Good morning, everyone. Welcome to day two of the 13th Annual Wolf Research, Virtual Global Transportation and Industrial Conference. I'm Scott Group. I'm the transport analyst here at Wolfe. You are stuck with me all day. We've got a jam-packed agenda. We've got all of the rails doing fireside chats today. We've got a rail regulatory panel. We've got one of the board members from the STB. We've got a rail shipper panel. We've got a pretty comprehensive view of the rails today. We've got two LTL panels, one with public carriers, one with private carriers. We've got XPO Logistics. We've got a truck technology panel talking about electric and autonomous trucks. We've got a truck brokerage panel with Echo Global Logistics, Landstar, and Transfix. We've got a freight tech panel. We also have DSV today.
We have got a full agenda. Thanks everyone for logging in. Just as a reminder, we are using GoToWebinar for all of the panels and fireside chats, and the way it is going to work, hopefully everyone will be—hopefully myself and all of the companies will be on video. I think that is better than just doing audio. In terms of questions, I will be moderating all day, but if you have any questions, submit them. It should be pretty clear how to submit questions. I will be filtering them, so ask appropriate questions. Certainly, if you have good questions, I will make sure that they get asked. I just want to thank all of our companies for participating in this virtual conference. Thank all of our clients for all your support.
Really excited about the agenda today. I thought we had a great day yesterday with airlines and trucks and multi-industry companies, and should be another good day today. I should also mention we do have a couple of, or at least one other multi-industry company, Stanley Black & Decker, is also going today. That looks like it on the industrial side. And then we wrap up tomorrow. We've got a couple more on the trucking side and a couple more on the multi-industry side. Okay. Why don't we, we're two minutes ahead of schedule, but I think that's okay. Why don't we, Grace, why don't we launch Norfolk Southern and we can get going. Nothing wrong with starting a little bit early, get us ahead of schedule. So, really happy to have Norfolk Southern kicking off the conference.
Perfect.
We've got both Mark George, the CFO, and Alan Shaw, Chief Marketing Officer. Mark, Alan, hopefully you guys are six feet apart in that room. Close enough it looks.
Always like.
And, Mark.
I'll get your father reports when they appear.
Okay. Yeah. Mark, Mark is going to kick us off with some, couple of quick opening comments, and then we're gonna go right into a Q and A. Thanks, Mark, for being here.
Hey, thanks, Scott, for hosting us. Alan and I are both delighted to be with you, and we are here in Atlanta together, although as you can see, we are maintaining a safe distance. Just a couple words before we get started with the fireside chat, and we'll start with our safe harbor. We will have forward-looking commentary today. I encourage all who are listening to view our recent SEC filings, where you'll see a discussion of our risk factors. Moving on to the business, you know, while the economic and market disruption from COVID has forced us and most companies to revoke guidance for 2020, we left our 60% OR target in place for 2021, waiting to understand the slope of the eventual recovery. We felt it was just too early to push out that goal.
We continue to be very aggressive on the cost side during this journey to be a 60% OR company. Our immediate challenge is trying to balance current volume realities while retaining the agility to react on a recovery. Speaking of those volume realities, quarter-to-date volume through last week were down 30%, including a challenging mix. Coal is down 55% quarter-to-date. Merchandise is down 34%, and intermodal is down the least at 22%. Now, RPU in each ex fuel, in each segment, is again looking solid like we showed in Q1 of last year. However, the mix and the volume declines—I'm sorry, Q1 of this year. However, the mix and the volume declines, along with a declining fuel surcharge in this quarter, will create overall net RPU headwind that implies revenue could decline in line with or more than volumes this coming quarter.
Our positioning for the long term is really great. Our top 21 strategic plan is paying dividends, as you would have seen from our Q1 results, where we had 11% cost reduction on 8% volume declines. Our team is nimble, with crew starts down in May, matching the volume declines that we have. Service levels and availability to our customers are the best they've been in the history of the railroad. That has helped us as we've recorded our 13th consecutive quarter of RPU improvement. We have an outstanding franchise with the best channel partners in the industry, and we are poised to leverage the recovery when it comes so we can deliver considerable incremental margins. Most importantly, we've got an inspired and dedicated workforce that is committed to safely transport the goods that keep America running.
They are doing it without interruption during this pandemic, and that is awesome to observe. With that, Scott, we are ready for Q and A.
All right. Fantastic. That was really helpful, Mark. Again, just a reminder, anyone listening in, we've got a lot of people on the webcast, feel free to submit questions, and I'll make sure we get to them. There are two things I want to follow up on just based on what you said, Mark.
First, when you talk about the 60 OR for 2021, and you say it's just too early, is this something where you realistically still have visibility or in line of sight to that for 2021, or is this just, hey, like, we just don't know, so it's too early to even cut it, and maybe just some color on, like, what level is it really just the magnitude of volume recovery that we're gonna see that we're gonna need to get there, and how much of that volume recovery do we need to see? Is it do we need to stabilize here, or do we need a recovery? Maybe just some color, because, at least for now, you're sticking with it.
I just wanna understand, is this we're sticking with it 'cause we just don't know anything else, right?
Yeah. No, that's a fair question. You know, it makes sense to drill into that given where we are with the volume declines and the collapse we're seeing in the overall marketplace. Look, we are still very focused. We've got an entire organization that's been motivated and inspired to try to get to the 60% by 2021. We just, we know that it's a question of when and not if, but we think it's a little too soon to push that out because, frankly, there's a lot of prominent economists, and including the Fed, nobody agrees, and nobody can predict what's actually gonna happen on the recovery. Given that, we feel it's better to just wait a little bit, see what the recovery shape is gonna look like, and focus on trying to drive this organization forward while people are still motivated.
Yeah, look, it's gonna require quite a bit of a volume recovery. We're gonna have to get close to pre-COVID levels, in 2021. You know, we built a plan when I came back, when I came in at the end of last year, and I looked at the path to get to 60 by 2021, it was clear that was constructed in a different volume environment than what happened at the back half of last year. The back half of last year, we had a big volume drop-off, and it wasn't clear that that 60% in the old path would be attainable. The whole team got together. We sharpened our pencils. We had proven to ourself, actually, that we were more successful on the cost side.
We reconfigured the model and rebuilt it with a good, clear path to get to 60 that was far less volume-reliant. And, you know, unfortunately, you know, we're sitting here going into the year with real confidence we got a path to 60 by 2021, even if we had a few points of revenue difference from what we assumed. At these levels, it would be tough if it stayed down here, for sure. We wouldn't get there, but we're gonna need it to come back quite a bit. And then, you know, if it does, you know, we'll be on target to get there. If it doesn't, we'll be in touch with you and let you know what the revised timing looks like.
Okay. It sounds.
Scott, I think the key thing is a speed bump, if anything. You know, we're still committed to get to 60.
I understood.
Okay.
It sound oh, go ahead, Alan. Yep.
Yeah. I, Scott, you know, all you have to do is look at an effective 230 basis point improvement OR in the first quarter on an 11% volume decline.
Yeah.
The actions that Mark and our ops team took with our locomotives, and our capital structure and our capital plan for this year is highly reflective of the fact that we are adjusting, and we are adjusting very quickly. It is very difficult for us to tell you what is gonna happen in 2021. We are just trying to figure out what is gonna happen for the remainder of this quarter.
That, that's fair. I mean, it ultimately, it sounds like the message is, you know, we'll see if we can get there in 2021. We're hoping we can if the volumes recover. Ultimately, is it 2021 or 2022? We'll find out over the next, you know, several months and years. We're getting there. It's just a question, really, of when.
Perfect. Perfect summary.
Okay. Now let's try and focus a little bit, near-term, and maybe one for you, Alan. Volumes are down 30% quarter-to-date. Do you think at this point—I'm gonna be asking all the rans this—do you think at this point that volumes have bottomed? How, what's your outlook as you think about the different commodity segments over the rest of the quarter?
I do believe volumes have bottomed. Scott, right now, we're tracking around 107,000 units per week. We've done that the last couple weeks. I think the incline is gonna be rough. It's gonna be uneven. I think through kinda where we are in each of our markets, you know, our auto plants reopened this week with very limited production. The sustainability of that production is gonna be highly dependent upon consumer demand and consumer confidence to go out there and buy automobiles. We're also gonna have puts and takes and fits and starts with us associated with the suppliers as they're ramping up just in time as well. Greater increases in automotive would potentially happen after auto plant shutdown during the month of July.
You know, and so you, I mean, we're gonna be looking at August or September before we see a meaningful ramp-up in auto. There's a lot of, say, steel that's already forward-positioned next to the auto plants, and so it's gonna take a little bit longer for the steel markets to recover after manufacturing and or after auto picks up. In international or in intermodal, we're gonna see probably some downturn in volume over the next couple weeks. We've got some pretty good visibility into blank sailings. About 25% of the capacity has been pulled out of the West Coast. About 20% is out of the East Coast. With coal exports, our, our pressured India seems like they're starting to take coal. However, now they're getting ready for the monsoon season, so that's gonna be an issue. The Chinese market is still impacted by import restrictions.
That's gonna be a very slow recovery. And then domestically, you know, we're gonna enter the summer with stockpiles at about 125 days and natural gas prices at extremely low levels. And so we don't see an upturn in, in domestic utility coal anytime soon. Hopefully, that provides some color.
It does. Just a couple thoughts. You mentioned auto starting to reopen, but we will not see the real recovery till after the July shutdowns. Are you, so it sounds like you are still expecting the typical July shutdowns to happen this year. Those are not going to get skipped this year because they were already shut down earlier?
We've heard of one who is potentially going to skip that. For the most part, going forward, auto production is gonna be highly dependent upon demand.
Sure. You said that intermodal is likely gonna likely to get worse over the next few weeks based on blank sailings. I think, and I'm gonna tie this into the mixed comments that you were making earlier, Mark. It sounds like, and clearly, we could see we're having challenging mix this quarter. Do you think as the rest of the quarter plays out, if intermodal is going to be getting maybe a little bit worse than what we're seeing right now, that would imply some of the other things getting better, maybe on the merchandise side, including autos, that the mixed headwinds that you're seeing now start to abate a little bit as the rest of the quarter plays out?
If anything, that'll be on the margin. Scott, I think you know, don't put too fine of a pencil on this. I want to underscore what Mark said. You know, in each of our three business units, the revenue per unit X fuel is lining up pretty closely with where we were in the first quarter. A little bit more pressure in coal as we had talked about how the export contracts were gonna start to see the impact as we move through the second quarter because the Australian premium low-vol coal price started really to decline in April and actually hit its high point in March. And so you know there's a little bit more pressure in RPU within coal. The rest are hanging in there X fuel. However, what you see is that, you know, intermodal is down 22%.
It's down the least. Our auto franchise is down 92%. Merchandise is down 33%, and coal is down about 55%. All of those things equate to negative mix. And even within intermodal, you know, our Triple Crown product is designed for the auto industry. And so that's down, very significantly, and that's the highest RPU business that we've got within intermodal because it has a drayage component to it as well. And then, you know, don't overlook the impact of fuel surcharge. We were down about $23 million year over year in the, in the first quarter, and fuel surcharge revenue in the second quarter could be down 3x-4x of that.
Okay. Just all helpful, just a couple follow-ups there for you, Alan. You've talked about coal just a bunch. Can you sometimes give us some sense of utility coal trends, northern, southern utilities, which has mixed implications. Do you have any view there? And then, on the met prices, they've taken a step down since the quarter. Do we see that show up in the RPU in the second quarter, or does that have more of a third-quarter impact as benchmarks potentially reset?
Right now, Scott, utility coal volume is down about 66%. Recognize that we are comping to our highest coal volume quarter of the year last year and I believe also our highest coal RPU of the year last year. That's gonna put more pressure on year-over-year comps. You know, export is down, export's down about a third right now. Domestic met, as you can imagine, associated with the impact of the steel industry running at about 50% capacity, is down about 40%. Domestic met is relatively high-rated, and so that has an impact on the RPU as well. You asked about export met. As we noted, March was a pretty high month for the underlying benchmark price. It was about $155 per metric ton.
It dropped about 40, 40 bucks during the month of April and then has dropped a little bit more now. Right now, it's moved up and down, but right now, it's at about $119. There you can visualize some pressure. There's a little bit of a lag in how that plays through our contracts. You'll see more pressure in that environment in May and June and then as you move through the third quarter.
Okay. I think we got all that. Okay. Let's go back to Mark for a second. I wanna understand just a couple things on the cost side here. When we look at the April headcount data that came out, headcount was down 18% year over year. In April, it was down, I think, 19% in March. I guess I'm wondering why you're not being more aggressive on the headcount, to the extent you can right now. And is there potentially some timing issue here where we'll see more aggressive headcount reductions in May as a response to the volume environment that obviously got a lot weaker as April played out?
Yeah. Scott, so look, we're continuing to make really good progress on the cost. The headcount, as you mentioned, came out again in April, you know, high-teen, high-teen levels. We're matching our crew start reductions with volume right now, in the month of May. You know, we've taken out 30% of our crew starts to kinda match the volume. The question is, when do you actually reduce the headcount, or do you leave those people on extra board, and able to flex when volume comes back? I think that's the bigger issue we have is making sure that we have that flexibility, to add back the capacity when the volume returns. We are continuing to make progress. You heard about our Linwood yard closure in North Carolina. We're gonna take out 85 people there with that yard closure.
That's, you know, between $10 million-$15 million of savings. We're continuing to push hard, frankly, on all the levers while making sure that we don't leave ourselves naked when volume comes back. Remember, you know, there's a long history in this industry where railroads struggle when volumes surge a little bit. That happens either because we went too deep with T&E resources or inadequate number of locomotives, or network congestion because we can't handle it when it all comes back at once. We're really mindful, especially with this type of downturn, that has prospects to come back rather quickly. We're trying to balance all of this, you know, keeping the resources out there ready. We're looking at reserve boards, which is an interim step.
You don't get all of the savings of furloughs when you just cut down a, cut down T&E starts, of course. You get a little bit more of the savings if you put them on reserve boards. It's something we're certainly looking at. Incremental savings are not that significant compared to just keeping them as extra boards. We continue to examine it all, and we're gonna continue to flex, based on the prospects of the recovery. That's why we're in close communication with Alan and his team, who are in close communication with our customer base to understand when things are starting to turn and how quick they might come back. You know, that's really the key, Scott, is just trying to maintain some level of flexibility and trying to find that right balance.
Right. Are there, you mentioned the reserve boards a couple of times. Are you using that, or is that something that you may use going forward? I what.
We may. Right now, we're doing a, I think, a good job balancing effectively, extra boards, along with furloughs. You know, extra boards, they come with some form of guaranteed payments. It's, you know, when you shift over to reserve boards, you eliminate at least the guaranteed payment portion, but you still have all the health and welfare benefits. You don't save all the cost like you would with a furlough. We're trying to push really more into the furlough when we are comfortable things, volumes won't come back, at least not as quickly. Right now, we think we're effectively balancing between those other two, but we are looking and examining the reserve boards as well.
Sorry. I apologize. This is a new term to me. Explain the difference between extra board and reserve board. I'm not sure I'm following.
An extra board is essentially, you know, the difference between a crew start when we reduce our crew starts, but we do not reduce the person. They go on the extra board or the reserve list or the bullpen, to use a baseball term. While they are not being paid for the trips per se, there are some form of guaranteed payments that they do have.
Okay.
Every other week. Now, when you go to a reserve board, you're basically on the hook for their health and welfare benefits. Obviously, when you go to furlough, that's when you have the full-cost reduction, although there are still trailing health and welfare benefits that continue for several weeks.
If I understand this right, the furloughs has the biggest reduction in cost immediately, then the reserve board, and then the extra board has sort of the least reduction in cost in the second quarter, but arguably would position you sort of for the best incremental margin on the way back up. Is that the right way to think about it?
That's correct. That's correct.
Okay. And then one more follow-up on this discussion of labor.
Scott, just to put a finer point on it for you.
Yeah.
You know, you might have an extra board, that when people move on to the extra board or into the bullpen because you're just not starting the trains, you might save 40%. Okay? If you move them into a reserve board, you might save 50-60%, max. And then obviously, when you move into furlough, that's where you save 100%, although, like I said, on a little bit of a time delay.
Okay. That makes a ton of sense now. Okay. One of the other follow-up just on the labor side then is just on the comp for employee side. That was an area that had a little bit more upward pressure than we were expecting in the first quarter. Given this extra board issue, is that an area where you think, or any color you can give us on comp for employee trends right now?
Yeah. The Q4 to Q1, let's just address that question that you've got. That is driven really by two things primarily. It's the timing in which you have a sense of accrual true-ups. In the case of Q4 and Q1, they move in the opposite direction. We had a big write-back in Q4 for incentive accruals, so that depressed the comp for employee, because we had less incentive payouts. Q1, you start getting onto a normal accrual again. So there was a shift there. Secondly, Q1 every year, you're gonna restart the payroll taxes with a new calendar year, you know, FICA and the such. That was kind of the Q4 to Q1 jump you see.
Going forward, you'll probably see that those are gonna be flat to modestly up on the balance of the year. Generally, it's not a metric that we manage to. We're focused on the absolute spend, which is going down quite obviously, and we're focused on the employee levels, which are going down. The net of those two, you know, there can be sometimes sequential dislocations in that ratio, because, as I mentioned, health and welfare costs can lag behind when an employee is furloughed. You still have their health and welfare costs. That can distort the ratio a little bit. That becomes really noticeable during times of significant changes in force levels. It may look different depending if the reduction was through attrition versus furlough. Certainly, the timing in a quarter plays a role as well.
Year over year, don't forget, you're always gonna be facing in that, in that ratio inflation, 3-3.5% merit or scope, sorry, merit, inflation rates. And then, you know, employee mix, frankly, for us this year, it's still a factor through Q1 because we have much fewer conductor trainees than we did last year in Q1. And that we lapped that now here in, in Q2.
Okay. Lots of moving parts, but if I'm hearing correctly, maybe comp for employee on a year-over-year basis up less in the second quarter than, than maybe the first, and maybe partly 'cause you're lapping that conductor trainee issue.
Spot on.
Okay. Now, the other thing is that we talked a lot about labor productivity. Train productivity, some of the rails right now actually have train starts down more than volumes, and you're sort of matching one for one. Is there an opportunity to start getting some train productivity with train starts down more than volumes, or is the reality, hey, when volumes are down 30, not down 20, that it's just tougher and don't really expect that?
Yeah. I mean, we've been exceeding on, for about eight months, nine months now, our train starts in excess of volumes on the way down. We've been doing a very, very good job at that. Thirty gets a little tough. You need a little bit of time to readjust, to drive more productivity, and have your crew starts down further than volume when it's down 30. The team is, you know, again, they're nimble. They're looking at things. I'm certain that on the way up, we're gonna see more productivity make an appearance here. I don't know if you have anything to add on that.
Yeah. I think we've done a very good job of keeping our train starts in line with our volume decline while actually improving our service product. That's an important thing, Scott. You talk a lot about yield, and you can see, you know, our differentiated product, and you can see that reflected in our margin strategy and our yield performance.
Right. Let's follow up there, Alan. Clearly, there've been some market share losses, be it to truck or to CSX, over the past several months. Do you think now we'll see the continued impact of that all year, but do you think that there's incremental market share that you might lose as you continue to pursue yield growth, or do you feel like we've stabilized on the market share trends, and it'll just be more, you know, we'll continue to see the impact of what we've already lost, but nothing incremental? How are you thinking about market share? Where's your focus right now? Is it still, you know, on yield? Is it now more of a balance? Just some thoughts there.
Yeah. Scott, we have talked about we are fierce competitors. We also understand that our focus is on revenue and revenue quality. We have performed pretty well over the last four-plus years in comps on revenue. We are committed to continue to do that. We are going to continue to focus on long-term revenue and revenue quality, not near-term volume gains, right, because that is what drives value for our shareholders. In fact, that is what drives value for our customers as well. There are always puts and takes in volumes, and we see that with respect to truck, and we see that with respect to the modal competition as well. We also understand that, you know, we have got some unique features of our franchise.
You know, last year at this time, 60% of our, or pardon me, our coal volume was in the utility franchise, and that's down about 66% right now. We've got a very strong ethanol franchise with forward-positioned plants. When energy markets are weak, it impacts outbound ethanol and inbound corn. We also serve more integrated steel mills than any other railroad in North America and, frankly, more U.S. vehicle production than any other railroad as well. All these things are having a market impact on our volumes that aren't necessarily related to a share shift to truck.
As well as the Hoosac Tunnel collapse.
The Hoosac Tunnel collapse. You know, there's a lot of things going on. The important thing is that we understand it. You know, we've got great visibility into our markets, into our customers, and into our drivers. You know, we're looking through these numbers. We look at the AAR stats on carloads every week, just like you do. We are gonna be determined not to make a bad decision based on some misleading signals. Okay. We're not gonna overreact right now and pivot away from the focus on yields and margins.
Just, Scott, it's revenue and revenue quality over the long term, not near-term volume.
Okay.
You can see that reflected over the last three, four years in RPU and revenue for revenue time off. It's been a.
So.
It's been a great strategy, and it's delivered a lot of gain for our shareholders.
We've just got a couple minutes left. I'm just gonna, last two, that are coming in from online. Talking about, for you, Mark, CapEx. So we reduced it to $1.5 billion this year. Is that a sort of a sustainable run rate? Does that go back up next year? And then someone asking about with significantly fewer less volume and, train starts and all that, does that have an impact on your sort of rolling stock maintenance expenditures as well?
Yeah. They're somewhat interrelated. Let me tackle first the CapEx. You know, we went low here. 25% reduction year over year is significant. We got together as a leadership team early in the year, when we started to see our own volume pre-COVID start to show weakness. That was a catalyst to reexamine CapEx levels into this year. Obviously, as COVID was evolving, we stacked hands again and said, "You know what? We gotta pony up and go deeper." That is what we did. There is gonna be natural pressure for this to come back up and to elevate from these levels. My goal is to try to keep a lid on it to the extent we can and limit the growth.
Hopefully, my goal would be I'd like to see revenue outgrow CapEx from this point in time forward, and really just put a lot of scrutiny on every project and make sure that we have a strong, robust dialogue on every dollar we spend. There's gonna be some tension in the organization. It's gonna wanna absolutely go up. I'm gonna try to keep a lid to some degree. Again, I'd love to be able to see revenue growth outpace CapEx and instead pivot away from this percentage of revenue fixation that we've got and focus really on what's needed. Then, yeah, rolling stock inventories. I mean, clearly, if we stay down—sorry, rolling stock maintenance costs—if we stay down at these levels for a prolonged period of time, yes, absolutely, you need less maintenance.
If this is a temporary trough, I'm not sure it's gonna provide any meaningful opportunity. Certainly now, if this is a step change down in volume levels, then yes, we will see lower maintenance costs.
Okay. The final question, and hopefully quickly, someone's asking, can you characterize Claude's role on the board? Would you say, can you, would you say he's any more or less involved with the management team than any others on the board, if you have any insight there?
Actually, yeah. Claude is a, you know, he's not just a, a, an outstanding board member in his fiduciary, I'm sorry, in his oversight role, but he's also acting to some degree as a consultant for us. And he's giving great advice and great insight to the leadership team. When we have presentations and when we talk about, as a management team, what's happening with the board and the market, what our objectives are as we're rolling out PSR, he's providing great insight and great wisdom from his own experience. Personally, I will tell you, I spend time having dialogue with Claude as CFO, with him as a former CFO, gaining his knowledge and insight. So he's also providing a, a real valuable role as an in-house consultant.
I would say that on a whole, we have a very active and very engaged board.
Indeed.
They put out very, very attainable yet difficult targets.
Mm-hmm.
They hold us and Jim and the rest of the executive team accountable for hitting that. It's great to have Claude on board because he's got, you know, some experience as market that's very relatable to Mark.
Yes.
There have been great synergies there. Overall, we've got a very engaged board.
Okay. I think we gotta wrap it there. Thank you so much, Mark and Alan. Really appreciate it. All right, guys.
Thank you.
If you guys wanna roll over right now, we're gonna be heading to the Fireside Chat with CSX. I'll be there in a minute.