The operator introduces the Norfolk Southern Corporation's First Quarter 2024 Earnings Call and reminds participants that the call is being recorded. Luke Nichols, Senior Director of Investor Relations, then begins the call by acknowledging that certain statements made during the call may be forward-looking and subject to risks and uncertainties. He also directs listeners to the company's website for presentation slides and a reconciliation of non-GAAP measures. Norfolk Southern's President and CEO, Alan Shaw, then introduces the rest of the team and welcomes the company's new Chief Operating Officer, John Orr.

The company has hired John, a seasoned railroad industry veteran and PSR expert, to focus on productivity and operational improvement. He will be leading the effort to enhance margins and balance service, productivity, and growth with safety. Despite progress in safety and service, more work needs to be done to reach industry competitive margins. Changes have been made to accelerate progress, including the recent hiring of John. The company is committed to a significant OR improvement in the second half of the year.

In the third paragraph, the company outlines its plan to close the margin gap with its peers by delivering a sub-60% operating ratio in the next three to four years. They emphasize the importance of doing so in a safe and sustainable manner that considers all stakeholders. The company also discusses their first quarter financial results, including the impact of a class action lawsuit settlement and a reduction in non-agreement headcount. They also mention advisory costs and a favorable deferred tax adjustment.

Slide 6 focuses on the adjusted variances compared to Q1 of 2023 in the year-over-year columns. Lower revenues, driven by fuel surcharge and intermodal headwinds, resulted in a 4% decrease. Operating expenses increased by 3% due to inflation and increased workforce. Non-operating income was down due to lower gains on company-owned life insurance. This, along with lower operating income, led to a decrease in net income and EPS. Moving to the right side, the sequential variance from Q4 2023 showed a 100 to 200 basis point deterioration in our OR, in line with normal seasonality. Slide 7 shows a decrease in revenue due to fuel surcharge headwinds and lower volumes, particularly in coal and intermodal. On Slide 8, operating expenses were down 1% from Q4, with typical sequential headwinds and lower spend in purchase services, efficiency gains, and favorable fuel prices offsetting the impact of lower surcharge revenue.

In the upcoming months, the company expects to see a significant improvement in margins due to the reduction of service costs and non-agreement headcount. Despite some challenges in the coal business, they anticipate a modest increase in volume. The closure of a port will have a revenue impact of $25 to $35 million per month, but the company still expects to meet their OR guidance. They are confident in achieving a 400-450 basis points improvement in OR for the year, driven by productivity and volume growth. The commercial results for the first quarter showed a 4% increase in volume, primarily driven by intermodal. Merchandise RPU grew by 3%, setting a new record for revenue less fuel, and reaffirming the company's commitment to price and service value.

In the first quarter, revenue for the company decreased by 8% due to a decline in RPU and the impact of a network simplification decision. Coal volumes also decreased by 4%, but export strength and efforts to increase throughput at a terminal helped to partially offset this decline. Fuel surcharge revenue and intermodal storage and fees were significant headwinds, while positive mix and pricing gains in the merchandise and metals franchises helped to drive revenue. Despite manufacturing challenges, automotive volumes remained flat due to improved network fluidity.

Intermodal revenue increased due to higher volumes, but was impacted by adverse mix and capacity in the domestic truck market. The company expects continued growth opportunities and positive market conditions, particularly in merchandise markets, due to improved service, network fluidity, and project development. Intermodal volumes are expected to continue increasing due to robust international trade.

The paragraph discusses the expected impacts on Norfolk Southern's business, including mix impacts from geopolitical tensions, low truck rates, and reduced demand for premium and coal shipments. The company is working with customers to find alternate supply chain solutions and is experiencing improved safety and productivity. The new COO is focused on closing the profitability gap with competitors.

The company's strategy focuses on both operating efficiency and service excellence, using a balanced approach to drive performance and profitability. The team is provided with metrics to track their performance and has successfully removed 200 locomotives from the fleet. Improvements have been made in terminal dwell, car miles, and re-crews, and the entire train service plan is being reviewed for further optimization. A network optimization team has been established to address underperformance, and two task forces have been deployed to improve productivity and throughput at major terminals. The company is also training operations leaders to think differently and make faster decisions to eliminate waste.

The writer discusses their commitment to implementing PSR in order to improve efficiency and streamline operations at Norfolk Southern. They mention the success of Canadian railroads and their goal to achieve top-tier revenue growth and a sub-60% operating ratio. The writer also introduces John Orr, who will be leading the operations team at NS.

The CEO of Norfolk Southern expresses pride in the company's employees and their progress in executing their strategy. He thanks them for their contributions and states that the company is on a transformational journey towards a safer and more profitable railroad. The call is then opened for questions, with the first being about the Meridian Speedway concession and the company's productivity savings. The CEO clarifies that the concession does not impact Mexico and the CFO addresses the question about productivity savings, stating that it is not a significant concession and that the company is on track to reach their goal of a 60% operating ratio in the next two to three years.

The speaker is confident in the plans they have in place to achieve a 400-500 basis point improvement by the end of the year. They attribute this improvement to their focus on asset management, speed, and accuracy, as well as their ability to quickly cycle assets. The next question is from a Wolfe Research analyst who asks about the drivers of this improvement and the status of the proxy and Meridian Speedway. The speaker responds that the proxy is out of their control and the Meridian Speedway amendment was just a formality. They expect ISS to release their decision at the end of the week or early next week.

In the first quarter to second quarter walk, there will be a modest seasonal volume increase that will result in a slight increase in costs. However, there will be relief in cost lines, particularly in compensation and benefits. The company has already started to experience the unwinding of service costs and expects most of them to be gone by the end of the second quarter. The reduction of non-agreement workers will also contribute to cost savings, as well as increased efficiency in fuel and other productivity measures. The company expects to see these benefits reflected in various areas of the P&L, especially in compensation and benefits. In addition, the COO has identified $250 million in productivity over the next six months. During the Q&A session, the CEO was asked about the risks associated with the aggressive changes being implemented by the new COO and team.

The CEO of the company explains that they are still focused on their strategy of balancing service, productivity, and growth with safety. However, they have made some changes in their operations to accelerate productivity and service improvements. This was done in response to the need for faster and more efficient operations. The company has hired a new person to drive these improvements and they believe that service and productivity are complementary to each other. The new person in charge is focused on restructuring the network and improving dwell times, as well as individual car handoffs, to improve overall performance and speed of the network.

The CEO of Norfolk Southern discusses his efforts to improve the company's performance and address concerns from employees, unions, and regulators. He plans to increase efficiency and provide training and resources to employees, but acknowledges that they will be stretched in the coming years. The company has seen strong volumes this quarter, but the focus is on improving the network rather than chasing volume recovery.

The speaker discusses the capacity for growth in intermodal and merchandise trains. He emphasizes the importance of both factors in driving performance and closing the gap quickly. The speaker also mentions the strong response from customers and plans to convert more freight from the highway. The speaker then answers a question about rationalizing lanes and the potential shift in the mix of the business towards more general merchandise freight.

The speaker discusses the company's approach to their intermodal network, which involved analyzing low-density lanes and those with limited growth potential. They made tough decisions and are always looking to redeploy resources to high-growth lanes. Intermodal will continue to grow, but merchandise will also see growth as the network is improved and they focus on converting highway customers.

John F. Orr discusses how the company is improving execution and plan compliance to increase car velocity, train speed, and overall performance. They are actively looking for ways to improve and are eliminating redundant turnouts. The new PTO and sick leave regulations are a national issue, but the focus is on increasing crew and yard productivity. There is a balance between meeting commitments to labor organizations and ensuring that employees are dressed and ready to work each day.

John Orr, a new member of Norfolk's team, explains the reason for focusing on hump yards and the challenges they present. He discusses the changes he has implemented to improve efficiency and mentions plans for a redefined yard operating plan. When asked about his impressions of Norfolk as an outsider versus an insider, Orr talks about his first visit to East Palestine and the importance of understanding the issues within the network.

The speaker, who has been a railroader for over 40 years, discusses his experience as an incident commander at derailments and his initial bias towards yards in a merchandise environment. He was pleasantly surprised by the richness of the terminals but also realized that this was where a lot of underperformance was happening. He set up a task force to drive performance through data and balance it with field checks. As an outsider, he had biases, but as an insider, he was able to identify big and small issues that needed to be addressed to create momentum. He has a career of unclogging drains and creating sustained improvements in service plans and operators, which he is currently seeing in his current role.

The speaker, John, believes that the architecture of NS is strong and the key is proper execution. He has experience in the East and understands the complexity of the network. He believes that NS has a talented team and resources to deliver impressive results, but they need to focus on execution. The next question asks about customer response to the changes and the speaker, Ed, explains that customers are encouraged by the velocity of change and improved service in the first quarter.

The CEO and other executives of Norfolk Southern are confident in their ability to continue delivering exceptional intermodal service for their customers. They believe that this level of service will ultimately lead customers to choose Norfolk Southern over other alternatives. Customers have already expressed support for the company's approach and have seen the positive impact of new leadership on service and productivity. The company is also actively engaging with customers and other stakeholders to ensure understanding and collaboration in their efforts to improve service.

Shaw explains that their strategy for transforming Norfolk Southern into a more profitable organization involves bringing along customers, employees, regulators, and shareholders. The next question from a Goldman Sachs representative asks about the company's plans for the next six months and 12-24 months, and how confident they are in achieving their margin expectations. John F. Orr, a change agent and architect of PSR, states that he doesn't spend time looking at the past and is focused on closing the gap and improving operations through asset management, reducing cycle times and dwell times, and increasing productivity. He also mentions the importance of creating resiliency and elasticity for network response.

The company is making smart investments and leveraging them to increase productivity. They are focusing on all aspects of operations and are confident in achieving their targets in a sustainable manner. Despite making substantial changes, there has been no customer disruption, which is a positive sign. The reduction of locomotives and lane closures may have initially caused concern, but customer feedback has been positive.

The speaker, Alan H. Shaw, is discussing the company's strategy of implementing PSR in a responsible and sustainable manner. He mentions their focus on safety and creating a sustainable plan for Norfolk Southern. John F. Orr, the COO, adds that they are taking a balanced approach and using an aggressive and disciplined approach to manage operations. They are also focusing on safety and compliance, and challenging every asset and standard to improve yard time and dwell.

The company is focused on improving its service levels and reducing costs. This will benefit customers by getting their cars to them faster and reducing disruptions. The company has already seen improvements in its locomotive and service levels, which has been positively received by customers. The new CEO, John, has been at the company for a month.

Mark R. George discusses the potential root causes of the problems at Norfolk and how they plan to address them, including taking 200 locomotives out of service and potentially reducing headcount by 2%. John F. Orr adds that as they improve productivity and accuracy, they can bring more people on board and freeze hiring in operations, with the exception of specialized positions. They both emphasize the need to focus on basic principles to improve performance.

The speaker is not going to criticize what they inherited, but they have been able to use certain things quickly. They believe that the key to success is providing great service at a low cost and with safety, and they have laid out a plan to improve these aspects. The call has ended and the audience is encouraged to reach out to Investor Relations for any further questions.

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