All right. Good morning again. I'm Brandon Oglenski, Airline and Transport Analyst. I think we're on our fifth or sixth session here. I'm losing track, but hope everyone's having a great 42nd Annual Barclays Industrial Select Conference. It is a record for us, and I'm really pleased to have Norfolk Southern on stage next. I think this is going to be the fifth railroad presentation. We have Mark George, CEO, Ed Elkins, Head of Sales and Marketing. So going to have a great conversation. Like all the other presentations thus far, I want to just cue up the audience response questions very quickly, and then we'll jump right into it. So do you currently own Norfolk? Yes, overweight, market weight, underweight, or no? All the prior rail CEOs have asked for buttons, but we don't want to skew that much for you guys. All right.
Question number two. What is your general bias towards Norfolk right now? Positive, negative, or neutral?
I should bet you on the outcome.
Yep. Okay. And then question number three, please. In your opinion, through cycle, EPS growth for Norfolk will be above peers, in line with peers, or below peers? All right. Well, Mark and Ed, thank you so much for coming down. Really appreciate you guys attending. And Mark, I know we were just discussing this in the back of the room. It's been a crazy 24 months for Norfolk specifically. How do you reflect on where you've come and where you're headed now?
Yeah, I mean, it has been a tumultuous 24 months between the East Palestine derailment and what happened in the 12 months following that, followed by the activist proxy battle. And then, of course, significant management change, which kind of was capped off there September 11th, poetically, with the announcement of a new CEO. And subsequent to that, basically appointing a new C-suite. And here we are. We've actually got momentum. And I think sometimes you have to go through the dark to get into the light. And I feel really good about where we are because the changes that we made last spring with bringing in a new operating leadership team led by John Orr and several of his leaders that he's brought in from prior experiences, we've really turned around the operations. And we're bringing in a completely new mindset.
I feel really good about the momentum we've got. You saw the results at the end of last year. We've strung three great operational quarters together, two strong financial quarters. We feel like we've got great momentum to deliver in 2025.
Yeah. I mean, I'm sure this time last year, if we knew that you were going to have the better operating ratio on the east versus your competitor, a lot of folks would have thought maybe that's not possible. But it does feel like you have a lot of incremental momentum, especially on the operation side. Is that true?
We definitely have really good momentum. I mean, we took out $292 million in cost last year, which I'm really excited by. We've got a line of sight to at least another $150 million this year. The momentum is there. Operationally, our service has been really at levels I haven't seen in my five-plus years. I think, Ed, you would probably say we haven't seen that in maybe a decade, huh?
Agree. Especially on a very sustainable basis.
Yeah. So that part feels good, for sure. I mean, right now, we'll probably see some setbacks in our service metrics here because we're on our 17th winter storm in like six weeks. And it's going to impact our network here probably for the next couple of weeks until we dig out of it. And we've got parts of our mainline that are actually down in West Virginia area where we move a lot of coal and ag. So you're going to have bumps in the road. But I think we proved in the fall that we've got a resiliency to bounce back. And I'll remind you, back in the fall, as we dealt with back-to-back hurricanes, we had our network up and running within days. That probably would have set us back 12, 18 months in the old Norfolk Southern.
But we've got a new team now, and they demonstrated again in the fall that we can recover. So we'll recover from this one. But generally speaking, I feel really good about our operational momentum. I feel really good about the things we can control, including the cost takeout. And we still feel pretty good about the markets.
Absolutely.
So it should play out well. I don't know how things will necessarily be competing head-to-head on financial results. I do intend to narrow the gap with our peers. And we put out guidance there on our operating ratio, which we still have a line of sight to. So it all feels pretty good.
I want to keep this definitely focused on the long term, but you did bring up the first quarter, and we've heard from other management teams that the weather's pretty tough. I mean, is this unseasonably tough or more than normal seasonality in the first quarter?
Every Q1, you have weather, which is my Q1 is usually your lowest, sorry, highest OR quarter. This is particularly tough. You've got 17 storms on our network back to back in six weeks. This is the 17th that's happening right now. And they're happening in parts of the network. Normally, you'd see nor'easters in the Northeast where we're not really that big. This is kind of in the Ohio River Valley and Appalachian Mountain Valley where we move. We've got mainlines. That's our Pocahontas mainline. And right now, that's out of commission. This is pretty tough. We've had between freezing and then heavy snows, thaws, refreezing, and then incredibly heavy rains that have led to flooding and washouts. It's not getting much national press, but it's pretty consequential.
Again, we'll recover from it operationally, but we're keeping our eye on it because I'm sure there's going to be some impact to volumes in the first quarter that we'll probably make up for. There'll be cleanup costs, but we'll keep our eye on it and talk more about it.
Any way to quantify that yet, or?
No. No way at all.
Okay.
No way at all.
Ed, I guess, how do you look at the current volume picture? What's run rate versus what's impacted by weather?
On our last earnings call there, we talked about what our expectations were for the market. I still see a very resilient consumer who has room to run, really, in that space. We see manufacturing has started to inflect positively after 24 months of negative. For most of our industrial markets, particularly those associated with petrochemicals and energy, we're seeing a lot of room to run in those markets too. Automotive, we knew was going to be pretty sedate going into the year, and that's playing out. Coal, we knew was going to be a headwind. There's just no other way around that. I'm sure you've heard that from other people as well, both in terms of demand, but also in terms of price on the seaborne side in particular. Everything's kind of playing out the way that we expected.
But we see a clear line of sight to continuing to grow our share of our customers' wallets. And that comes from not only other rail competitors, but primarily from over the road. That's the real competition that all of us are dealing with out there. So we've talked about it before, but sort of the table stakes to get into the game is good service. And we're there now. And now we're focused, Mark and I are spending a lot of time focusing on how we can deliver additional value for our customers with that good service, whether it's ease of doing business, new technology, or ways for them to build their supply chains around us.
I think that's a big point to build upon, which is the things we can control there. The markets will be what the markets will be. But we do have a really good service product now, another thing that we can control. We've demonstrated consistency, and I have a lot of confidence in this operating team. So really, we've got to start to work on generating more demand for our product. Even if the markets are down, how can we make sure that we're at least continuing to grow share and take advantage of this great service product while we continue to maximize our pricing in the marketplace as well?
First quarter aside, what metrics should we be tracking from the outside looking in as it relates to service? Because there's a lot of things out there that we can look at: velocity, dwell. What's most important from our perspective?
I mean, I think we've added new public metrics to kind of round it out. I think car miles per day is another very good one. Obviously, the network speed and the terminal dwell, those are important, and the things that we disclose on our quarterly calls, those are good enough proxies for you to understand where our health is. We track dozens and dozens of metrics every single morning. We've got so many. You drown in all of the metrics. Ultimately, performance are those publicly provided ones. They will give you a general sense of the health. There are times where you might see a negative inflection in terminal dwell, but train speed doesn't change, or vice versa, and you can't get too fixated on that because sometimes there are trade-offs being made related to something that's happening in the network.
But generally speaking, I'd feel pretty comfortable just looking at those metrics to get a general sense of the health. And our car miles per day, we improved by 10% last year. To me, it's all about velocity. The faster you move the assets along this network, the fewer assets you need deployed. And you also have less overtime and less recruits. Our recruits were down 40% last year. And that's part of what drove that $292 million of cost reduction. It's all a function of velocity. And that's what the public metrics really point to.
I think on the call, John spoke to reworking the operating plan this year to get incremental cost out, more efficiency. I think you just said you're confident that you're going to get. I'm sorry, what was the cost target again this year?
$150 million, which we've got a line of sight to, and my goal is to exceed that.
Is that mostly coming from labor productivity?
It's actually going to show up in pretty much every line in the P&L. We're going to get labor productivity. Basically, think about it this way. We're looking at, and the goal is to keep labor flat with year-end. So we're going to move 3% more volume on basically the same headcount. So you're going to see productivity show up in comp and ben. We continue to look at purchased services. We've got a new CIO who's taken a real sharp pencil to looking at our IT budgets to make sure that we're investing in the areas that are going to drive the most impact for us, both operationally to support John, but also commercially to help Ed drive more sales growth and improve that ease of business. Meanwhile, cutting out a lot of the other stuff that we've been working on.
You saw we wrote off a number of IT projects. That means projects we're not going to be spending money on. So you'll see it show up there. And then all the velocity improvements that we're making are going to show up in things like equipment rents and material spend. As we reduce assets on the network, you have fewer cars to maintain, fewer locomotives to maintain. So pretty much everywhere, you're going to see that $150 million fall out.
And Ed, maybe along those lines, how does this benefit your customers? Because the customers own a lot of these cars too, right?
Sure. Most of our customers, this sounds very simplistic, they want a conveyor belt that runs at the same speed all the time. And when we deliver that kind of service quality to them, then they can start to trust us as a supply chain partner. And when they do that, actually, I had a call from a good friend of mine who's also a customer right before Christmas there. He's like, "Hey, I'm way overfleeted. I'm going to have to get rid of 20% of the cars I own, which I want to do. Are you guys going to stay where you are?" We're like, "Yes." That's exactly the conversation we want to have. Our customers, they fleet up to acquire more cars, in other words, so that they can have safety stock to be sure that they're not going to run out of product.
When we deliver that conveyor belt kind of service, they can right-size that supply chain. It saves them money, keeps congestion out of our yards. It's a win-win.
Okay. We'll talk about in-markets and where you can be winning in the future. But a big issue for this conference is obviously tariffs. There's going to be volatility this year. I guess, what have you heard from your customers? Has there been pull forward in advance of this? And then maybe secondarily, is it making them pause decision-making? Is there capital decisions that are being diverted?
As far as pull forward, I'm not sure we've seen a lot of that. Maybe we've seen some, but there's been so much distortion between East Coast, West Coast with the labor issues that it's pretty hard to pick up. We had a really good peak season, not only for international, but for domestic. I think that's really a reflection of the broader consumer market. Tariffs are a challenge. It's fun parlor games around talking about what happens. I think there's probably some reticence on the part of some of our customers to make any supply chain move right now until they figure out exactly what's going to happen or not happen with regard to those tariffs.
Okay. But it's hard to plan for inside of transportation like this because I also know from my industrial products background, those are big consequences. Factory somewhere, close a factory. A lot of them are going to take quarters to make a decision to figure out if this is a temporary tariff that might go away with some geopolitical negotiation. So it's going to take a while for things to play out. But I think ultimately, 75% of our business is domestic.
Yeah, domestically focused, yes.
So we're going to be there. That also means 25%-30% is international. So wherever the demand originates, we're going to be there to serve it. But there's not much you can do to plan for it.
What about from an industrial development perspective? Your competitor in the East talks to that a lot on incremental opportunities with your customers as well?
We are. You probably saw the announcement during our last earnings call about the strong pipeline of projects that we have and the ones that we've already landed. We continue to have line of sight on a really robust pipeline of projects that are both expansions of our current customer base, but also new customers coming into our territory. When I think about economic development and where customers will want to relocate or locate their businesses or expand them, it's probably going to be in the U.S. It's probably going to be in the East. It's probably going to be in the Southeast and the Midwest. And we're really well positioned in both of those regions to deliver a lot of value to them, working with them every day.
Over the last couple of years, given all the turbulence on your network, did you lose share to other modes or other competitors? Is that an incremental opportunity this year?
Oh, no.
Alternative solutions to serve their supply chains when we were in a place where we couldn't be a reliable partner for them. That's no longer the case. And so all I do every day is talk to customers about how I can help them unwind those less efficient alternatives and come back to Norfolk Southern. And there's a real value proposition there. Sometimes it happens right away. Sometimes it takes a few quarters to unwind whatever they've got in place. But in the meantime, we're working really hard to make sure that any incremental opportunity that comes up, we're there for them.
All right. Can we queue up question number four for the audience? And as well, if there's any questions from the audience, just raise your hand. We'll get a mic to you. Hi, ARS 4, please. In your opinion, what should Norfolk do with excess cash? The first two are M&A, share repurchase, dividends, debt paydown, or internal investment. All right. Question number five, please. In your opinion, what multiple of 2025 should Norfolk trade? Go ahead and vote. Okay. And then question number six. What do you see as the most significant headwind facing Norfolk Southern? Core growth, margin, performance, capital deployment, or execution? Core growth. So Ed, we had a long conversation earlier with your competitor in the East because they share some similar markets, specifically export coal and domestic coal, which have been pretty volatile for the both of you the last couple of years.
What can you tell us about the outlook for coal now and how that's going to impact earnings in the near term?
It hadn't changed from our last earnings call. We still see a lot of pressure on price. All the forwards are coming in incrementally more negative as we look at them. And I think metallurgical coal, we're going to be okay on the demand basis. But on the domestic side, there's weakening demand. There's plenty of stockpile. So we've called out coal as a clear headwind, both in terms of price and overall volume, and that hasn't changed.
But keep your eye on natural gas prices because that could impact thermal demand domestically.
Yeah, they're going up, so.
I guess, tactically, how does that play out? Because it's hard to model this from our perspective. Are coal yields going to come down throughout the first half of the year, or should we be close to?
Yeah, I think there's more pressure in the first half, at least what we're seeing in terms of outlook. It's playing out right now, as a matter of fact, when you look at what prices are right now.
Okay. But is there a certain floor at which point you don't see degradation in price anymore?
You mean on a year-over-year basis?
Yeah.
I think for the full year, we're going to be mostly negative. But again, I think we'll start to level out in the second half. I think by the time we get to the end of the year, we'll probably be flattish.
All right, and I guess, strategically, because I've covered railroads a long time, there was a point in time when we didn't have commodity-based pricing, or at least significant amounts of it. Now, it's creating a lot of volatility. Obviously, good when commodity prices are high, but we're seeing the inverse of it now. Is that the right path forward, as you think, through the next cycle?
I think so. What we as an industry are doing is making sure that U.S. coal is competitive on a global market. And if we don't do that, the long-term implication of that is we may not be in the market or get shut out of the market. So you're asking me, I would say the strategy is working. It's worked so far as an industry. And I think it's probably the right path.
Okay, and I guess in that outlook for around 3% volume growth, where are the bright spots from an end-market perspective?
Sure. We're seeing just really consumer-facing, both on the domestic as well as the international side. We know that premium, what we call premium, is under a lot of pressure. That's from over-the-road external issues, but also some internal compression there. But overall, intermodal is going to deliver what I would call outsized growth. In our merchandise markets, we see automotive pretty flat. We see many of our industrial products, commodities like agriculture and metals as winners, growth there. And in the petrochemical space, when I really think about NGLs and those inputs like sand, we believe we're going to continue to see strong demand in those markets. Coal's a downer, like we just talked about. So overall, that 3% range for volume growth. And because of all those mixed factors, I think you're going to see RPU mostly flattish.
Okay. I guess in that context, the frustrating part for a lot of rail investors the past few years has been the level of cost inflation and then realized yields for most networks haven't really kept pace, even though maybe underlying price has. Can you talk to that dynamic? And I think you just said mix adjusted RPU, or sorry, not mix adjusted, but RPU flat, given all those mix inputs. Are you seeing underlying price traction, though?
We are. I talked about this a couple of times in different formats, but you have, on the one hand, coal, which you've noted is sort of a global commodity-based structure. On the other hand, you've got truck markets where we're serving with intermodal. And we're really a price taker based on a very large truck market in those spaces. But in the middle, you've got this very large array of freight where we deliver exceptional value because of our capability, our throughput, and our really through-freight capacity against those commodities. And in those markets, our merchandise markets, we've been very successful in helping our customers recognize the value of the product that we're delivering. And that manifests itself in terms of above inflation pricing over a very sustained long-term. I think it's. I've forgotten how many quarters it is, 37 being a record.
So we feel really good about our ability to deliver value in the form of price against the service that we're delivering in the merchandise space. And I've got some hope that in the truck markets, as that excess capacity draws down and demand lifts up, we'll probably see at least a little bit of elevation in those markets as well.
I think some of that strong pricing performance that we see in the merchandise markets does get neutralized by coal pricing declines, for sure. But also, since COVID, fuel prices and our fuel surcharge has come down consistently from what were pretty high levels. So that impacts your RPU in an adverse way. We're probably seeing the end of that now as we probably get down, and by the time we get to the second, third quarter, the comparison fuel starts to flatline a little bit, and we have a little bit less headwind there. But also, we had, it's behind us now, but the fuel surcharge, I'm sorry, the intermodal storage revenue that we had to unwind, that was a COVID benefit. That took several quarters for also to unwind, but that impacted your RPUs.
So overall RPU, I agree, it's been frustrating, and it doesn't look good, and people connote that with pricing. There's a lot more than pricing. There's also mix that plays a role. We think this year, though, the RPU, even with some headwinds in coal and a little bit of legacy challenges here and there on fuel surcharge, we think it's going to be pretty much flat this year.
Got it. I guess on the OR side, you're wanting.
The duct tape and the Band-Aids that were being put on service to deliver good service after East Palestine, they knew how to do it in a better way, a more efficient way. So they were able to shed a lot of those excess costs, as well as us taking more than 10% out of our non-agreement workforce through a separation plan that we had. So all of those things yielded the cost reduction. Now it's, okay, we're going after 150. How are we going to do that? Well, now they've put a detailed action plan together, including looking at the service plan and the operating plan and said, "All right, how can we tighten connections to, again, a goal, reduce handlings, tighten connections, increase velocity so we can get that next step of efficiency, productivity improvements, and cost takeout?" So it's what you do in a good PSR railroad.
You're constantly looking at your plan. You then refine, you iterate, and then you see where the next turn of the crank is, as John would say, where you can tighten connections again, reduce circuity, and eliminate handlings, so it's an iterative process, and we're on our second step right now.
Like, we only have a couple of minutes left here. And this year has been unique because I've just had all five North American rail CEOs on stage here. And I guess I'm going to leave the closing remarks with you because I've asked, "What's your commitment to shareholders here?" And I think long-term, you said you want to close that margin gap to your competitors. Is that commitment here? And do you see line of sight even beyond 150 basis points this year, getting to that 60 or below target?
Yeah, look, that is our goal. That is our commitment to narrow the gap. I mean, it's got to an unacceptable level. A lot of us internally saw it. Certainly, our board sees it. And we're all aligned on that being our goal. So we've laid out the things we can control. We also laid out the top-line support to get there. We still see line of sight to both of those. We've got a lot of confidence. But it goes beyond that. I mean, we want to really start driving meaningful earnings growth. We've got to get back to basically 2022 profit levels because we lost a lot of profit after East Palestine and the impacts that we've had to deal with after that.
So we want to grow earnings, narrow the margin gap, start to build some momentum on the top line as well because we need that as well in order to get some of these margin type of improvements. So we're feeling good about that. At the same time, we're repairing our balance sheet, and we've got a good line of sight to that. And one of your questions, I think it was number four, we're going to resume share repurchase this year in a measured pace. It'll build over the course of the year while we continue to pay down debt and get back into bounds with the credit rating agencies. So we'll be done with that this year, again, while feathering in some share repurchasing. And our dividend continues to be at an attractive payout ratio. So here is definitely part of the equation.
Mark and Ed, it's been a pretty crazy ride here the last couple of years, but it sounds pretty solid.
Good to see you.
Thanks, David.
Take care.