The operator introduces the Norfolk Southern Corporation Fourth Quarter 2023 Earnings Call and reminds participants that it will be recorded. Luke Nichols, Senior Director of Investor Relations, begins the call and mentions that there will be forward-looking statements. Norfolk Southern's President and CEO, Alan Shaw, then thanks everyone for joining and introduces other members of the team. He acknowledges the challenges faced in the previous year, including a major derailment and weak freight market, but praises the team's response and commitment to protecting the company and addressing community concerns.

In 2023, Norfolk Southern made significant improvements in safety and service, resulting in a 42% reduction in mainline accidents and a 5% growth in intermodal volume. Despite facing network disruptions, the company was able to deliver its best intermodal service in over three years. With a focus on increasing productivity and delivering industry-competitive margins, Norfolk Southern is determined to continue its success in the future.

Norfolk Southern is focused on improving the velocity and resilience of its merchandise network, which accounts for two-thirds of its train starts. By complying with their PSR operating plan and reducing variability, complexity, and costs, they aim to increase asset velocity and achieve productivity gains and cost savings. They are targeting a double-digit percentage improvement in terminal dwell by 2024. The company is also working on winning business and negotiating prices above inflation, while streamlining their cost structure and eliminating inefficiencies. They have invested in safety and service in 2023 and will see the benefits in their cost structure in 2024. To offset increases in critical operating areas, they plan to reduce management headcount by 7%. This transformation will take time, but they believe it will position them to secure volume and incremental margin when the freight cycle recovers.

The company is optimistic about the future despite a soft freight market and disruptions. They have implemented a strategic vision to balance safe service, productivity, and growth, which will lead to improved margins and attract more business. The derailment and network disruptions have been addressed, and the company is focused on reducing complexity and enhancing productivity. They have incurred significant costs related to the derailment, but are confident in their strong franchise advantages and potential for growth. The team will provide more details on their planned improvements in performance and profitability.

In 2023, the company received $76 million in insurance recoveries, bringing the total to $100 million. However, the net outflow was $652 million after the recoveries. Ongoing monitoring and cleanup efforts are expected to continue in 2024, with additional costs for legal settlements and fees. In the fourth quarter, revenues were down by 5% and adjusted operating expenses were up by 3%, resulting in a 30 basis point sequential improvement in the adjusted operating ratio. However, the company fell short of expectations due to higher service-related costs. Adjusted operating income, net income, and EPS were all down by 19% and 17%, respectively. The main drivers of the increase in operating expenses were employment growth and inflation across all categories.

In the comp and ben section, the company plans to maintain the same headcount levels in 2024 as in 2023, with some changes in mechanical craft and non-agreement categories. There was an increase in purchased services due to technology spend and repairs for the auto fleet. Rents also increased due to short-term locomotive resources and increased car supply. Materials costs were higher due to repairs for locomotives and freight cars. Claims were lower compared to the previous year, and there were fewer real estate gains. The company introduced a slide to help investors understand their service costs and resiliency investments. The costs related to service that did not meet planned levels have not decreased as expected, but service has improved. However, costs will remain elevated in Q1 due to crew-related expenses and cold weather. Overall, service costs are expected to decrease significantly in Q2.

The paragraph discusses the costs tied to investments in resiliency for Norfolk Southern, including additional T&E crews and hiring in mechanical crafts. These costs are expected to settle at around $55 million per quarter in 2024 and will lead to a safer and more efficient operation. Other income increased in the quarter due to higher interest income and the adjusted effective tax rate was 19.2%. Overall, the company saw a decline in revenue and an increase in operating expenses, resulting in a decrease in operating income and an increase in the operating ratio. However, favorable below-the-line items and share repurchases helped to mitigate the decline in earnings per share.

In 2023, Norfolk Southern's free cash flow was $1.4 billion lower than the previous year due to derailment-related expenses and higher capital expenditures. Shareholder distributions were $1.8 billion, with a focus on dividends and share repurchases. The company issued debt and built up their cash balance in preparation for the strategic CSR purchase. As a result, share repurchases will be temporarily suspended to absorb the asset and improve credit metrics. The company's operations saw improvements in safety, with a 42% reduction in mainline accidents and the second lowest injury rate in eight years. However, they are still striving for further safety enhancements.

In early 2023, a major incident in Eastern Ohio prompted the company to review and adjust their train makeup rules, resulting in an even better product. This has helped the company make progress in mainline accidents and improve safety. Despite the change causing network disruption, the company believes it was the right move for the long term and they kept their promises to restore fluidity and service levels. They took a small step back in service levels at the beginning of the quarter due to system outages, but quickly regained footing and saw improvement in November and December. The company deliberately deployed additional resources to balance restoring fluidity and delivering peak volume, resulting in strong service for intermodal customers. However, this also led to higher-than-planned service recovery costs, which the company is actively working to reduce.

The company has made significant improvements in their intermodal service and expects to continue this trend by leveraging their resources for productivity and growth. They have seen a 4% increase in workforce productivity and have plans to further improve it through various initiatives. They have also successfully trained 600 conductor trainees and are confident in their workforce size to handle future growth. Despite lower locomotive miles per day, they are focused on improving train speeds to increase efficiency. They have also implemented PSR principles in their intermodal network, resulting in improved service and a successful peak season in 2023.

The company is continuing to improve its merchandise network by increasing execution and discipline, optimizing train building processes, and tracking progress through various measures. These improvements will lead to reduced costs and increased productivity by reducing T&E expenses, improving car velocity, and increasing capacity within the network.

The company is focused on driving growth and increasing productivity while achieving service resilience and taking market share from trucks. The fourth quarter saw a 3% increase in overall volume, led by intermodal and automotive markets, but total revenue and revenue per unit declined due to various factors. Despite flat merchandise volume, there was a 1% increase in RPU less fuel due to price gains. Intermodal volume increased by 5% and revenue was down 13% due to lower revenue from storage and fees in the prior period.

The decrease in fuel prices, an excess supply of available trucks, and negative mix within the international business all had a negative impact on revenue per unit. Excluding the effects of fuel and storage fees, intermodal RPU decreased by 1% in the quarter. However, the domestic franchise is expected to perform well as the truck market recovers. Coal volume increased slightly due to strong demand for exports, but utility coal faced challenges due to high stockpiles and low natural gas prices. Overall, volume for the full year decreased by 1%, with declines in intermodal and energy-related chemical commodities offset by growth in automotive. Revenue for the year was down 5%, but excluding the impact of fuel and storage fees, underlying revenue was positive. RPU, excluding fuel, increased by 2%, setting annual records for merchandise revenue and RPU.

In 2023, the freight environment was weak due to low demand for goods and excess capacity in transportation. However, the company focused on creating value and saw growth in the fourth quarter. Looking ahead to 2024, they anticipate modest volume growth, particularly in steel and automotive shipments. They also expect increased demand for intermodal services due to international trade. However, there is uncertainty regarding the truck market and the strength of the consumer could affect growth. The company expects strong pricing conditions in their merchandise markets due to improved service product.

The persistently weak truck market will limit the opportunity for intermodal pricing, but Norfolk Southern still expects to generate pricing above rail inflation in 2024. The company's customer-centric approach has yielded smart and sustainable growth, with examples including increased volume for FedEx Ground and landing a new plastic recycling plant as a customer. In 2023, Norfolk Southern's Industrial Development team partnered with 62 customers to complete strategic industrial development projects.

In 2023, Norfolk Southern overcame challenges and saw success in intermodal service and volume. They expect continued success in 2024 with a 3% increase in revenue and strong productivity gains. However, net income and EPS growth will be impacted by higher interest expenses and the suspension of their share repurchase program. The second and third quarters are expected to be the strongest in terms of margin performance. The first quarter may be impacted by cold weather and there are still some headwinds from storage fees, fuel revenue, and export coal prices.

The company expects to see strong incremental margins and revenue growth over the next few years, which will help narrow the margin gap with its peers. They are not providing a specific margin target, but anticipate a 100-150 basis points improvement annually. This will be achieved through volume growth, productivity initiatives, and cost control. The company sees potential for even greater gains during the upcycle, and believes that its strong franchise will deliver shareholder value through earnings and free cash flow. During a question and answer session, the company's CEO was asked about the potential for a structural gap between them and their closest geographic peer, to which he replied that there is still more opportunity for improvement beyond the 100-150 basis points target, but it may take some time to achieve.

The speaker discusses the company's three-year outlook and how they plan to improve productivity and margins. They also mention that the three-year outlook is not an endpoint and that they will continue to focus on continuous productivity improvement. The speaker believes that their cost structure is too high for their current revenue base and that they have addressed service, safety, and growth in the previous year.

The company has taken responsible measures to protect their franchise and shareholders, resulting in a safer and more productive network. They are focused on reducing costs and have a strong price plan in place for 2024. The service trajectory is improving and customers are satisfied with the value provided. The company expects to see better margins in 2024 due to pricing outpacing costs. The CEO has previously mentioned the potential for weaker decrementals at the trough and better incrementals on the way back up.

The company experienced good volume growth and marginal profits in the last quarter due to investments in safety, service, and growth. However, the freight environment, inflation, and tough comparisons to previous year's revenue affected their performance. They expect improvement in the next quarter as they have a more fluid network, better service recovery, and attract new business. Their strategy is to outperform during an upmarket, which they anticipate in the future.

Mark George, speaking on behalf of the Scott Group, asks about the OpEx and OR for Q1 and whether the cost structure will come down. Mark explains that there will be some seasonality impact in the first half, but they expect to see stronger incrementals and drop through in the back half as they address headwinds such as intermodal storage charges and fuel prices. Amit Mehrotra then asks about the three-year plan and whether the goal of improving margins by 100-150 basis points a year is just maintaining the gap rather than narrowing it. Alan responds that they are taking difficult actions with non-salaried workers to address the high cost structure, and that their response to problems is often to throw more resources at it.

The speaker is discussing the company's efforts to improve their financial performance and operational efficiency. They mention their commitment to industry-competitive margins and top-tier revenue growth, but acknowledge that recent incidents and a difficult truck market have made it challenging. They are now focusing on productivity and operating to their plan in order to shed resources and improve service.

The company plans to continue iterating their plan to drive out complexity, reduce costs, and improve balance. They saw growth in the fourth quarter due to improved intermodal service, and now they are shifting their focus to improving merchandise network productivity. This will result in reduced costs and increased capacity. The company expects the first half of the year to be difficult due to macro headwinds, but they have easy volume comparisons and anticipate pricing to remain above inflation. Therefore, they expect volume growth to be better than 3%.

Tom Wadewitz asked two questions during a conference call with Norfolk Southern. The first question was about train starts and whether they would come down in 2024 due to the muted volume backdrop. The second question was about the potential for Norfolk Southern to run their system better and if that would happen regardless of the freight market.

The speaker is discussing the improvements in the Norfolk freight market and how it can be viewed as both an idio improvement story and a freight cycle leverage story. They also mention initiatives to improve T&E productivity, such as running more discipline to plan and transitioning to long pool runs. They also plan to roll out predictable work scheduling for conductors.

The company is expecting to see improvements in train length and productivity as they implement predictable work scheduling and consolidation initiatives. They also plan to make investments in their merchandise and bulk channels to drive further improvements. The company's strategy is to outperform during the upcycle, with a focus on safety, service, and attractive growth. They believe they will recover from network disruptions faster and attract new business with high incremental margins.

The company is focused on improving operations and efficiency, and believes they can outperform during the upcycle. They also have unique strengths and are committed to delivering top-tier revenue and earnings growth with industry-competitive margins. They face the fastest growing segments of the U.S. economy and are poised for growth, despite being in a freight recession.

The company has made enhancements to safety and service, which will help them attract more business in the fourth quarter. The executive team is focused on driving out cost inefficiencies and increasing productivity. They recognize that there is a margin gap that needs to be closed, and they are working on it. Initiatives will continue regardless of the volume environment, and they are focused on driving train life and crew productivity. The company has always been trying to close the gap, and they are currently working on improving trip plan compliance with their customers.

Paul Duncan and Ed Elkins discuss the future of service to customers, with a focus on intermodal and merchandise. They mention improvements in intermodal service and merchandise trip plan compliance, as well as the success of train makeup rules in driving safety and resiliency. They also mention a recent comment from a large customer about their recovery after weather events, which serves as a proof point for their resilience.

In the paragraph, analysts ask about the company's projected improvement in operating ratio (OR) for 2024. The company's CFO provides details on the expected interest expense headwind and predicts improvement in the second half of the year, potentially reaching the targeted range of 100-150 basis points. However, the full year improvement will depend on other factors.

The speaker discusses the potential impacts of diversions on the port side, such as geopolitical events or the Panama Canal, and how the company is prepared to handle them. They mention that they have not yet seen any impact on their volumes, but are in communication with customers about the situation. The company's network is well positioned to handle growth, whether it comes from the East or West Coast, with a strong intermodal franchise in the East. The speaker also notes that there may be more intermodal conversion opportunities on the West Coast, but overall the company is prepared to handle volume growth from either coast. The speaker thanks the questioner for their time.

The speaker asks about the growth investment and CapEx, and the potential impact on the company's long-term margin roadmap. The company's capital guidance for 2023 is expected to be flat with 2022, with a mix of reinvesting in the business, safety and resilience, and growth. The speaker also asks about the potential offset in the margin due to ongoing investments in service. The company's strategy focuses on balancing service, productivity, and growth, with the belief that a faster network leads to cost savings. The speaker thanks the presenters and the next question is asked.

The speaker asks for clarification on the company's plans for the year, specifically in terms of increasing volume and margin. They also ask about the use of cash and whether debt reduction is part of the plan. The speaker mentions the CSR purchase and the need to fund Palestine costs, and states that there will be no debt redemptions this year. The speaker also asks about the company's long-term target for margin improvement and how they plan to exceed it.

The speaker discusses their expectations for increased volumes and improved margins in the second half of the year, with the potential for even greater improvement than initially projected. They mention cost reduction measures and productivity gains as key factors in achieving these goals. A question is asked about the potential for exceeding the projected margin improvement and the speaker expresses confidence in the company's ability to do so. The call ends with another question from a different caller.

The company has faced challenges in terms of costs and revenues, but has taken steps to improve its network and attract more business. The company is focused on reducing costs and is confident in its ability to outperform during the upcycle. There is still room for cost reduction and the company is prepared for increased revenue. There have been recent headlines about headcount actions for non-union workers.

Mark George, the executive of the company, discussed the cost program in place to reduce non-operational costs. The target is to reduce costs by 7%, which would involve laying off 300 employees. The cost relief is expected to take place in the second quarter, and the savings will depend on the mix of employees who participate in the voluntary program. The company is also looking to cut costs in other areas such as purchased services and technology expenses. Inflation in 2023 was over 4%, but it is expected to be less of a factor in 2024.

The speaker discusses the potential benefits of the CSR purchase and the impact on the company's financials, including the avoidance of potential lease rate increases. They also mention a temporary hurdle in terms of interest burden and share repurchases. The next question is about the company's plan to reach industry-competitive margins, which the speaker confirms will take several years based on their current projections.

The speaker discusses their commitment to maintaining competitive margins in the industry. They mention that if the freight market improves, they expect to outperform due to their investments in safety and service. The speaker then addresses a question about ongoing operating cost increases, specifically related to the Eastern Ohio incident. They mention that there were impacts on train make-up and additional wayside detectors installed, but they have now been ingested and are no longer causing adverse effects.

The speaker discusses the direct safety costs associated with EP and how they have not been significant. They believe that the changes made as a result of EP will ultimately lead to a safer railroad and have already resulted in a 42% reduction in mainline accidents. They acknowledge that there may be some lingering costs, but the benefits of a safer product for customers and communities outweigh them.

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