene caused across our network.
Mark George: It was their fast and effective actions that resulted in us being able to recover and serve our communities within days.
Mark George: There's a lot more work to do but we've made enormous progress.
Mark George: It's the tremendous skill and dedication of our rotors that have enabled us to deliver third quarter results that are among the best in the company's history.
Mark George: Together, we drove productivity grew volumes and delivered notable sequential and year over year margin improvement, while overcoming a challenging landscape.
Mark George: We achieved 3% higher revenue compared to the prior year and adjusted earnings per share was 23% higher than the third quarter last year.
Mark George: Importantly, we delivered 570 basis points of adjusted or improvement, bringing that ratio down to 63, 4%.
Mark George: Continuing to close the margin gap with peers.
Speaker Change: Here today from John about the incredible work of the operations team that is driving significant and sustainable improvements as well as resilience and overcoming multiple weather challenges and an east coast port disruption.
Speaker Change: Their commitment to excellence is helping us build a stronger more efficient network.
Speaker Change: We also accelerated volumes in the quarter Ed.
Ed will provide greater detail on the components the drivers and outlook for our markets.
Speaker Change: And finally, Jason will provide color to a number of notable achievements in terms of productivity as well as line sales and project rationalization.
Speaker Change: I'll turn it over now to John to start with an overview of our operational progress John.
John: Thank you Mark and good morning, everyone.
John: In Q3, our team drove system wide improvements that are demonstrating how our focus on safety is protecting our people and our organization, while serving as a foundation for sustainable service and productivity improvements.
John: I'm delighted to share our transformation agenda proof points.
Our guiding value is safety.
John: Overall, I'm very encouraged with our progress on safety.
Well, our FRE personal injury rate has increased serious injuries and total accidents have declined significantly.
John: 40, and 20% respectively.
John: Our blueprint for commitment starts with our people.
John: They are value creators.
John: Through our new Thoroughbred Academy, we are investing in the work environment and core railway skills in.
John: In the quarter over 300 top level operations leaders completed the first of a multi year curriculum.
John: It builds organizational trust.
John: And drive business performance.
John: And over the next three months 2300, frontline and operating officers, who will participate in safety curriculums.
John: Turning to service with safety as our guiding value.
John: Service performance is our North star.
John: The team is designing out handling and extending train schedules.
John: Just producing gains in speed and consistency.
Speaker Change: Q3 car velocity was 13% higher year over year, driven by a 9% increase in train speed and progressive reductions in terminal dwell.
Productivity improvements driving service are also allowing us to accelerate cost reduction and create a more competitive platform for growth.
Speaker Change: Our flywheel of cost takeout initiatives has been robust.
Speaker Change: Year to date, we've reduced over 130 crew starts per day with an 8% reduction in cost per start.
Speaker Change: Excluding a 20% reduction in overtime and the elimination of attendance and other unproductive incentives.
Speaker Change: On the intermodal front, the new intermodal reservation system is helping us develop a unique value proposition in the industry.
Speaker Change: By adding terminal visibility accountability and rigor.
Speaker Change: Locomotive productivity in the quarter improved 18% year over year.
Speaker Change: Boeing is to reduce our fleet and capital requirements for both rolling stock and engines.
We've stored over 500 locomotives and have moved 8000 plus cars offline since March.
Speaker Change: This has allowed us to challenge previous capital spending assumptions.
Speaker Change: Through our new precision energy management program.
Speaker Change: We've optimized each PT standards.
Speaker Change: Extended train schedules and are relying more power from training to train.
Speaker Change: Keeping assets and productive revenue service longer.
Speaker Change: As a result.
Speaker Change: Fuel efficiencies alright record levels.
Speaker Change: Our strategy is both targeted and broad.
Speaker Change: Tactical and strategic ranging across structural improvements and consumption.
Procurement materials management purchase service optimization crew cost efficiencies and productive enhancements.
Speaker Change: And we've just scratched the surface and extolling a few of the initiatives that are within our pipeline.
Speaker Change: They are helping us close the competitive gap and track confidently to our cost reduction commitments.
Speaker Change: As we move to the next slide.
Speaker Change: I wanted to take a moment to state how proud I am of our response to Hurricanes Helene and Milton.
Speaker Change: Especially to our engineering teams.
Speaker Change: They proactively protected our employees communities and assets.
Speaker Change: Our recovery demonstrates the grit and capability of our team.
Speaker Change: Responders cleared over 15000 trees managed over 1000 locations with power outages repaired multiple washouts and scour locations and supported local responders.
Speaker Change: Including two instances, where they led lifesaving civilian rescues.
Speaker Change: This resilience highlights our preparedness and ability to recover swiftly from natural disasters.
Speaker Change: None of this is possible without an inspired and committed team.
Speaker Change: We are enriching our strong culture by blending external talent with legacy leaders in our field first management team that is accelerating solutions and deepening ownership and accountability.
Speaker Change: Our new labor agreements enable us to innovate across our entire workforce.
Speaker Change: So what you see is that we have established a new baseline and standards heading into Q4.
These are providing next level perspectives of our assets.
Speaker Change: Their utilization and the service quality they unlock.
Speaker Change: Working as a field centric team we are building a safer.
Speaker Change: More efficient and more resilient operation success breeds success.
Speaker Change: Thank you and I'll turn it to Ed.
Ed Elkins: Well, thank you John and good morning to everyone on the call.
Ed Elkins: I'll start on slide 10, with a review of our commercial results for the third quarter, where you'll see that the work, we're putting into creating a fluid network and dependable service delivered year over year revenue and volume growth.
Ed Elkins: Overall revenue of $3 5 billion was 3% higher than the third quarter in the prior year and volume moved up 7% year over year with all three segments contributing gains for the quarter, while our view fell 4% as our price gains were outpaced by lower fuel surcharge revenue lower coal prices and <unk>.
Ed Elkins: Unfavorable impacts from intermodal mix.
You've heard me discuss all of these factors in previous quarters.
Ed Elkins: The merchandise segment produced year over year volume growth led by our grain markets and segments of our chemicals business.
Ed Elkins: And as was able to deliver this growth backed by a service product that our customers can count on every day and you've heard me talk all year long about our focus on our merchandise business and the increased value to our customers is evident as this marks the 37 out of the prior 38 quarters, where merchandise RP less fuel grew year over.
Ed Elkins: Year.
Now hurricane Helene impacted certain segments of our merchandise business in the southeast, but we expect volumes to gradually recover as our affected customers operations normalize overtime.
Ed Elkins: Intermodal revenue grew 4% year over year this quarter as volume growth of 9% was offset by a 5% decline in our view.
Ed Elkins: Stagnant truck prices continue to pressure domestic intermodal rates and unfavorable mix trends continue with strong gains in international and domestic outpacing our premium market volumes in intermodal.
Ed Elkins: The Iowa strike negatively impacted our international volumes, but we expect the majority of this volume will be recovered in the months ahead.
Ed Elkins: Finishing up here with coal revenue declined 2% for the third quarter.
Ed Elkins: Our year over year volumes finished up 11%, but declining export prices and unfavorable mix within the portfolio pushed down <unk> by 11%.
Ed Elkins: <unk> been the saw headwinds from easing export prices and challenged utility segment factors to include low natural gas prices high stockpiles and reduced demand in coal burning regions.
Ed Elkins: Turning to the next slide let's talk through our outlook for the remainder of the year.
Ed Elkins: Overall, we expect our markets to experience tempered growth, albeit with some discrete headwinds from market trajectory and mix impacts on certain sectors.
Ed Elkins: It's very important to note that the impact of fuel price normalization from the 2022 historic highs will remain the single largest revenue headwind that we face and this has been true all year long.
Ed Elkins: We expect our merchandise business to see continued but sedate growth supported by easing interest rates and ongoing infrastructure projects, although sector specific headwinds in various sectors in our automotive and metals markets will pose challenges.
Ed Elkins: Intermodal will see strong demand driven by our dependable service product by New bid awards and import export demand. Despite the interruptions caused by the Ili strike that ended on October three.
Ed Elkins: We're prepared to handle international shipments that were delayed during that interruption.
Ed Elkins: Our outlook for coal is really a mixed bag as seaborne pricing for met coal is trending downward on the other hand, we're seeing positive momentum in the thermal export markets.
Ed Elkins: And finally in the wake of the destruction caused by Hurricane Helene, we stand ready to support our customers and handle the goods and products needed to help the affected regions rebuild.
Ed Elkins: And as always I will end with a word of thanks to our customers for their partnership and their support.
Speaker Change: With that I'll welcome Jason Zappy to the call to talk about our financial results. Thank you.
Jason Zappy: Thanks, Ed.
Jason Zappy: Start with a reconciliation of our GAAP results on slide 13, and I wanted to call out three items here in the quarter first the impacts from the eastern Ohio incident or itemize as they have been for the last several quarters.
Jason Zappy: I highlight that our insurance recoveries outpaced the incremental cost of the incident for the second quarter in a row.
Jason Zappy: That brings the total cumulative amount of insurance recoveries to over $650 million.
Jason Zappy: The other two items as a result of specific actions, we executed to further our strategic objectives, including an unrelenting focus on productivity and asset utilization.
Jason Zappy: As we previewed last quarter, we completed two significant line sales. An example of us continuing to simplify the network and generate cash flows.
Jason Zappy: These two sales resulted in $380 million of gains and generated almost $400 million of cash.
Jason Zappy: Additionally, under the leadership of our new CIO Aneel Bot, who has a relentless focus on technology delivery and ROI generation, we rationalize certain it projects that were not generating the desired benefits that coupled with the discontinuance of our triple Crown Roadrailer assets combined totaled $60 million.
Jason Zappy: And restructuring costs.
Jason Zappy: Adjusting for these items <unk> for the quarter was $63 four and EPS totaled $3 25.
Jason Zappy: That's a 650 basis point improvement in our adjusted or since the first quarter, all while providing a safe reliable resilient service product generating productivity and growing the business.
Jason Zappy: Looking at these adjusted results compared to last year and last quarter on slide 14, you'll note that the year over year revenue was up $80 million due to strong volume growth, partially offset by RPE pressures operating expenses were down $118 million due primarily to fuel prices and productivity.
Jason Zappy: All combined these drove 570 basis points of or improvement.
Jason Zappy: From a sequential perspective revenue is relatively flat. However, we have continued to build off the strong momentum from our productivity and cost reduction initiatives with expenses down $47 million and 170 basis point improvement in or.
Jason Zappy: Drilling into the sequential variances starting with revenue on slide 15, you'll note that the strength in coal and intermodal volumes drove an overall, 3% volume increase over last quarter.
Jason Zappy: Unfavorable mix pricing pressures, particularly within the export coal market and lower fuel surcharge revenues drove RPE lower leading to overall revenue there was essentially flat with the second quarter.
Jason Zappy: Slide 16 breaks down the $47 million sequential improvement in expenses.
Jason Zappy: The transformative actions delivered by John and his team are benefiting our P&L and you'll see that through record fuel efficiency strong labor productivity with TD count down 3% on 3% more volume.
Jason Zappy: And decreases in rents due to better network fluidity, while the results of our initiatives to drive down purchase services are also taking hold.
Jason Zappy: All more than offsetting the wage inflation headwind that we called out last quarter.
Jason Zappy: These strong third quarter results and our operational momentum position us well to achieve our second half and full year targets.
Jason Zappy: We do expect a sequential uptick as we move into the fourth quarter from normal seasonality, including headwinds that we are expecting on the topline, but also due to additional cleanup costs from hurricane Hellenes aftermath.
Jason Zappy: Going forward, we are confident in our ability to continue to improve margins that will generate shareholder value and the $400 million in cash generated from the line sales along with our goal of reducing Capex as we move into 2025 will help with much needed balance sheet repair.
Mark George: Mark I'll hand, it back to you.
Mark George: Thanks, Jason we are proud of our results in the quarter.
Mark George: Let me summarize some of what you just heard.
Mark George: First we drove improvements in safety in the quarter, despite volume increases and the significant weather events.
Mark George: Second we leveraged attrition in the quarter, while handling robust volume growth, resulting in productivity gains while not compromising service.
Mark George: Third we delivered strong operational resiliency recovering service quickly following numerous disruptive weather events with Helene being the most severe.
Mark George: Fourth we executed upon major line sales that we signaled last quarter, providing meaningful cash proceeds that will help us accelerate balance sheet repair.
Mark George: Finally, we delivered strong financial results in the third quarter.
Mark George: Even with the volume pressures in the last eight days of September.
Mark George: And we are on track for our second half and full year or commitments, even if the full year revenue falls, a little short of our guidance, which is to be up roughly 1%.
Mark George: So with that let's open it up to questions.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone, you'll hear a prompt to indicate that your hand has been raised should you wish to decline from the polling process. Please press the star followed by the two.
Speaker Change: If you were using a speaker phone please lift the handset before pressing any keys.
Speaker Change: One moment for your first question.
Speaker Change: Okay.
Speaker Change: Chris Wetherbee.
Speaker Change: Yeah.
Speaker Change: Wells Fargo Hi, Good morning go ahead.
Chris Wetherbee: Yeah, Hey, thanks, good morning.
Chris Wetherbee: We can start with sort of the short term, where you left off just wanted to get a sense of maybe how you think about the progress that you've made and how you can carry that into the fourth quarter. I know you talked about hitting the second half guide specifically around the operating ratio and want to get maybe a little bit drill down a little bit deeper on maybe how that impacts in the fourth quarter.
Mark George: Hey, Thanks, Chris This is mark.
Mark George: We've got a really great momentum right now on the cost side, John can talk about that.
Mark George: I think right now we feel really good about those things that we can control.
Speaker Change: Yes, as we talked about in Laguna we were.
Speaker Change: Getting a little bit concerned about the auto and steel markets and Thats starting to really play out the way we the way we previewed so that's definitely going to be something we keep our eye on but generally speaking intermodal as we expect to peak season intermodal should be good obviously, the port disruptions, we don't know exact.
Speaker Change: We win in.
Speaker Change: How the volumes will manifest here in the fourth quarter, but generally we feel really really good about.
Speaker Change: The way we go into fourth quarter. So I wanted to talk a little bit about the momentum we've got on the cost side, and then add a little bit more on the on the revenue.
Speaker Change: Hey, Chris Great question, and I would say I'm really pleased the way we exited Q3 on safety. We finished Q3 at a 2.05 and we're into the quarter at 157 and as you know in a precision railway environment when when things are working in the rhythm.
Speaker Change: They are supposed to and first and foremost from a safety perspective, you get a lot of them.
Speaker Change: Momentum and we're seeing that in the terminals and our terminal dwell was continuing to improve and that's being achieved not only through the terminal itself, but how we're looking at reduction in handling and accelerating cars through terminals by extending schedules of trains. So work complexity is coming down while the case.
Speaker Change: <unk> is increasing.
Speaker Change: And that's playing out in fuel that's playing out in a lot of purchased in services.
Speaker Change: Taxi reductions et cetera, and now we're able to negotiate and structurally changed some of our vendor agreements that.
Speaker Change: More discipline around those things as a result of how we are improving so I would say.
Speaker Change: Those are those are some of the cost and then the puts are also as we use our resources better we're able to create more opportunities for ed to sell into spot markets and increase even our permits so ed.
Ed Elkins: Any color on that sure yes in the fourth quarter, we certainly expect to see continued growth in the intermodal product both on the international side, but also on the domestic side, we see strong demand out there and we've confirmed that with some of our key partners that we talk to every single day that Theyre seeing the same thing. So we're looking for a robust fourth quarter.
Ed Elkins: From intermodal the only headwind there is going to be premium and those are pretty well known headwinds in terms of the challenges that that particular markets facing on the coal side, we see a lot of demand on export thermal but let's be clear.
Ed Elkins: Seaborne prices for met are continue to be a drag and there is a lot of stockpile.
Ed Elkins: Build on the domestic side, so there'll be some headwinds some puts and takes Mark's already talked about automotive or excuse me automotive and steel we're keeping an eye on those but we feel very good about our ability to capture every single opportunity that we're able to get in front of.
Thank you.
Speaker Change: That gets you into the $64 65 range for the fourth quarter, though when you think about the operating ratio.
Speaker Change: Yes, so we really had a great quarter, we are confident in meeting the 64% to 65 operating guidance for the second half of the year that we talked about earlier.
Speaker Change: We move into the fourth quarter, we are expecting a sequential uptick in the <unk> and just a couple of things to remember.
Speaker Change: First we called out the fuel recoveries this quarter.
Speaker Change: We don't expect that to recur in the fourth to that same magnitude.
Speaker Change: But that's those recoveries really great outcome of running a tight railroad and the disciplined processes that John's put into play. So that's great outcome. There second I would say, we're expecting a more normal seasonality historically, that's been around 100 basis points.
Speaker Change: Headwind as you move from third to fourth quarter and a lot of that is due to the revenue headwind.
Speaker Change: Headwinds that Ed talked about.
Speaker Change: I'd also call out we are able to close on about $20 million of land sales in both the second and third quarters and as we've talked about those are difficult to predict so that that could provide some sequential headwind and then finally as we called out. We're also going to have to deal with the additional costs from some hurricane cleanup. So that just on the expense side, that's around 20 million.
Speaker Change: But offsetting all of that just on the good side, we've got a lot of operational momentum and really doing a great job here on the productivity front. So that's what gives us confidence to reaffirm that second half guidance.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from Brian Austin back J P. Morgan.
Speaker Change: Please go ahead.
Brian Austin: Hey, good morning, Thanks for taking the question.
Brian Austin: So maybe for Mark and Jason can you just talk about the capital intensity of the business going forward.
Speaker Change: Locomotives offline cars going offline at increasing rates as well into storage.
Speaker Change: How do you see that going forward you rationalize with some other it projects as well so.
Speaker Change: Are you able to see a little bit lower capital intensity over the next couple of years and how does that tie into your expectation to be back in the market buying back shares.
Speaker Change: Yes, great question Brian.
Speaker Change: You really nailed the strategy here I think with John taking more than 500 locomotives offline.
Speaker Change: That allows us to really start to deploy capital elsewhere, and actually constrained our capital to a large degree and we brought in Aneel.
Speaker Change: To run the <unk>.
Speaker Change: It organization, we've been re prioritizing it really reevaluating all of the projects we have in the pipeline and we're going to focus on a more concentrated portfolio of projects that are going to yield high returns the fastest possible projects that we can work on to generate high returns. So.
Speaker Change: We fully expect that Capex next year will come down.
Speaker Change: And obviously with the line sales we have this year and the cash buildup that we.
Speaker Change: We expect to have towards the end of the year, we fully expect to be back in the market repurchasing shares to some modest level next year.
Speaker Change: Thanks for the question.
Speaker Change: Yes, Mark if I could just add yes.
Speaker Change: As far as locomotives are concerned we're looking at.
Speaker Change: Pushing back as far as we can our capital commitments to locomotives and Youre right converting that resilience railroading and the disciplined approach to resources allows us to redo all of those things and really look for capital investments that create value either in a niche.
Speaker Change: Area like RMB, three four the worry or call that we've got or other things that Ed might bring online and help us really achieve a faster more precise service delivery against the new new business call, but we're taking a really hard look at our the.
Speaker Change: The projects that we've got working closely with Aneel Meena and her team looking at their resource consumption are really driving that ability. So it's just it's most.
Speaker Change: Both opex and capital that we're attacking here.
Speaker Change: Okay. Thank you <unk> next question.
Speaker Change: Your next question comes from Ken <unk> Bank of America.
Speaker Change: Please go ahead.
Speaker Change: Hey, great good morning, and Mark and Jason Congrats on the new jobs.
Speaker Change: Thanks, Kevin I guess, thanks, guys.
Speaker Change: So Ed volume is just starting off it looks like down about one 5%.
Speaker Change: <unk> and carloads I think you said you can rebound are you talking about getting to positive growth is there a level. You would you would think we should throw out there in terms of catching up and then in terms of pricing with with coal benchmark pricing down and I guess looking at where we are today at just over 200 could could we see.
Speaker Change: Or would you expect pricing to be down double digits or not not quite that level again.
Speaker Change: Hakan.
Håkan: I'll start with the last question first I think we're going to see coal prices continue to drift lower.
Speaker Change: I think double digit but.
Speaker Change: We'll see we've taken a very conservative approach to it.
Speaker Change: Here and then on the question of our overall volumes in the fourth quarter, we've seen a really nice catch up after the disruption from the from the port strike and from Helene in the areas that have recovered already and we feel very confident and I think this is one thing that it's hard to get across on a call, but we feel very confident in.
Speaker Change: Our ability to recapture volume no matter, where it comes from whether it's continued west coast imports or more east coast flowing through in the wake of the strike. So you put that together with what I would call some opportunistic.
Speaker Change: Bought moves that we've been able to pick up in the third quarter that may continue in the fourth on the merchandise side with the network is really doing right now and John and his team are working really closely with us as we're really manufacturing a lot of capacity that we can deploy to be very agile.
Speaker Change: So you think about the rapid increase run up and West coast imports before the before the strike and now we're much more fluid on the east coast coming through so I fully expect that whatever the market presents we're going to be able to handle.
Speaker Change: Thank you.
Speaker Change: Question. Please.
Speaker Change: Your next question comes from Scott Group Wolfe Research. Please go ahead.
Hey, Thanks, Good morning, So John some strong labor productivity with volume up seven head count down three what's the runway here is is this an incremental opportunity as we look out to next year or at some point does this get tougher.
Speaker Change: Well Scott.
Speaker Change: I'm glad you recognize the work that our all of our team is doing including aircraft labor. They are really embracing our management and leadership style.
Speaker Change: And that's reflected in some of the CVA is there.
Speaker Change: We've got Tas against.
Speaker Change: I would say that labor productivity, we're just getting started on having a disciplined approach to our operations, where we're looking at not just the head count, but how do we help people are deployed.
Speaker Change: And our train structures designing out handling is designing out.
Speaker Change: Train stops and elongated schedule is allows us to increase the productivity of not only our people, but also the resources like locomotives and so I think these gains.
Speaker Change: They're starting to really get traction and they'll continue to get traction.
Speaker Change: I really think that you can't underestimate the power of leadership and the power of the team and you see.
Speaker Change: Our engagement with labor as being very collaborative and they're a major stakeholder in our <unk> application.
Speaker Change: Last our last month, we had over 65 labor leaders, including President of National National's cover.
Speaker Change: Turning bodies coming to Atlanta, and talking about issues in and really understanding what we're doing and embracing our philosophy on railroading.
Speaker Change: They had some really challenging questions. They had some different differentiating different points of view.
Speaker Change: But we were able to work through those things and come out with a really cohesive.
Speaker Change: Perspective on what we need to go forward. So I would say that I don't want to put the burden on any particular group shoulders to bear I think as a team we're bearing a lot of that the discipline of change and the commitment to change and Thats reflected in the women and men who work for us and as I've said railroading is a tough a tough business, it's a $365.
Speaker Change: $4, seven and when we're creating the environment where people feel that they.
Speaker Change: They are contributing and they feel fulfilled in what they do.
And who could be more fulfilled in contributing to the U S economy. The way we do so I think the story is just starting to be written.
Speaker Change: Okay.
Speaker Change: Thanks, a lot next question.
Speaker Change: Next question comes from Tom <unk> UBS.
Jason I also wanted to say congratulations on the new roles and John.
Tom: It really looks like you're having a great effect on on the railroad. So congratulations on that as well I wanted to see if I could ask you a bit about 2025, I know, that's kind of probably tough given lack of visibility and in markets and everything in pricing, but how do you think about the frame for 25, if you do.
Tom: We see improvement in some of the market trade it seems like industrial markets arent getting better maybe getting a little worse than you highlight automotive and metals. So is there enough productivity that you improve the margin in 2025. So obviously high level is that reasonable given john's commentary and momentum or if you don't see <unk>.
Tom: <unk> growth and some pickup in markets is that kind of tough to do just wanted to see if you could offer any kind of high level thoughts on how that those two.
Tom: Kind of markets versus idiosyncratic network improvement how to think about those two together. Thank you.
Speaker Change: Hey, Thank you Tom Great question.
Speaker Change: Lets bifurcate and just say that for the things, we can control which is cost.
Speaker Change: We've got a path you will.
Speaker Change: You will recall that we had committed to $250 million of cost reduction this year.
Speaker Change: We're on track to hit that number we committed to another $1 50 next year, so regardless of the economic environment, we committed to another $150 million next year in 2025, we're going to beat that and John and I have spent a lot of time talking about this I think there's a real opportunity to fast forward.
Speaker Change: Cost reduction from 2026 into 2025, so we feel really really confident there.
Speaker Change: We can't control, the topline and the economic environment.
Speaker Change: Except to say that there is share recapture opportunity out there. So even if you have a softer market.
Speaker Change: We still have some idiosyncratic opportunities to recapture some share to help mitigate any pressure that might be there. So obviously there is a limit to.
Speaker Change: How much you can get in any given year, but given the product that John and his team are putting out there for service.
Speaker Change: We feel really really good about the traction and momentum we have with our customer base. John do you want to talk any more about the.
Speaker Change: Confidence in our cost reduction next year I would say the confidence for me comes and the power of the team and I look to my own experience.
Speaker Change: Through Hunter camp back.
Speaker Change: Back in the early two thousands and.
Speaker Change: How hunter encourage us to find the small wins in a 1000 small wins by <unk>.
Speaker Change: Army of people, who are believing and continuous improvement.
Speaker Change: Add up to a lot.
Speaker Change: And as we work through our investment in people in the almost 2800 engagements that we're doing through the balance of the year.
Speaker Change: We're educating people on the specifics of <unk> and how to really contribute to it.
Speaker Change: Promoting the culture of change and really removing the mud as Hunter would say and we're providing people with the ability then to apply what we're teaching them on their jobs day to day and that's that's really finding organic improvements and then we've got our strategy, where we're unlocking the value of the network and that's the beauty.
Speaker Change: Starting with two terminals like Chattanooga in Conway and really understanding how they work and now we're able to to force multiply those learnings and engage real asset Utah.
Speaker Change: Utility.
Speaker Change: And now we're thinking rethinking, how we use our assets and we see that in some of.
Speaker Change: Our pool distributions and our asset management and the refinements are Great example is how we are moving the cars.
Speaker Change: Out of out of Detroit, instead of stopping them in Toledo, moving them over to Bellevue, and then going to Elkhart were able to you repurpose a secondary hard and go right from Detroit to Elkhart, removing assignments, removing car days, reducing our power locomotive fleet requirements and those.
Speaker Change: Those ideas are coming from the field up.
Speaker Change: And so it's really taking hold and so long answer to say the story is just unfolding here and as we as we invest in people as we engage in clearing out the organizational mud.
Speaker Change: And the case for change is still there there's a lot to be fixed here.
Speaker Change: I think reflecting Tom when we put those targets out.
Speaker Change: They were targets now we're filling in that.
Speaker Change: That outline with real specific actions, we're realizing that we were maybe a little modest in the <unk>.
Speaker Change: And then the targets that we saw in front of us because of the actions now tallied a little bit more as we're putting together a 2025 numbers. So it feels good no.
Speaker Change: If you have any thoughts on five outlook, absolutely and we are.
Speaker Change: Still working on what 25 looks like Theres clearly a lot of a lot of moving parts out there.
Speaker Change: Let's be clear about this we're not sitting on our hands just waiting around to see what's going to happen.
Speaker Change: My team as well as John's are working together right now to build a service product that does one thing and that's produced service that you can count on delivered by people that you can trust every single day and on top of that we're working to build what I would consider to be a unique value proposition because of the technology.
<unk> that were deployed at the customer level to make it very easy to do business with.
Speaker Change: That's a process change and grow that some technology augmentation, but I think it's going to be a real differentiator in 2025, we look forward to the response from our customers on both counts.
Speaker Change: Thanks, Tom next question.
Speaker Change: Next question comes from Brandon No Glinski Barclays.
Speaker Change: Please go ahead.
Speaker Change: Hey, good morning, and thanks for taking the question.
Speaker Change: Mark Congrats on the top seat here, but I guess a two part question from me first structurally at Norfolk is there any way you are looking at this organizationally that you'd like to see different at the company.
Speaker Change: And then maybe following up from that discussion.
25, or there was a lot of back and forth on guidance earlier this year with the proxy contest I think you guys had committed to a 100 to 150 basis points of annual improvement for the next few years, but then also said maybe a sub 60 in three to four years if volume contributed.
Speaker Change: Is that still the right framework, especially within the context of the answer to that last question.
Speaker Change: Yes, I think starting with your second one.
Speaker Change: Absolutely we're still on track for that and you remember the components there were components of cost reduction there.
Speaker Change: In the one to 150 was really based on kind of a more modest topline outlook.
Speaker Change: Middling, 2% to 3% type of top line.
Speaker Change: Growth, but then if we had a more traditional top line recovery.
That would get us to the sub 60 in.
Speaker Change: But the three to four year time window, so we stand by those.
Speaker Change: Those guidance indicators now with regard to.
Speaker Change: Structurally anything different I think.
Speaker Change: What I would tell you is we are on track we've got some great momentum.
Speaker Change: The strategy.
Speaker Change: At its core is.
Speaker Change: Exactly what we're going to stick to and this really gets to about execution right now.
Speaker Change: We have a really sound operating team that is executing upon our strategy to create network fluidity that will allow for a really great service product.
Speaker Change: And as we always said with that Great service product. It will enable growth use you started to see that play out last quarter and now again this quarter, we've got some idiosyncratic opportunities to grow and Ed and his team have been capturing on it.
Speaker Change: So that worked and we told you that productivity is kind of a third leg of that strategy.
Speaker Change: And honestly you also saw that play out in the third quarter, we had fallen out of balance with the strategy on productivity. We told you we were going to get back in balance and we're well on our way to doing that.
Speaker Change: With 570 basis points of or improvement.
Speaker Change: Thanks to a sprinkling of some some volume here in this quarter it was a real accelerant.
Speaker Change: But even the sequential improvement.
Speaker Change: Is very encouraging so.
Speaker Change: Execution is what's key and John and I talk about that a lot.
Speaker Change: And I kind of touched on it a little bit at Laguna.
Speaker Change: I really embrace and operational excellence mindset coming from my background in industrial products.
Speaker Change: And I believe strongly that any good operation needs a quality type system.
Speaker Change: Call. It six Sigma you can call. It <unk> like we used to call. It a mile company, which is achieving competitive excellence either way you've got to have really solid standard processes that are based on best practices.
Speaker Change: <unk> got to get those system at times, so that everybody follows it.
Speaker Change: When you have breakdowns in the process you do relentless root cause analysis to identify where the problems are and then fix the standard processes.
Speaker Change: So you can mistake prove going forward.
Speaker Change: That's this virtuous cycle that we have to get ourselves into and the beauty is when an operator like John and John's team.
Speaker Change: What you hear about.
Speaker Change: There is a real resemblance to what I'm describing.
Speaker Change: In fact, when John talks about the war rooms, what do you think the war rooms are those are relentless root cause analysis every time they have an issue the war room gets to work on it they figure out what the root causes they fix it. So we are in lockstep on driving that culture and.
Speaker Change: Im really really excited about that and then I think the other thing is obviously culturally I want to continue to advance first our safety culture, but also a real two way communication John touched upon that a couple of minutes ago, as well, but a two way communication where information flows up.
Speaker Change: Not just down.
Speaker Change: Lot of the best ideas that come inside this railroad are from the people who are on the ground whether thats in the marketing organization with what's happening with our customer base, whether that's in the operations team like John just described we have to create an environment where people are comfortable to speak up.
Speaker Change: And it's not just process stuff, it's not just ideas for improvement, but it's also concerns that they might have.
So we're going to be really working on creating and fostering a better culture for two way communication and then I would say finally, Ed and I have been having a lot of conversations about really working a lot closer with our customer base to figure out exactly how we can serve them better to accelerate the share gains and the share re.
Capture opportunities that are out there.
Speaker Change: So that's where I'd say the focus will be structurally going forward.
Speaker Change: Thanks, a lot for the question Brandon appreciate it next.
Speaker Change: The next question is from Jonathan Chappell Evercore.
Please go ahead.
Jonathan Chappell: Thank you.
Jonathan Chappell: Ed on your market outlook, there is a lot more red and yellow than there is green and you talked about some of the headwinds there and maybe some more incremental you've also mentioned in some of these prior answers spot market wins. So can you just maybe put a little bit more quantitative where youre winning how much of that is if we look at a macro that's.
Jonathan Chappell: 1% to 2% industrial production growth, what's the realistic volume growth on the Norfolk Southern network as Youre, winning more than maybe the economy is giving you.
Ed Elkins: Yes, I would point to is pretty easy I would point to our AG markets where the.
Ed Elkins: In the third quarter, we were able to take advantage of some market dislocations as well as some some what I would call true spot opportunities that frankly in prior quarters, we could never have addressed because we couldnt generate the additional capacity to do that nor the operational agility to really respond in a way that the market.
Ed Elkins: Could take advantage of.
But this last quarter, we have I would say very successfully executed a number of those moves whether it's soybeans, whether its corn, whether it's green that have helped to offset some of the weakness that we've seen in some of the other industrial markets, where we're fulfilling all the capacity needs that our customers have but there is simply don't have that much need right now.
Ed Elkins: And I would point toward the deceleration in some of our auto markets.
Ed Elkins: Idiosyncratic.
Ed Elkins: Phenomenon going on there with regard to whether its quality holds or specific plant outages, but.
Speaker Change: About intermodal.
Speaker Change: Look at the look at the very solid growth both on the domestic and international side and the the ability that our network has had to not only absorb that growth, but also produce those spot wins that I'm talking about here, which really are again.
Speaker Change: Opportunities that we would not have been able to take advantage of in prior quarters.
Speaker Change: I would attribute part of our ongoing agility improvement to our reservation system on the intermodal side and we're in the early innings of that but I really think that overtime and John may want to comment on it but over time the feedback we're getting from our customers is going to help them know that they've got to ride on a train on a specific day, which.
Speaker Change: Allows them to plan and their customers to plan and allows us to make some very important operational decisions that help us be not only more efficient, but more reliable for our customers.
Speaker Change: I would agree and while it's early days and the reservation system.
Speaker Change: I'm really I'm really confident that as we work through this our customers are going to enjoy the discipline and that brings to our terminals.
Speaker Change: Because they've been a part of its development.
Speaker Change: And what I'm excited about is that opportunity to add 100, 200, 300 501000 feet to our intermodal trains are existing trains as we create the disciplined smoothing out our network.
Speaker Change: Through the rest of the year and into next year.
Speaker Change: And then being able to really project, what our true capacity is as far as that growth because I think we're just on the cusp of really hitting our stroke on long trains and in bringing on new business at very low incremental costs. Thanks John.
Speaker Change: The next question please.
Speaker Change: Your next question comes from Jeff Kauffman Vertical research partners. Please go ahead.
Jeff Kauffman: Hi, Good morning, everybody and thank you for squeezing me in congratulations also to market Jason.
Jeff Kauffman: I just wanted to go a different direction I know, there's some things you probably can't talk about with the labor agreements.
Speaker Change: John can you talk about what is going to make a difference for what youre trying to achieve and these these labor agreements that were reached <unk>.
Speaker Change: My math for ratification. So you may want not want to discuss some things, but just kind of talk about <unk>.
Speaker Change: You to hit your targets with these new labor deals.
Speaker Change: Thank you for that question and it is a really good question and coming from both the craft and from organized labor in the early days of my career.
Speaker Change: I really appreciate having clarity on the future as far as the payment structures and the discipline around what my CPA looks like so I think first that that.
Speaker Change: Extending that confidence to our workforce and predictability and how they can budget their own households in their own work schedules is really important and that cascades into or are being able to model from a from a pricing and from their predictability with our customers.
And third there.
Speaker Change: I think it is very complementary to what we're trying to achieve in <unk> and Thats really disciplined service safety safety and and really delivering value for our customers and that discretionary effort that we're getting from our running trades crews in our operating operating employee.
Speaker Change: <unk>.
Speaker Change: It's really going to allowing us to optimize the value of our network built build a team a team that's inclusive of every one of the 20000 people who work here and contribute to the value that we're creating.
Speaker Change: And that leadership in developing skills and capabilities is just going to help us to enhance our great product already.
Speaker Change: And I think as well then that allows us to.
Speaker Change: Really.
Speaker Change: Create a new blueprint.
Speaker Change: And unlock that unlock the bigger rocks that we need to so that we move to the network further along so it's a win win and I know from my experience.
Speaker Change: There is nothing you can put a price tag on that discretionary effort.
Speaker Change: Thanks, a lot Jeff next question.
Speaker Change: Your next question is from Jordan Alegar Goldman Sachs. Please go ahead.
Jordan Alegar: Yes. Good morning, just wanted to talk about network resiliency, if I could you had some pretty strong volumes in the third quarter. So I'm just sort of curious.
Jordan Alegar: Whats working well on resiliency, what still needs to improve really just to get a sense you know what needs to be done to ensure the network can run.
Jordan Alegar: Fluidly for the foreseeable future. So you can do the things you are talking about like taking share off the highway et cetera. Thank you.
Speaker Change: Well I would say again I will get back to we're trying to do things better in every area of the business.
Speaker Change: And in order to do that we have to bring up our efforts and our capabilities to a completely.
Speaker Change: Their level, but I would say the six things that we focus on the network health.
Speaker Change: Our asset efficiencies in our customer facing metrics are the guiding the guiding metrics that we're going to use to drive that.
Speaker Change: And as we continue to improve those things under the Hood, there are going to be a lot of.
A lot of ability to put more discipline engineer out inefficiencies and engineer in optimization things like the reservation system that are just going to unlock so much discipline around our terminals in intermodal is our growth.
Speaker Change: And to have better discipline around that just gives us such an advantage as the market comes comes Roaring back in the U S economy, and as trucks tighten up we'll be able to really leverage from a pricing perspective, and I think Ed you talked about that numerous times Jordan I think.
Speaker Change: John has done Decongestive the terminals in networks. It goes a long way to improving resiliency laying down 500 locomotives over 8000 cars. Since Q1, you create a lot more fluidity in the network and when you add a little bumps in the road you have less congestion.
Speaker Change: To hold you back from recoveries. So that I think is key and critical and you saw it play out here in the third quarter. Following these storms I would tell you a year ago. Some of the events that we saw in the quarter, probably would've set us back three months, okay, but we were back within a week.
Speaker Change: And now we're actually at record network speeds.
Speaker Change: And low dwell so it's really remarkable and I do actually just want to refute the notion that resiliency is about retaining costs. In fact, we've achieved resiliency this quarter, while lowering costs. So it's a good news story, we seem to have a good model in place here. Thanks.
Speaker Change: Thanks for the question Jordan next.
Speaker Change: Your next question comes from Ravi Shankar of Morgan Stanley. Please go ahead.
Ravi Shankar: Thanks morning, everyone. Thanks for the color on <unk> 25 on the productivity actions, but without the drop through to the bottom line how much pricing do you need to conquer agenda inflation for next year.
Ravi Shankar: Yes.
Speaker Change: Thank you Ravi by the way.
Speaker Change: <unk> had a very successful year, so far in terms of being able to price to the value of our of our service and that value is increasing as the.
Speaker Change: The year goes on.
Speaker Change: We're very confident that we're going to finish up the year in a strong position going into 'twenty. Five we continue to believe that we're going to outpace inflation in all of our major markets now.
Speaker Change: Commodity prices like seaborne coal.
Speaker Change: Maybe a headwind, we'll see how that evolves in 'twenty five, but when you think about our core product and the value of the service that we're offering is increasing and our customers are saving money at the same time. So it's a powerful combination you have to think of it Ravi.
Speaker Change: In the elements when you talk about pricing you can't talk about it.
Speaker Change: One topic right merchandise.
Speaker Change: As I just said, we feel really good really strong.
Speaker Change: Service helps us a good backdrop there is those inflation so.
Speaker Change: So the model is intact I think intermodal is going to be somewhat dependent on what happens with spot pricing.
Speaker Change: Clearly we seem to have found the bottom on the question is when does it start coming off the floor here.
Speaker Change: And yes, we have other commodity groups that follow indices that we don't control obviously in seaborne met being.
Speaker Change: Being a big one.
Speaker Change: No.
Speaker Change: But I think for those areas like and particularly in merchandise in 2025 models in Tac, we feel really good.
Speaker Change: Thank you I appreciate the question.
Speaker Change: I was trying to get another couple of months.
Speaker Change: Your next question comes from David Vernon Bernstein. Please go ahead.
David Vernon: Hey, good morning, guys and congrats to the to the new roles. So maybe just kind of building off that question around the seaborne met market in 2025, and you've been around this business a long time.
David Vernon: What do you think about the U S is role in terms of the export markets. If we see.
David Vernon: Lower price correction or you're worried just could you kind of maybe shape the price headwind that might might might manifest it on a slightly weaker market for north over into next year and then.
David Vernon: Kind of help us understand whether you are worried about also sort of like overall aggregate volume demand on the export markets for 2025.
Speaker Change: Yes, a little bit rather than to get a lot into 25, because we are still building our build and our view of that of that particular dimension, but I will tell you.
Speaker Change: U S has remained remarkably competitive over time I think we're going to continue to do that.
Speaker Change: <unk>.
Speaker Change: Think about export thermals, we're in a very good spot in terms of demand I expect that to generally continue and China is going to determine a lot about what happens with export met demand. There is there's a tremendous amount of geopolitical uncertainty that's driving a lot of commodity prices driving a lot of energy prices, but we've got our <unk>.
Speaker Change: Other eye on it and we are fully prepared and capable of delivering the tonnage that our customers around the globe I need.
Speaker Change: Thank you.
Speaker Change: Next question please.
Speaker Change: Your next question comes from Ben Nolan Stifel.
Ben Nolan: Hey, I. Appreciate you guys fitting man I was just going to ask you talked a little bit on the intermodal side that it feels like maybe it's bottoming and specifically around an appreciating that the trucking market is still really challenged.
Ben Nolan: Are you starting to see any green shoots on the premium intermodal at all or is that.
Speaker Change: Not yet the place where we are.
Speaker Change: On the premium side.
Speaker Change: There is still a lot of headwinds out there.
Speaker Change: Emanating from the highway generally we are seeing I mean, you got to look at it.
Speaker Change: From a fairly substantial distance, but we are seeing truck utilization head up and I think we're close to the 10 year average now and I think we're going to trend above it you look at the total number of motor carriers are out there it's declining slowly.
Speaker Change: But both of those things along with feedback that we're getting from our key partners like J B Hunt and hub group are telling us that they were reaching a point where I fully expect that pricing is going to eventually inflect I do think we're around the bottom now.
Speaker Change: At least somewhat confident knocking on the table here that that's true.
Speaker Change: Premiums are different story, we'll see how that evolves. What we are focused on is making sure that we're delivering exactly the product that that particular segment needs.
Speaker Change: Okay. Thank you.
Speaker Change: That brings us to the end.
Speaker Change: Look I want to thank everyone for your questions and we look forward to talking to you all throughout the quarter have a great day.
Speaker Change: <unk>.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
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Speaker Change: Yes.