Morning, everyone. I'm Scott Group, transport analyst here at Wolfe Research. Welcome to day two of our Global Transport and Industrials Conference. It was a great day yesterday. Good to see a really busy room yesterday. Hopefully, we have another busy room today. I'm gonna ask you, I think we got, like, one or maybe two questions from the audience yesterday. I am on stage almost eight hours straight, so I will need a little help today. So, please don't be shy if you have questions. My questions can't all be that good. There must be some questions I'm missing. So please ask some. You know, I got asked a lot yesterday about just, you know, what did we hear that was so bad? Obviously, the stocks were under some pressure.
I don't know that we heard anything incrementally negative from really anybody, right? I just think it's, you know, we're in a, you know, more of the same kind of environment. It's been a tough, elongated, you know, you know, freight downturn, and I'm just not sure we're hearing anyone saying that things are getting a whole lot better. But, you know, I think we've got... Today, I think the agenda, we've got a lot of, we're gonna conclude with, we've got a bunch of the rails. We've got our rail regulatory panel. I think we have some really good panels today. We have our public truckload Co panel with Schneider and Werner, Co's on a panel together. We have our shipper panel.
We have our truck brokerage panel with Robinson, Echo, Landstar, RXO, all on a panel together. That's pretty rare that we do that. And then some other really good content. So we're gonna be kicking off right now with Norfolk Southern. John Orr, now almost a two-month veteran COO of the company, and I'm gonna pass it to John. I'm gonna come sit with you, John. I'll pass it to you for some opening comments, and then we'll get into questions. I think John has some slides. Those are up, so thank you, John, for being here.
Thank you, Scott. What a great day to be in New York and just checking in with the field this morning, and it's a great day to be railroading. The team is really engaged and really focused on getting down to the business of closing the gap to our peers and increasing our service performance and capabilities. So just to do a little housekeeping, everything I talk about is forward-looking. The full details of the disclosures, normal disclosures are available on our website, as are the 2 slides I'm gonna just refer to, just put some context to what we've been up to and where we're going. And over the last 60 days, you're right, it's been a couple of months since I've been at NS.
It's been a very exciting time, and it's been a time where we've had ambiguity, and now we have clarity. And so I'm sure we'll talk about some of that today, but within that space, the team has been busy. It hasn't distracted from the mission, and the mission is to increase service capabilities, really, hone down on what resources we need to dedicate to our our service proposition, align that with our commercial and, stakeholder commitments and really drive performance. And I've looked at some of the key measures that give me leading indicators where we're making headway on those items. And, like, it's a journey, and it's always going to be a work in progress, but there are gonna be milestones that I look at to make sure we're on track.
And then to turn up the heat on the team or to, you know, take time to celebrate and then move on to the next thing and pivot to a higher level of standard. Some of those things that, as we define KPIs and, constrain some of the access to resources in the field, give discipline to how we use them. And our locomotives, our car cycles, some of the—those yields that I'll talk about, are important elements to closing the performance gap financially, at the same time delivering exemplary service levels to restore the confidence of the shippers and to really attack some of the, opportunities in IP and merchandise to bring back and repatriate to NS or to compete head-on with other modes of transportation.
Over the next six months, we've committed to taking out significant cost and align our cost structure with our service proposition, and a lot of those, you know, first crank savings, first crank improvements on visibility and accountability are in flight. As I move through the next six months and even the next twelve months, I'm very confident that as we move towards the latter part of the year, we'll see the commitment of 400-450 basis points take out on our cost structure and will come into play.
While these are, these are important things, you know, making use of the network upstream and downstream blocking, making sure our terminals are performing at the levels they need to, particularly as it applies to merchandise, and, and then really getting into optimization of our lanes and the yields that we'll expect to see. You know, some of the metrics I talked about at our earnings call, on our earnings call really are threefold. We talk about network health, how we use assets, and how the customer sees what we're doing. And those are three important elements where it's not a singular focus on one particular stream, although emphasis could be added in particular contexts, depending on the conditions.
And it gives us the ability to flex up and flex down around that kind of purpose-driven leadership and outputs to our shareholders and people who should be able to see this level of visibility. Of course, there are just six measures. There's hundreds of things that go underneath that to cross-check and check and balance and validate. And those are the—these are sort of the six things that I decided to talk about in order to put context to how we're doing, how we're working on the network, how we're managing our assets, and how our customers are seeing it... and I look forward to the discussions. I hope that gave you enough time to have a break, Scott, so you're not on for a complete eight hours.
But the five minutes will give you a little bit of rest.
That, that's perfect. Thank you, John. So I'll start with questions. If you have any, raise your hand, we'll make sure to get you involved. So maybe just, John, let's just start at a very high level, right? You've been here now for two months, sort of. What's the just big picture diagnosis of maybe what was missing at Norfolk, and what are you, you know... You know, we see the network updates of what's, you know, what's happening, but how are we changing this? What are we actually doing to accomplish some of these changes?
Yeah. Scott, that's a great question, and it's a question I asked myself the minute I walked into the door the first time: How do I look at this? Because it is a great network, it's a big network, and it's arguably or unarguably underperforming. And where are the big buckets of underperformance, and what are the rocks that are in play that we can move in order to free up the capability of the network and the team within the network? So two elements. First and foremost, the physical execution of our service plan, and then the capability of leaders to drive performance, hold accountability, and have enough perspective to adjust and continuously adjust the service plan to fine-tune to the current need.
One of the first things I did was, after kind of diving into the data sets, was to realize that our merchandise business was the biggest opportunity for improvement. It was a true case for change. You couldn't argue it was underperforming. In fact, it was underperforming to the extent that we were disproportionately expensive as far as organizational cost, but also from a reputation and a growth perspective, it was a big drag. And one of the things that I wanted to look at in context to what that meant to the network, and then go down, zoom in and zoom down, right down to the terminal level to figure out, where can we make the most impact?
How can we then make changes, replicate it, go to scale across the entirety of the network from a terminal perspective, and then pull it back up on a macro to redesign the network around the improvements and the new standards? So I would say, in simplest forms, merchandise was dragging, the terminals were underperforming, and the accountability and visibility to make the changes were lagging. And putting those kind of conditions, resetting them, resetting expectations, providing organizational support and impetus for change around those things, and then really driving that, and that's helped establish some of the improvements that we've seen so far.
So when we say merchandise underperforming, terminals underperforming, what are we doing to sort of change that? What are the metrics to specifically... I mean, we could look at terminal dwell time. Is that ultimately the metric that we're focused on, or are there other sort of KPIs that you wanna, that you're looking at every day?
Yeah, there's checks and crosschecks.
Yeah.
So from a terminal, our commitment to customers is run a plan, that all is all predicated with on-time performance. So on-time performance for train departures and how the trains arrive at destination are two important bookends. Within that, terminal dwell helps us understand, okay, it's one thing to say we're gonna run everything on time, but if we're gonna run everything on time and not connect the traffic that needs to connect that day, then we're underusing our assets.
And so on-time performance, dwell, connections, cars, car miles per day, and GTMs per available horsepower tell you that on-time performance, if the other things are lining up and improving, tells you that on-time performance is not only the discipline of running to the plan, but the mechanisms and the churn of delivering within the terminals is working because all of those other things are in line. If you didn't, then you could say, "Okay, we're not connecting enough traffic. We're not processing. So are we not flat switching or humping enough cars? Why not? Is it mechanical? Is it engineering? And how do we coordinate that?" And we've had to ask those questions at every terminal, and not every terminal had the same answer or the same bogey, so to speak. And so we, we've, we've...
Having the war rooms and the task force create the playbook and the standards takes all of these things, unifies our objectives, unifies our standards and commitments, and obligations within the terminals, and now we've got more energy around all of the right things in place. And it also helps us train people and develop the skills necessary to really read the data, respond to it, and then have that playbook executed.
We were talking last night about the redesign of the network in the south and the north. Maybe just-
Yeah
... give an update there.
So the network is, from my perspective, is our terminals connected by over-the-road lanes. So it's the sum of the whole of terminals and first mile, last mile. One of the things that after we got into our terminal management and really focused in on our two major- two of the major hump yards, we're able then to pull back and look at how do they work together? How do the networks and nodes coordinate traffic? Well, after fixing the terminals and improving the terminal clocks on the flows in and out of the terminals, we're able then to put more context around a north-south orientation. So we've redesigned the train service plan for the south of the network. We did that three weeks ago. We're running it, a reinvigorated plan.
On the north next week, end of May, we are introducing the next phase, so the northern part of it. And we want to give time for the balance to take hold, to see how the, you know, the network responded to the changes. And it's working. I mean, the north is running very well right now. It's probably the strongest it's ever ran in the last 5-10 years, which is significant because that's the main corridor, and especially in light of East Palestine and some of the drags that were, you know, really centric up in the north. And in the south, there's a lot of merchandise, a lot of growth opportunity, so getting those right, right-sized and calibrated is important. So, it's not our last change.
We'll be continuing to move the dials, and the next crank of the improvement wheel is really about standards and tightening down the standards and making that new plan more difficult to deliver and more constrained on assets and how we see the customers so that we can continuously improve and challenge the team.
So you do the network redesign in the south three weeks ago. What I know is there a metric or two, let's say, here's where we were three weeks ago, and here's where we are today, and so here's the proof point that the network redesign is working?
Yeah, I think they're really in line with what we're saying, and we're keeping it simple by using these six types of data points. And speed, network speed is an important component of it, as much as the car miles per day, and while they seem the same, they're not really the same. But it also... You know, we also have had some really, really difficult weather and, you know, horrific weather in Texas and in the south of our network. And what I've been really, really happy to see, 'cause I'm into it every day, is we can go deeper into the problems without being impacted and faster exiting the problems.
So that tells me not only is the plan robust enough to service the customers, but the team is readily engaged and understands it has to be managed. It's. You cannot set and forget a plan.
So when I look at this slide, I wanna spend a couple minutes here, right? You know, the second quarter metrics are, they're all through, I guess, your earnings call-
Yeah
... April, twenty-first. Like, when you guys actually report Q2, do you think that ultimately these Q2 numbers are they— are we making incremental progress as Q2 is progressing? Or as we're implementing some of the changes, I don't know, are we taking any step backs? I don't know. Any-
Mm.
How should we think about that?
You can tell your experience because-
Yeah
... you know it's not linear, right?
Yep.
There's gonna be ebbs and flows, and our objective is to lop the tops of the sine waves off the bottom and the top and create as much stability as possible within a dynamic environment. But I would tell you this: the asset efficiency is tracking on a linear path and really improving. So car miles per day and available GTMs for horsepower are really significant and tracking absolutely in the right direction. Our intermodal composite, we're peeling back the, you know... To overperform, we're peeling it back a little bit so that we can balance merchandise. And while we're doing that, it's outperforming itself.
So we've had some of the best intermodal composite performance over the last 2, 3 months, well, 2 months, that we've seen in almost a decade, and that's pulling back some of the behavior over the road and creating more balance for our merchandise, more prioritization of our merchandise. But that's only made possible by terminal engagement and making sure that first mile and last mile are absolutely efficient and giving up a little bit in the middle so that we can benefit the overall network. So I would say those things are there. Terminal dwell, you know, as we work through the master plan and the playbooks, that's gonna vary, and it's really conditioned on the cycles.
But I would say I'm really impressed by what we're doing so far.
Six months from now, right, where do you think... You know, if we wanna gauge success here, right, where do you think each of these metrics, where should they be? Where do they need to be for you guys to be hitting some of the cost and productivity targets that you're laying out for us?
Yeah, I guess I'd look at asset efficiency, right? Because that tells you you're going fast, but you're doing something with that speed. And so the car miles per day would as it increases, and we talked about, you know, modest double-digit improvement on that. I would say I'll be looking at the team with a smile on my face as we hit 115 on car miles per day, and then I'll take the smile off and say, "Now we're going higher," right? Now we're going to 120 or 125. And how do we get there together? What do we need to do?
And that's, that's a function of curtailing the number of cars that are on the network, as well as making them work very effectively while they're there. And there's, there's just a couple of lines of thought on that. Our, our GTMs for the available horsepower, that's an important measure for me. That, locomotives are an important asset, and they're expensive to maintain. The double-click benefit of this right now is that we've been able to pull out underperforming locomotives, either from a reliability or fuel consumption. So as we pull these out and put a more favorable mix, gives the locomotive team more time to really get into the reliability index on the stuff we're pulling out, and it allows us then to really recondition our view on capital.
So in the next six months or a year, all of these come into play, but that asset efficiency is something I'm gonna be dialed into completely.
And by the way, guys, there's some seats over on the side if you, if you need it. Okay, so the car miles per day, we said we want to get to 115. The GTMs per horsepower, any, where else, any of the other metric, KPIs in terms of where we want to get those?
Well, our merchandise trip plan, I mean, that's a subset of on-time delivery and on-time departure.
Okay
... and the health of how our throughput at the terminals. And so I would think that, as we improve our merchandise delivery, whether it's viewed through compliance on trip plans or on-time arrivals, that's going to give us the benefit not only of cost reduction and waste reduction, but also now the case for change for our shippers to come back or to choose rail instead of a truck or whatever mode they're using.
You talked in the sort of, I think the slide earlier, crew starts down 35 per day.
Mm-hmm.
What's the base of that? I just wanna, you know, just understand how much improvement that is, and is there more to go in terms of reductions in crew starts?
Yeah, I would talk more in terms of more to go. And there are... It depends how you look at it. From a crew start, where the crew start is because of a recrew, that is a very wasteful use of a crew. Not only are you spending an additional crew where you hadn't planned it, and so we're drilling down on any train that has a stop that's not by design, whether it's by service, by failure, or by our wayside detection, and really getting into the what, the why, and the how. And we're finding gleaning a lot of information that's giving us more capability at our terminals.
But that are starts for our yards, our starts for our local switchers, we're taking a very hard look at that, because we don't want to impact the service component, and we don't want to pull the rug out from underneath some of the customers who are in a rotation. But we also want to work with them to right-size the level of service and the frequency of service based on their needs, rather than what historically we may or may not have done. So I would say that is one of the ones that'll probably be in the century club here as we move through the second into the third quarter, where we've got better than 100 takeouts, and we'll continue to do that.
But that's something you want to be very smart about, thoughtful about how you do it.
So, just so I understand, to date, reduction of about 35 crew starts per day, you're saying that could get to 100 crew starts per day in terms of reduction?
Yeah.
Did I hear that right?
Yeah.
Okay.
Yeah.
And so, you know, when we think about past, you know, PSR implementations, if that's what you want to call this, one of the big things that people think about is headcount.
Mm-hmm.
When I hear crew start reductions, you know, you know, again, headcount, like, help us think about what 100, you know, reduction of 100 crew starts per day, what does that mean from a headcount perspective, or if it makes more sense more broadly from a labor cost perspective?
Yeah. I would think labor cost perspective is how I'm viewing it.
Okay.
Because as I've said throughout this whole, this whole last six weeks, is that this is not a headcount reduction exercise. NS has had, to various degrees, the implementation of PSR for the last 3 or 4 years. The issue is really how do we create accountability around how do we use people? How are they adding value and contributing to the top end of our growth of our company and the course correction that we need to do to close the gap on our financials? And so it's the discipline around how we use people, the visibility to that, and driving down those decisions to where people actually understand the financial implications to the decisions they make on people. And you know, cost takeout, crew starts takeout, they all have an end decision point.
When we get to a point where we may be long on crews in a particular area because of either the growth didn't develop or the discipline is such that we've got surplus, you know, there are a lot of ways that we can manage that. You know, attrition can outpace or has historically outpaced the number of takeouts that we're doing right now, and even I think changing how we train people. Training forward to have qualified locomotive engineers during the lull, so as we pick back up, we've got trained people available to go to work.
Even working with the unions, I mean, it is not lost on me the importance of having this commitment with our labor organizations that we're gonna treat people respectfully, we're going to value their contributions, and we're going to hold them accountable to perform the way... you know, show up when they're supposed to, work safely, use common sense, and go home safely. That's the value proposition that I've asked them to give me in return.
We've committed that we're not gonna furlough, but there are a lot of historic elements within CBAs that we could work with the unions to be able to move people around in an environment where we may be long and put them to work in other places temporarily or make whatever arrangements we can make. I think there's a lot of value in having that stakeholder engagement to and partnership attitude towards labor and management.
So you guys have previously said by the end of the year, headcount would be down about 2%, I guess, including attrition. Any change to that? Does that-
No, our headcount projection is really truly based on attrition. There's gonna be no need to put anything in place to hold people longer than they wanted to stay. And I'm really comfortable with what we've talked about as far as headcount and as far as people count. And if anything, that discipline around our people spend and eliminating the punitive elements of payroll, like recrews, overtime, held away, those sorts of things, I think we'll make a lot of headway on those.
And then what about hump yards?
What about them?
Well, I mean, again, maybe this is a dated question as we've... You know, in some prior, you know, again, PSR implementations that we've seen reductions, changes in hump yards as-
Yeah.
Um-
Yeah.
Is that part of this?
Everything's part of it. Everything's on the table, and I, I'll share with you, and I, I've talked to you about this before. When I was at CN in Toronto, and Hunter asked me to go to Western Canada, he asked me to think about the hump yard in Edmonton. It was an older hump yard. It was what I characterize as Commodore 64 technology that wasn't supported, and the hump was not built for the modern era. Over the course of 6-8 months while I was there, right-sizing the operation, much like I'm doing right now, I looked at the satellite yards, I looked at the value proposition of the hump yard, and times had changed.
We were now a bulk, you know, unit train environment, Western Canada. Less pins to pull to sort trains, and so we were able to work very very hand in glove with commercial and with service design and push out a lot of that work to satellite yards and repurpose the hump yard into a flat and grain center. And so that's one of the only hump yards. It is the only hump yard that Hunter closed, that stayed closed. It's closed today, and that's really important how we view assets, how we rationalize assets or use them appropriately. So Scott, if it makes more sense to pull volume into the hump yards, 'cause they're very modern at NS.
They're very great work centers, but hump yards are costly. So if you're getting volume and the right mix and the right value proposition for upstream or downstream cost savings, then it makes sense to have them, and that's all in play right now. And as I see it right now, I wanna make those hump yards as effective as some of the best hump yards that I've worked at, and then really as you know evaluate from a the best-in-class, do we still need it? That's where I wanna get to.
Okay. I wanna try and just, as we have, like, five or so minutes left, put some numbers around this. So you guys talked about on prior guides, right?
Mm-hmm.
$250 million of cost reduction, first six months. Are we on track? Not on track?
Yeah, I'm really pleased on how we're tracking on our cost takeout. You know, comp and ben, some of the things we talked about on people, on crew starts, on the punitive aspect of wages are really tracking well. Our fuel that we talked about with our GTM's available horsepower being more selective on the locomotives we use, and putting our better performers in, while we then can spend the time to properly respond to the unreliable elements of our fleet really start to create a lot of savings, and that really drives then to purchase services and some of the ongoing consumable costs that we're pulling out. So yeah, we're on track. I'm really pleased with how we're tracking right now.
And then, you know, one more, you guys did a 70% operating ratio in Q1. The guidance is, I think, a 65%-66%-
Mm-hmm
... for second quarter. Do you feel like we're on track for that as well?
Yeah, just 69 something, wasn't it?
What's that?
Q1.
We like to use round numbers. We don't get caught up in the basics-
Let's take it down. Let's, just kidding. Yeah, I think, like the cost takeout, I'm really, really pleased with where we're tracking, and I think our guidance is pretty solid, and I'm very happy how we're tracking right now.
Okay, and then would it be a similar answer in terms of the, at this point, you know, I know it's early, but the back half, or guidance you guys have talked about?
Yeah, yeah, because it, one of the things that's exciting about it is that, volume, volume and revenue is, looks like it's, it's gonna pick up steam in June, and then carry through the year. And really excited to get Baltimore back on track because that was a really significant headwind, and, you know, the team responded really well. I mean, we pivoted. Within 12 hours, we moved our whole supply chain to start feeding Norfolk. And I was just in Eastern Pennsylvania the other day at the coal load out, and not only are we able to protect some of our revenue, but we're able to, on that pivot, keep 2,200 people employed at those mines in Eastern Pennsylvania. That, it's like order of magnitude, something like $4 million-$5 million a day in wages.
So we did a great job. The team did a great job on that, and the tail that headwind goes away when Baltimore picks back up, and the nice thing is, we just proved how much capacity we have at Lamberts Point, and I've challenged the marketing team-
Mm
... to get out there and sell that. Let's fill that back up.
... I'm wondering, what does all this mean from a capital standpoint, where give or take 18% of revenue on CapEx? Does that go higher or lower from here?
I'll tell you it won't go higher. And as we, and especially not from a capacity, rebuild-out requirement in, in the near term. We're creating our own capacity and capability. And, and as we've talked about, the locomotive component that we can, you know, re-evaluate our capital plan for the next 5 years and start reappropri-- you know, re, re, re- the balance, the balance, is, is coming in. And the nice thing is we're ready to, to jump on the, the value proposition opportunities. So it, we won't be, creating any kind of barrier for ourselves to access better, better marketing capability, and as we improve service, we only get stronger in, in getting in there and fighting for those, those, transportation dollars.
Just really quick, procedurally, what is the timeline in terms of the new board first meeting? When do we learn about who the chairman is and chairperson is and all?
Yep. Yeah, Friday. Friday is the first meeting with the board. It'll be a virtual meeting, an hour. I know that Mark, Alan, and I are, and Ed are all presenting, you know, just orientation around that. And at that time, the board chair will be selected, as will the other chairs of the respective committees.
Okay, and just last question for me, you know, maybe we should have started here, but, you know, how do you, as one person, think about sort of undergoing sort of a culture change at a company? What does this mean for the team? And then give us comfort that, that you've got the, you know, ability to make the changes you need with respect to, you know, Alan, the board-
Yeah
... and all that.
Well, Scott, that's a great question, and when Alan and I met in the days or hours before I came to NS, we talked about leadership, we talked about the need for change and the value of respecting the history and the culture at NS, but also the just glaring case for change. And I've taken that approach all through it. There was... I didn't have to ask Alan for the authority to make decisions in operations. He was very overt in his willingness and ability to give me that support. And it was kind of personified in the first early days when just in a conversation, I told him that in order to really extract the value from automotive, intermodal, it has to report to me.
It was a five-minute conversation with Ed, Alan, and I, and we made the change. And those are the sorts of things that are happening now. The leadership people that the people we have coming in to support some of the leadership needs that the organization has to both stimulate these results but also to embed the culture of excellence, operational and service excellence, are being well supported as well by both the board and with Alan and the leadership team.
There are some changes to the team that you are making?
Yeah, yeah. And we're in the process of delivering that. People start to come onto the property in the next week or two, and then they'll... We'll insert them into where we really need to stimulate the organization and to bring a specialized skill into place and bring people around them. So it'll be a blend. We've got a great team at NS. There's a lot of really solid leaders there. And there's also, there's, without a question, a need for a change, and to really create that constructive tension, it's good to have a balance.
Okay, we're gonna wrap it there. Thank you so much, John. This was great.
Thank you. Thanks.