The paragraph is an introduction to the Norfolk Southern Third Quarter 2024 Earnings Conference Call. The operator informs that the call is in listen-only mode until the Q&A session later. Luke Nichols begins the call, mentioning that forward-looking statements will be made, which come with risks and uncertainties as outlined in their SEC filings. Presentation slides and non-GAAP measures are available for reference. Mark George, the President and CEO, introduces himself and his executive team, including the recently appointed CFO, Jason Zampi.

In recent weeks, Norfolk Southern has successfully engaged with stakeholders and leveraged its skilled workforce to recover swiftly from Hurricane Helene, achieving impressive third-quarter results. The company's strong performance, including a 3% increase in revenue and a 23% rise in adjusted earnings per share compared to the previous year, is attributed to the dedication of its employees amid challenging conditions. The operational team has driven significant improvements, managing weather challenges and port disruptions while enhancing network efficiency and productivity. With a focus on resilience and excellence, Norfolk Southern has reduced its operating ratio and closed the margin gap with competitors. The company also saw accelerated volumes, with further details to be provided on market drivers and outlook.

In the third quarter, John Orr highlighted the company's operational progress, focusing on safety as a foundational value. Despite an increase in the FRA personal injury rate, serious injuries and total accidents have significantly decreased. The company is investing in its workforce through the new Thoroughbred Academy, with 300 leaders completing its curriculum and 2,300 more employees set to engage in safety training. Service performance improvements are evident, with a 13% increase in car velocity and reduced terminal dwell, driven by enhanced train speed and schedule efficiency. These productivity gains are supporting cost reductions and fostering a competitive growth platform.

The paragraph outlines the company's significant operational improvements and cost reductions year-to-date, including reduced crew starts, overtime, and incentives, alongside enhanced intermodal terminal processes. Locomotive productivity is up, leading to a smaller fleet and capital savings, with over 500 locomotives stored and 8,000 cars offline since March. A new energy management program has increased fuel efficiency, and ongoing initiatives aim to further close competitive gaps and meet cost commitments. Additionally, the company commends its engineering teams for their effective response to Hurricanes Helene and Milton, demonstrating robust crisis management by clearing debris, managing power outages, and performing life-saving rescues.

The paragraph emphasizes the company's resilience and ability to recover from natural disasters, which is credited to an inspired and committed team. By integrating external talent with existing leaders, the company is fostering a strong culture and enhancing management. New labor agreements are facilitating innovation across the workforce, setting a new baseline and standards for service quality. As a field-centric team, they aim to build a safer, more efficient, and resilient operation. In Q3, the company saw 3% revenue growth and a 7% increase in volume compared to the prior year, despite a 4% drop in RPU due to various factors. Growth was driven by the merchandise segment, particularly in grain and chemicals, supported by reliable service, with merchandise RPU less fuel growing in 37 of the last 38 quarters. Ed Elkins highlights these achievements, demonstrating a focus on continuous improvement in the company's merchandise business.

The paragraph outlines the financial impact of Hurricane Helene on the merchandise business in the southeast, noting expected recovery as customer operations normalize. Intermodal revenue grew 4% despite a 5% decline in revenue per unit (RPU), influenced by stagnant truck prices and unfavorable mix trends. The ILA strike affected international volumes, but recovery is expected. Coal revenue declined 2% due to declining export prices, unfavorable portfolio mix, and reduced demand from low natural gas prices and high coal stockpiles. The overall market outlook is for tempered growth, with the largest revenue challenge being the normalization of fuel prices from 2022 highs. The merchandise business is expected to grow slowly, supported by easing interest rates and infrastructure projects, but faces challenges in the automotive and metals sectors. Intermodal demand is anticipated to remain strong due to reliable service, new bids, and import-export demand, despite recent disruptions.

The paragraph discusses the company's response to various business challenges and recent financial activities. They are ready to manage delayed international shipments and aid areas affected by Hurricane Helene. There are mixed trends in coal markets, with declining met coal prices but positive momentum in thermal exports. Financially, Jason Zampi highlights insurance recoveries from the Eastern Ohio incident totaling over $650 million, gains of $380 million from two significant line sales, and restructuring costs of $60 million related to IT projects and discontinuance of certain assets. Adjusted operating ratio for the quarter was 63.4, and earnings per share were $3.25.

The paragraph highlights significant improvements in the company's financial and operational performance. Since the first quarter, there has been a 650 basis point improvement in the adjusted operating ratio (OR). Year-over-year, revenue increased by $80 million due to strong volume growth, despite pressures on revenue per unit (RPU). Operating expenses decreased by $118 million due to lower fuel prices and improved productivity, resulting in a 570 basis point OR improvement. Sequentially, revenue remained flat, but expenses decreased by $47 million, leading to a 170 basis point OR improvement. The text attributes these gains to increased coal and intermodal volumes, record fuel efficiency, strong labor productivity, and reduced rents, despite some pricing pressures and wage inflation. Overall, the paragraph claims that these efforts position the company well to meet their targets for the second half and full year.

The paragraph discusses the company's expectations and performance in the face of challenges. They anticipate improvement in operating ratio (OR) in the fourth quarter despite seasonal headwinds and costs from Hurricane Helene. They remain optimistic about enhancing margins to create shareholder value, partially aided by $400 million from line sales and plans to reduce capital expenditure by 2025 for balance sheet improvement. Mark George highlights successful safety improvements, productivity gains, operational resilience in the face of weather disruptions, and line sales contributing to financial recovery. They achieved strong third-quarter financial results amidst volume pressure and are on track for their OR commitments, albeit slightly below full-year revenue guidance. The floor is then opened for questions.

The paragraph discusses the progress and strategies of a company as it moves into the fourth quarter, specifically focusing on cost control and operations. Mark George expresses confidence in managing controllable factors despite concerns about the auto and steel markets, which are unfolding as anticipated. The company expects strong performance in intermodal transport despite potential port disruptions. John Orr highlights improvements in safety and operational efficiency at the end of Q3, noting enhancements in terminal operations by reducing complexity and increasing capabilities, contributing to positive momentum going into the fourth quarter.

The paragraph discusses the company's efforts to renegotiate vendor agreements and improve resource utilization, which are leading to cost savings and new sales opportunities. Ed Elkins mentions expected growth in the intermodal product due to strong demand, while acknowledging challenges in the premium market and coal export prices. There are concerns about stockpile builds affecting domestic coal. The company remains optimistic about capturing opportunities despite these challenges. Additionally, they expect to achieve a 64% to 65% operating ratio for the second half of the year, with some sequential increase anticipated in the fourth quarter.

In the paragraph, the speaker highlights several factors affecting their business outlook. They acknowledge that the significant fuel recoveries seen this quarter are unlikely to recur in the fourth quarter and expect more typical seasonality, resulting in about a 100 basis point headwind due to revenue challenges. Additionally, they mention the unpredictable nature of land sales, noting $20 million sold in the second and third quarters, which may not continue and create a headwind. Moreover, they face roughly $20 million in expenses related to hurricane cleanup. Despite these challenges, they remain confident in their second-half guidance due to strong operational performance and productivity improvements. In response to a question from Brian Ossenbeck at JPMorgan, Mark George affirms a strategic focus on capital intensity, aligning with plans for reduced capital spending and share buybacks.

The paragraph discusses a company's strategic shift in capital allocation, driven by taking over 500 locomotives offline. This move allows for capital redeployment and project reevaluation, focusing on high-return projects. Capital expenditure (CapEx) is expected to decrease next year. The company plans to use line sales and cash build-up for modest share repurchases. Jason Zampi adds that delaying capital commitments to locomotives enables resource optimization, targeting valuable investments like B3 for warrior coal and other initiatives. The IT projects and operational expenditures are being scrutinized for efficiency. Mark George thanks and moves to the next question from Ken Hoexter of Bank of America, who congratulates Mark and Jason on their new roles and inquires about a 1.5% carload volume decrease, expecting a recovery.

The paragraph discusses the outlook on coal pricing and volume recovery after disruptions like a port strike. Ed Elkins expects coal prices to gradually decrease but not significantly in double digits. He expresses confidence in recovering volumes, especially after disruptions and mentions having the capacity to handle shifting import flows between the West and East Coasts. There have been opportunistic spot moves in the current quarter and efforts to create agile capacity for quick response to market changes. Following Elkins, Mark George invites the next question, which comes from Scott Group of Wolfe Research, who inquires about strong labor productivity, mentioning a 7% volume increase and a 3% decrease in headcount.

In the paragraph, John Orr discusses the ongoing improvements in labor productivity within the organization, emphasizing the adoption of a disciplined approach to operations. He highlights the positive impact of leadership and teamwork, noting their collaborative engagement with labor stakeholders. Orr mentions significant interaction with labor leaders to address concerns and align on railroading philosophies, emphasizing the organization's commitment to change and productivity enhancements. Overall, he underscores the challenging yet essential nature of railroading, which demands continual adaptation and collaboration.

The paragraph discusses the company's approach to handling potential economic challenges in 2025, focusing on cost reduction as a primary strategy. Tom Wadewitz from UBS questions Jason and John about their expectations for 2025, considering stagnant or worsening industrial markets like automotive and metals. Mark George responds by outlining the company's commitment to cost control, with a specific plan to cut $250 million in costs this year and an additional $150 million next year, with the potential to accelerate some cost reductions from 2026 into 2025. This approach aims to improve margins regardless of economic conditions.

The paragraph expresses strong confidence in the team's ability to navigate economic challenges by capitalizing on opportunities to regain market share, even in a softer market. John Orr emphasizes the power of the team and their strategy, inspired by past experiences with Hunter Camp, focusing on continuous improvement through small wins by a committed team. The organization is investing in its people, educating them on PSR 2.01, promoting a culture of change, and enabling them to apply learnings to achieve organic improvements. They are also refining their strategy to optimize asset use and unlock network value, demonstrating this with examples like the Chattanooga and Conway terminals.

The paragraph discusses improvements in the logistics and operations of moving cars from Detroit directly to Elkhart, eliminating intermediate stops and reducing resource needs. These ideas stem from field insights and indicate ongoing organizational change. Mark George mentions that initial targets were modest, but specific actions have surpassed expectations, contributing to a promising 2025 outlook. Ed Elkins emphasizes proactive efforts to build reliable service and a unique customer value proposition through technology and process changes. They anticipate positive customer feedback.

In the paragraph, Brandon Oglenski from Barclays asks Norfolk's Mark George about potential organizational changes at the company and their guidance for operational ratio improvements by 2025. George affirms their commitment to improving operational efficiency by 100 to 150 basis points annually, with potential for further improvements if top-line growth recovers. He emphasizes that Norfolk's strategy is sound and focused on execution, with a competent team working on creating network fluidity to enhance service and growth. Recent improvements and growth opportunities are noted as evidence of this strategy's effectiveness.

The paragraph discusses the importance of productivity as a key component of the strategy, highlighting significant improvements in operational efficiency and the focus on execution. The speaker emphasizes the adoption of an operational excellence mindset, drawing from industrial experience, and the need for standardized processes like Six Sigma or ACE. They stress the importance of root cause analysis and process improvement through a cycle of continuous learning and mistake-proofing. The concept of "war rooms" for tackling issues is highlighted as part of the cultural shift towards operational excellence. Additionally, the speaker aims to enhance the safety culture and promote effective two-way communication within the organization.

The paragraph discusses the importance of fostering two-way communication within a railroad company, where information flows not only from the top down but also from the ground up. The best ideas often come from those involved in daily operations, whether in marketing, operations, or other areas. The company aims to create an environment where people feel comfortable sharing ideas and concerns, to improve overall operations and effectiveness. Additionally, Ed and another leader are focusing on enhancing collaboration with the customer base to better serve them and capture more market share. The paragraph then transitions to a new question from Jonathan Chappell of Evercore, asking Ed about the market outlook and specific areas where they are seeing success despite broader economic challenges. Kathleen Quirk responds by highlighting success in agricultural markets.

In the third quarter, the company was able to capitalize on market dislocations and spot opportunities, primarily in the agricultural sector, including soybeans, corn, and grain, which helped offset weaknesses in other industrial markets like the automotive sector. The company's enhanced operational agility, partly due to improvements in the intermodal reservation system, allowed them to absorb growth and achieve spot wins that were not possible in previous quarters. This system enables better planning and decision-making, leading to increased efficiency and reliability, with customer feedback suggesting it will continue to be beneficial. Jason Zampi also supports this view.

The paragraph discusses a company's early experiences with a reservation system and its expected benefits, such as improved discipline in terminal operations and the potential to extend train lengths, thereby enhancing network efficiency and business growth at low costs. The conversation shifts to labor agreements, where Jeff Kauffman from Vertical Research Partners asks John about the importance of these agreements in meeting targets. Jason Zampi responds, emphasizing the significance of providing clarity on payment structures and work schedules to ensure workforce confidence and predictability.

The paragraph discusses the company's efforts to enhance its network's efficiency and service quality. It emphasizes the importance of pricing and predictability, aligning with the goals of PSR 2.0, which focuses on disciplined service and safety. The discretionary effort from employees is highlighted as crucial for optimizing network value and building a cohesive, inclusive team of 20,000 people. Leadership and skill development are seen as key to improving the product and unlocking further potential. Overall, these efforts create a "win-win" situation. This leads into the next topic, where Jordan Alliger from Goldman Sachs inquires about network resiliency and the company's strategy to maintain smooth operations and increase market share.

The paragraph discusses the focus on improving network health, asset efficiencies, and customer-facing metrics to enhance operational discipline and optimization, particularly in the reservation system. Improvements in these areas will provide an advantage as the market recovers and truck availability tightens, allowing for better pricing leverage. Mark George praises the efforts in decongesting terminals and networks, mentioning that laying down 500 locomotives and over 8,000 cars since Q1 has increased network fluidity. A year ago, similar storms would have caused prolonged setbacks, but now recovery is faster, achieving record network speeds and capacities. He refutes the idea that resiliency retains costs, stating costs have been reduced while achieving resiliency. The paragraph concludes with George appreciating the question and the next question being called by the operator.

The paragraph is a discussion between Ed Elkins and Mark George about pricing strategies and inflation in the context of the company's services and the broader market, especially looking forward to 2025. Ed Elkins expresses confidence in the company's ability to outpace inflation in major markets, although he acknowledges that commodity prices like seaborne coal may pose challenges. Mark George elaborates on how pricing is complex and linked to various factors, notably the impact of spot truck pricing on the intermodal sector and commodity market indices. Despite potential headwinds, both express optimism about the company’s model and service value, particularly in the merchandise sector. The operator then introduces a follow-up question from David Vernon about the U.S.'s role in the seaborne met market amidst price corrections.

The paragraph is a discussion in a Q&A format during a conference call. Ed Elkins addresses concerns about potential price headwinds and aggregate demand on export markets for 2025, stating that the U.S. remains competitive, especially in export thermals. He notes geopolitical uncertainty affecting commodity and energy prices but assures readiness to meet customer demands globally. Ben Nolan from Stifel asks about the intermodal market, specifically the premium segment, given the challenges in the trucking market. Elkins responds that there are still challenges but slight improvements are seen, with truck utilization nearing the 10-year average and a decline in the total number of motor carriers.

The paragraph discusses feedback from key partners like J.B. Hunt and Hub Group, indicating that pricing is likely to change soon, with the current situation being at or near the bottom. The speaker, Mark George, expresses some confidence in this assessment, despite uncertainties in the premium segment. The focus is on delivering the right product for each market segment. The conversation concludes with Mark George thanking the participants and looking forward to future discussions.

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