The operator of the Norfolk Southern Corporation Second Quarter 2023 Earnings Call introduces Luke Nichols, Senior Director of Investor Relations, who notes the potential risks associated with forward-looking statements. He then introduces Alan Shaw, President and Chief Executive Officer, who is joined by Mark George, Chief Financial Officer; Paul Duncan, Chief Operating Officer; and Ed Elkins, Chief Marketing Officer. Shaw thanks his colleagues for their hard work and commitment to safety and recovery.

Norfolk Southern has committed to a strategy that balances service, productivity and growth in order to create long-term value for customers, employees, shareholders and the communities they serve. The derailment in East Palestine tested the company's resolve, but they have responded by making decisions in the best long-term interest of the community and have achieved significant progress. The financial results were challenged this quarter due to the derailment, but the company is investing in the long-term success of their company and has made significant progress in the second quarter.

In the second quarter, Norfolk Southern continued to invest in their business through economic cycles and prioritize engaging with their frontline railroaders. They provided paid sick leave for all craft employees, co-authored an open letter with leaders of 12 railroad unions to collaborate on safety, and reorganized their marketing team to align with their strategy and pursue growth in high-value markets.

Norfolk Southern made the innovative move to create the industry's first Vice President of First Mile Last Mile in the second quarter and created a performance excellence team within operations to build rigor and discipline into their processes. Additionally, they strengthened their safety culture, implemented best practices and accelerated technology improvements. They chose Atkins Nuclear Solutions as a partner to challenge and inspire them and asked the leaders of national unions to work with them to enhance rail safety. These initiatives have produced positive results in their safety metrics and the railroad is now poised for long-term value creation.

In the second quarter, $416 million of costs were recorded due to the Eastern Ohio derailment, primarily for environmental cleanup activities. This brings the total costs to $803 million so far this year, of which $287 million has been paid. The company is pursuing recovery from third parties and insurance coverage, however these reimbursements will take time to materialize. The incident and response had an accounting impact on the company's key metrics in Q2.

In the adjusted results, revenues were down 8% and adjusted operating expenses were slightly up. This was due to wage inflation, locomotive related work, lower gains on the sale of property, and purchased services and rents being up 5%. Fuel expenses were down 36%. Consequently, the adjusted operating ratio was 66.7%, operating income was down 22%, net Income was down 18%, and EPS was down 14%.

In the first half of the year, Union Pacific's adjusted operating income was reduced by $279 million, partially mitigated by a $71 million increase in other income. Free cash flow was lower by $276 million due to derailment-related expenditures and investments in roadway and equipment, while shareholder distributions totaled $918 million. Safety performance has improved, with injury frequency and accident rates trending lower than prior years, and train velocity, dwell and service across the network being restored to two-year best levels.

The company has improved its service and is now focusing on driving further reliability, productivity and resiliency in their network. They have successfully worked down their inventory buildup and are now cycling railcars faster than before. They have also right-sized their workforce and are achieving velocity near 200 miles per day with their locomotives. They have allocated a portion of their road locomotive fleet to surge capacity and have a solid outlook for their locomotive fleet.

Paul discussed the initiatives taken to improve T&E productivity, fuel efficiency, and service reliability. He mentioned the steps taken to improve safety, velocity, and service, as well as the new performance excellence team that was created this year. Additionally, he mentioned the capital investments made to increase productivity, such as the siding projects between Chicago and Cincinnati. Finally, Ed Elkins will review the commercial results for the quarter.

The second quarter experienced challenges such as soft freight demand, lower commodity prices, and recovering service levels, leading to a 8% drop in revenue from the same period last year. Revenue per unit less fuel improved 1%, driven by tempered demand for intermodal and utility coal, but there was significant negative mix within markets that tempered overall revenue per unit performance. Total merchandise volume and revenue was 1% below prior year levels, but revenue per unit was flat year-over-year, with RPU less fuel growing 2%. Intermodal experienced the strongest market headwinds, with domestic lines of business seeing a 14% year-over-year decline due to weak freight demand, high inventories, and excess truck capacity.

Intermodal saw a shift in ARPU mix with end markets as volumes increased 1% year-over-year and 5.8% sequentially over last quarter. Coal volume was flat year-over-year, but revenue fell due to lower RPU and fuel surcharge. Utility volumes were down 17% due to low natural gas prices and elevated stockpiles, but export shipments increased due to production and overseas demand. Norfolk Southern is confident that their service product will enable them to take advantage of market growth opportunities, particularly in nonresidential construction, metals, and construction volume.

Norfolk Southern is confident in their ability to grow their franchise and deliver value for customers despite uncertain economic conditions. They are focusing on service, productivity, and growth, and have highlighted the strength of their network and ability to drive growth in the future. Last quarter, they announced the new Scout Motors plant on Norfolk Southern, demonstrating the development of the electric vehicle ecosystem in recent years. They expect growth in light vehicles and Intermodal international volumes, but weakness in chemicals markets and a low double-digit percentage sequential decline in coal RPU.

Norfolk Southern's network is well-positioned for industrial development, as it covers 50% of the US manufacturing base and reaches 60% of the population. Over the last 18 months, $70 billion in new EV battery manufacturing plants have been announced, with Norfolk Southern's team helping to locate nearly a third of that investment. Year-to-date, the industrial development team has reported $2.6 billion in industry investment along Norfolk Southern lines, bringing 3,200 new jobs to local communities. With this, the outlook for 2023 has been modified, expecting revenue to be down at least 3% and higher capital expenditures to be made for safety, service, productivity, and growth.

Norfolk Southern's team is committed to delivering long-term shareholder value through revenue and earnings growth. The team has made progress and investments and is confident that their strategy will help them achieve their full potential. In March, they reworked their train makeup and have seen improved service since. This has increased their capacity for growth, as they have increased the utilization of distributed power.

Norfolk Southern reported a real estate gain of $19 million in the quarter. The company experienced a service degradation during the first and second quarters of the year, leading to slower volumes, but they have since met their service targets and have seen their equipment turn faster and customers incorporate Norfolk Southern into their supply chain solutions. Over the past 20 weeks, Norfolk Southern's volumes have outperformed the industry average for 18 of those weeks.

Alan Shaw and Ed Elkins are discussing the outperformance of the Class 1 railroads and the bright spots they see in the automotive industry, infrastructure spending, and residential construction. They are focused on these markets and are looking to deliver more value for customers as the network speeds up. Elkins is asked to comment on the sequential drawdown in intermodal yields and whether there will be an increase in operating income in the back half.

In the second half of the year, the company expects to see higher volumes due to better service product, a partial wind down of service costs, and a decrease in fuel expenses. However, there will be headwinds on the ARPU side due to a decrease in fuel surcharges and the lag benefit disappearing. The company has also seen an increase in IPI shipments in international markets, which is adding value for customers.

Mark George and Alan Shaw discussed the headwinds and tailwinds of the company's OR and RPU. They expect to see some OR improvement in the back half of the year due to increased volumes, but there will be headwinds from fuel surcharge and coal pricing. They also discussed their commitment to improve service throughout the quarter and into the third quarter, which will create more volume and a better cost structure.

Ed Elkins and Mark George discussed the revenue headwinds from fuel surcharges and storage, which is projected to be around $650 million in the second half of the year. Paul Duncan then discussed Union Pacific's plan to reduce their conductor trainee pipeline to 600 or less to focus on attrition and filling in remaining locations.

The company has been able to hire more staff to help with service improvements, and they are expecting to have around 600 new employees by the end of the year. They have also seen an increase in their cost structure due to service issues, but this is offset by a 4% wage increase that took effect on July 1. In the back half of the year, they expect to see a flattish sequentially in terms of their other P&L line items, and an increase in average headcount.

Mark George discussed the impacts of service disruptions and the shutdown of the line in East Palestine on the revenue and cost side. He estimated that $175 million to $200 million of revenue was lost, and $40 million to $45 million of costs were incurred due to poor service. He also mentioned that the average compensation per employee increased by 4% for craft employees.

Mark George discussed the guidance for the cost per employee each quarter and the potential headwinds from the work rule changes. He mentioned that they would have to pay for it with productivity initiatives in the future, and Paul and his team are looking at it. Jordan Alliger asked for a sensitivity perspective on the network and OR in the second quarter.

Mark George states that mid-single-digit revenue growth is the goal for the company, and that this implies a few points of volume and a couple of points of pricing. Alan Shaw then adds that the financial impact of the accident is still unknown, and that the cleanup activity is expected to continue into October. The future periods may also be impacted by legal costs, fines, and penalties, which are currently unknown and cannot be estimated.

Mark George stated that Union Pacific is continuing to buy back shares in the second quarter at similar levels as the first quarter. He also mentioned that the company's model is to reinvest in the business, pay a dividend with a payout ratio of 35-40%, and that this year they have $2.2 billion of CapEx spend. Lastly, he mentioned that they have started the process of seeking recovery from third parties and making claims against insurance policies which could take quarters, not months.

CSX is looking to bring in first mile and last mile head to improve customer experience, service quality, and commercial sophistication. This is not the right time as they are focused on rehabbing the network and fixing what needs to be fixed. CSX has been speaking with customers for a long time and have realized that first and last mile is a critical component of the customer experience and will be beneficial in all three categories.

The biggest lever for improving the operating ratio is to absorb volume growth into the current cost structure. Paul's team is also working on productivity initiatives since service has been improved, but not necessarily in the most productive way.

Paul and his team are focused on reducing costs in order to drive productivity. They are not able to predict the outcome of their efforts in the next 12-18 months, but they are confident that there is volume to be taken and share to recapture. Additionally, they are working to improve the base plan in order to drive productivity and efficiencies.

Ed Elkins and Alan Shaw answered a question from Allison Poliniak about the potential volume opportunity of the industrial development and EV battery plants. Elkins noted that the value of the product delivered varies based on the size of the project and it could take months or years to manifest volume. Shaw noted that the macro trends in the economy play to the strengths of the company's franchise. Seidl then asked about other income below the line and potential regulation from the FRA regarding train size and weight.

Mark George and Alan Shaw discussed the other income and regulations in response to a question from Jason. Mark George explained that the $64 million in Q2 from company-owned life insurance will not be as big in the back half, and Alan Shaw spoke about the various bills moving through the house and senate. In response to a question from Bascome Majors, Mark George discussed the timing of recoveries and spend related to East Palestine and the uncertainties around free cash flow for the year.

The company has accrued over $800 million and expects to spend half of it in the back half of this year and the other half in the following year, with some potentially slipping into 2025. Recoveries are unlikely to happen until 2024 and it will take several quarters to process the claims and get the free cash flow benefit. There have been no signs of intermodal shifting back to the West Coast yet, but the company is prepared for volume growth from either coast. Lastly, the company was unable to quantify the share loss in 2Q from the East Palestine derailment.

Ed Elkins discussed the financial impact of the weak macro environment, estimating that the company lost $175 million to $200 million in the quarter due to customers finding alternatives to keep their supply chains running. Elkins and Alan Shaw then discussed the importance of providing consistent and competitive service in order to maintain their long-term strategy. The question-and-answer session concluded with no final comments from Shaw.

Alan Shaw thanked the participants for joining the conference call and expressed anticipation for further conversations in the third quarter. The call was then concluded and participants were thanked for their participation before being asked to disconnect their lines.

This summary was generated with AI and may contain some inaccuracies.