Welcome back. We're going to keep things rolling here with Ryder. I'm Brian Ossenbeck, who covers transport logistics for JPMorgan. We have Robert Sanchez, who's the Chairman, President, and CEO of the company. He's going to make some intro comments, got a few slides to go over to kind of set the stage, and then we'll go into Q&A. As usual, if you've got questions in the room, raise your hand, get my attention, and we'll get you a microphone. We also have Calene and Christy from the team in the audience. Robert, let me kick it over to you, and thanks again for coming.
All right, thank you, Brian. Before we get started, those of you that aren't familiar with Ryder, let me give you just a quick overview of what we do. We're a $13 billion transportation logistics outsourcing business. We operate in North America with 93% of our revenues coming from the U.S., which has become much more relevant over the last few weeks. We operate in three segments: fleet management solutions, which is basically the outsourcing of a truck. So if you need a fleet of trucks as a business, you need a fleet of trucks to move your product. You can buy your own trucks, do all your own maintenance, and then figure out what to do with the vehicle at the end, or you can outsource it to Ryder. We operate about 250,000 vehicles in that segment.
We have a Dedicated Transportation Solutions business, which is the outsourcing of a truck and the driver. I can also outsource not just the truck, but the driver, and outsource the whole private fleet to Ryder. That is what the segment does. That represents about 20% of the revenues of the company. We have the Supply Chain Solutions, which is the outsourcing of broader supply chain activity. Think about distribution centers, warehouses, traffic department, where we are managing freight that is not on a Ryder truck and could be on a third party's truck. E-commerce fulfillment, where we have a network of warehouses and facilities where we fulfill e-commerce transactions. We have a last mile, big and bulky final mile delivery business, where we are delivering stuff that the typical parcel companies do not move. Think about furniture and office equipment, exercise equipment, that type of stuff, appliances.
Broad supply chain activity, anything that has to do with transportation logistics, typically Ryder can do for companies. The good news is that all that stuff has gotten more complicated to do over the last couple of decades. Complexity is our friend at Ryder. The more complicated things become, the more likely they are to be outsourced. That has really given us an opportunity to grow a business that has been around for over 90 years. We have really been on a growth sprint now for the last probably 15. This is a comparison. At the end of 2019, we pivoted our growth strategy to what we call our balanced growth strategy. It had three components. Number one was we wanted to de-risk the business.
By de-risking the business, primarily meant that we realized we were taking too much risk on our truck leases, which is in our fleet management business. The residual assumptions we were making when we priced those leases turned out to be a little bit high compared to where used truck prices were coming in. We had been using a methodology of an average over a five-year period to try to forecast what that vehicle would be sold in the used truck market six years out. While the used truck market was in normal cycles, it worked pretty well. As post the 2009 falloff, the used truck market became much more volatile, higher highs and then lower lows and longer periods in a low and really impacted the earnings of the company.
What we did is we reduced our residual assumptions in our pricing for leases beginning at the end of 2019 to what I would call bottom quartile, bottom quintile type levels, which meant we did not rely as much on that final sale of the used vehicle to get the returns that we expected on the lease. That was step one. We started that in 2019. We have a typical holding period of six years. It takes six years to get the whole portfolio of leases repriced. This is our last year of really repricing most of those leases. That has been part of the benefit. The other thing we wanted to do was improve the overall returns of this business. We were targeting 60-100 basis point spreads historically in that business.
We felt that for all the work that we do in maintaining these trucks throughout their life and the purchasing power that we have, the service that we bring to that customer, we could shoot for more. We started targeting 100-150 basis points and have been achieving that. We are now in the fifth year of the lower risk, higher return leases in the portfolio, which has given us an overall big earnings boost to the company. In addition to that, the third leg of the strategy was to accelerate the growth in our more asset-light businesses. That is the dedicated transportation business and our supply chain solutions business. This is the tail of the tape after five years, six years now of doing this. You can see the revenue mix back in 2018.
Before we started this, we were $8.5 billion, with almost 60% of the revenues coming from our more asset-intensive leasing business. Today, we're $13 billion, with only 40% coming from the more asset-intensive leasing businesses and 60% coming from the more asset-light supply chain and dedicated solutions. Our earnings in 2018, which was a peak year in the freight market, was just under $6 a share. Last year, which we believe is a trough in the freight market, we were at $12 a share. Peak to trough, our earnings are double what they were before the transformation. This year, in 2024, we're expecting $13-$14 a share as we've got initiatives that we'll talk about in a minute that are helping to drive that. From a return on equity standpoint, we were historically achieving low, call it low teens over the cycle return on equity.
As we started this journey, we started targeting mid-teens over the cycle. We then raised that to high teens over the cycle. Last year, we've now raised our target ROE to low 20s over the cycle. We believe this year we'll achieve 17%-18%, which again, we're still coming off of a lull in the freight cycle. As that freight cycle continues to move up, we feel pretty confident we can get that return on equity up in that low 20s level. Big improvement there. Obviously under operating cash flow, we've seen an increase there as the profitability of the business has improved. As I talked about the $13-$14 a share that we expect to do this year, the good news is that we've done a lot with this balanced growth strategy, but there's more to come.
The more to come is really about $350 million. $150 million of it is from initiatives that we've identified of additional things we could do. One of them is this last leg of the repricing of the leases that are in our fleet management business that's going to add another $20 million. We did an acquisition of a company called Cardinal in our dedicated business last year. The synergies of that we've identified as $40 million-$60 million. We expect to get a good chunk of that this year. We've got good line of sight to that. Finally, really around, I forgot to mention maintenance costs. That's another piece that I didn't mention, but one of the drivers of the improved profitability has been our ability to take cost out of our maintenance organization.
We maintain 250,000 commercial vehicles, which means we spend about $1.3 billion maintaining trucks. We have been chipping away at process improvements and just getting better at that across our 750 locations. We have achieved over $100 million in annual cost savings over the last four years and now have identified another $50 million that we know we can achieve over the next few. That is also going to contribute to this $150 million. We expect this year to have achieved about $100 million of the $150 million in initiatives that we have got line of sight to. There is another piece to the $350 million, which is $200 million. The $200 million is just as the freight market recovers, we expect to get our rental business, the more cyclical parts of our business, our rental business and our used truck businesses back to more normalized levels.
That alone could generate an additional $200 million in earnings. Those are the drivers of the improvements in returns. This year, we're only looking at about $15 million of the $200 million being achieved because we still think this will be a soft year in terms of the overall freight market. That is the tail of the tape for us in terms of earnings. Again, we're not forecasting a significant improvement in the overall freight economy. Maybe a little bit of a pickup in rental at the tail end of the year. The majority of the earnings improvement that we are looking for this year is coming from initiatives. Things that we have control over, the pricing of the equipment, the leases that we're signing, the maintenance costs that we're bringing out, and the synergies that we see from our more recent acquisition.
Another slide we'd like to talk about is really to show you how the earnings power is increasing the capital capacity of Ryder. Obviously, we're in the leasing business. We buy a lot of trucks. We borrow money in order to do that. As we generate more earnings, it increases our overall debt capacity. We've got target leverage of 250%-300% debt to equity. As we generate more earnings, that capacity keeps going up, gives us money to use to buy more trucks or to invest in other parts of the business. This gives you an idea of how that works. We've got about $10 billion. Over a three-year period, we've got about $10 billion of operating cash flow and used vehicle sales proceeds that we expect to generate. That would increase our debt capacity by $3.5 billion.
Think about $13.5 billion over a three-year period that we can use to invest in different things. The first call is going to be the replacement of lease trucks that expire. That is just under $9 billion that we will spend on replacing lease trucks. We have our dividend that we pay out, which over a three-year period is about $400 million. That leaves us with $4.3 billion of what we call available for flexible deployment. We can use that to invest in organic growth, primarily in our truck leasing and dedicated businesses. We are targeting 2,000-4,000 unit growth. If you assume we are hitting that level, that still leaves me with $2.3 billion to either invest in acquisitions or buybacks or other investments that we could return money to shareholders.
That is kind of the model that we now have working, which we think is in a really good spot. We see this model really being able to continue to contribute and allow us the flexibility to invest in organic growth, acquisitions, and return money to shareholders. That is it.
All right. Great. Thanks for the intro, Robert. Maybe we can just pick up kind of where you left off in terms of you are not expecting a big recovery in the guidance. What are you hearing in terms of conversations with customers, with prospective customers? Do you see any areas, whether it is a geography or a vertical, that is a little more exciting as you start the year?
Yeah. You know, we started the year with, I think ended last year after we got the election behind us.
I would say our customers prior to the election were in a wait-and-see mode or waiting to see what happens with interest rates, what happens with elections. I'd say probably starting in the end of the first quarter of last year, we started to see a slowdown in sales of our contractual businesses, our lease business, our dedicated, and our supply chain. It was primarily customers just not making decisions. Pipeline kept growing because decisions kept getting put off. I would tell you, once the election happened, I said, "Okay, we're past this. Everything's good." As we've gotten into this year now, we're back in this wait-and-see now because of the tariffs and some of the other uncertainties around policy. I would tell you, customers are generally across the board in more of a wait-and-see mode again and not a lot of decisions being made yet.
I think everybody's waiting to see what the rules are going to be going forward. I think there's a desire by most customers to do something and to move forward with projects. Right now, we're seeing just more of a wait-and-see.
I think you're roughly what, 93%-94% U.S. revenue base. The other part with the cross-border is you've invested and have a decent exposure to Mexico. Auto has always been a big part of what's come down over the years in terms of exposure. With all the noise and the back and forth, have you seen any pull forward or stop and starts on the cross-border side?
Yeah, I would tell you not a lot. I think it's interesting to see.
Most of the customers that we have in our supply chain business are large Fortune 500 type companies that have long-term investments and different manufacturing capabilities, if you will. There is not a lot, I think, that can be done in the short term. We have not seen a lot on that side of it. I would tell you that as we have obviously, we are running all our different scenarios like everybody else is. For Ryder, there are puts and takes. On the plus side, I would tell you more manufacturing coming to the U.S. is really good for us because we are 93% U.S. That is where most of our capabilities are. We do have strong capabilities in Mexico, primarily to support manufacturing that comes to the U.S. and then also in Canada. Long term, I think that would be a good thing.
The other positive would be clearly if tariffs are put in place and the cost of trucks, commercial trucks, goes up, that's going to slow down the purchase of trucks and maybe accelerate getting the freight recession behind us with more balance of freight and trucks. On the negative side, though, I think in the short term, if there's an economic slowdown, that could impact our rental business. It could impact our volumes for our supply chain businesses. The extent of that is really hard to gauge. What I can tell you is in our supply chain and our lease business and our dedicated, it's all contractual. The volatility does not impact us to the level that it might to somebody who's got a more transactional business.
You're one of the largest, not the largest buyer of commercial trucks in North America.
A lot of those come from Mexico, or at least manufactured in parts going across the border. We still do not know, like I said, the rules of the game. Are you in discussions with OEMs? Are they able to pre-ship some of those to get them across? Is that something that they are able to do? Is that something you guys are considering at this point? You know you have some growth, so can you pre-stage some of those?
Yeah. On the margin, there is some stuff that we can do and that we are doing for our customers. We do have the ability to pass those costs through, even on trucks that have been ordered. I do not typically buy a truck until I have a signed lease. If I sign a lease, I order the truck and the tariff gets put in place after the lease is signed.
I do have the ability to still pass that through. Obviously, any new leases that we sign, we would pass through. We are doing everything we can on our end to try to get as much of that production across. Again, especially with the on and off, on and off again approach, it has been more challenging. We also do not know what the price impact is going to be from the OEMs. None of them have really quantified that yet.
The other big part with the OEMs is the pre-buy with EPA 2027. Maybe you can walk through that in terms of how that would impact Ryder, what opportunities that would bring if you still think it is going to happen in this deregulatory or potentially deregulatory environment.
Yeah.
Look, I think the pre-buy for Ryder historically has been an opportunity to sell more leases because companies have to make a decision. They pull forward decisions. We end up having slots available from the OEMs. It's such a big purchaser because it's an opportunity to get more customers into leasing. In the short term, it's just locking in more leases. It does not have as big an impact on the bottom line. Where I think it helps us more on the bottom line is longer term. When there is a change in technology that makes the new technology less attractive, either more expensive or less reliable, in this case, probably just more expensive, the older technology becomes more attractive. That happened back in 2007, happened again before 2012. I think that could happen again. That tends to raise the value of used trucks in the marketplace.
Anything that was built before that change, that would be a help for us if that happened. Now, is it going to happen or not? We don't know. I think last month I said, "Yes, I thought it would still happen because the OEMs have developed most of the technology." Maybe it'll happen with some modifications where maybe you don't have all of the components that were originally in the 2027 technology change, where some of the technology change that has already been developed will be included, but maybe some of the other components of that legislation won't be.
What are some of the other regulatory environments that you're watching? I'm assuming California is still always one, just given the size, but also given the CARB rules. They've pulled back the Advanced Clean Fleets, but you still have the Clean Trucks.
Given your footprint and your scale, how do those two potentially play out?
Yeah. The advanced clean truck is basically the OEMs are only allowed to sell a certain number of diesel units based on the number of electric vehicles that they sell, which, as you know, electric vehicles have just been for commercial truck purposes have been very, very difficult to move just because the economics do not work yet for most of them. We do not know. We do not know what the EPA is going to do in terms of some of the waivers that were passed that were given in the past, if those will still hold. If they do not hold, that could maybe impact advanced clean truck. I do not know. We are managing through that.
It's limited the number of trucks that we could buy in California, which is hurting, I think, some of our customers out there. Everything we do is getting more complex. That's an example of complexity.
Right. We're passed through the cost.
We're passed through the cost to them and then really work with them to make sure they can get the vehicles they need.
We have seen a little bit of an uptick in terms of used truck pricing. There's trucks and tractors. There's obviously two quite separate markets. Are you seeing something similar? Obviously, that market's been down for a while now with the rest of the freight market. I don't think you guys have high expectations for that in the guidance this year.
Yeah.
I think there was a, so we've been seeing it kind of bumping along the bottom, actually slightly down each quarter, low single digits. I think there was ACT had a preliminary January number that looked up. The real number, the final number, I think came in up 1% or something. I think the bumping along the bottom is still probably a good description.
Can you talk a little bit more about the cycles? We have the financial crisis, not a lot of trucks get built. Then six or seven years later, the prices go up because you don't have that production gap starts to show up. 2020, five years ago now, hard to believe. I would assume that something similar would happen in the business. Are we only a couple of years away from potentially seeing something in history repeat itself?
Yeah. Our holding period is typically going to be six. By the time we get to the used truck market, six, seven years on some of these things. So we're still maybe a year or two out of that. Yeah, at some point, you should see a shortage of there weren't enough babies born. There weren't enough trucks built six, seven years ago. You will see that. That might be 2026, 2027. As you know, there's a lot going on there too.
Right. Right. One of the other things I want to ask about in terms of the we hear a lot about, but it's maybe a little bit longer lead time than we might expect, is just the nearshoring, reshoring with supply chains and with outsourcing and coming back to the U.S., hopefully, or North America more broadly.
In your experience, is that like a three to four-year time frame? Is it a four to five-year time frame? If we do get some certainty on tariffs and everything else with that in the policy perspective, when would we expect to see some of those supply chains?
You know.
That can be online, I guess.
The more recent example of it, I think, was post-COVID when, especially in the auto sector, there was a move of suppliers closer to where the assembly is taking place and also a move away from China. I think, as I look at that, that probably took a couple of years for these suppliers and tier one, tier two suppliers just to be able to reposition their manufacturing in different countries. I would expect that's probably a similar timeline here because I think they were doing it as quickly as they could.
You're probably looking at, by the time that they actually get it all done in operations, probably a couple-year process.
One of the things we're hearing more about, just industry-wide, not Ryder or any company specific, but just the concept of cargo theft becoming a bit more at least visible. It's always been there. It's always been a challenge. Now we're seeing more, I guess, organization related to that. With your supply chain outsourcing visibility, how does that affect Ryder as an opportunity? Are you seeing similar requests for shippers when it comes to just what seems to be a bigger and bigger problem? We hear about it more from shippers now as well.
Yes. Safety and security is one of the services that we bring to the table.
It is an opportunity for us to companies that are strong with that. We certainly bring best practices to it. We haven't seen a big increase across our fleet. On the leasing side, our customers are responsible for that. Clear on that. Our customers are just leasing the truck from us, and then they handle whatever has to do with whatever they're moving. They're moving with their own drivers. When it comes to the stuff that we do, that's a service that we provide is making sure our drivers are trained on how to try to avoid these types of situations. Again, hasn't been a big impact on our fleets.
One thing that stood out to us when you look at the guidance that you're talking about a little bit earlier, there's not a lot of cyclical recovery in there. I know we've heard this back-half recovery from the freight market for the last couple of years. Same for this year. You got a lot of visibility, I would assume, with the initiatives that are coming. Is the cycle, if it happens, just all upside? Do you have a lot of visibility to these initiatives? Are there ones you can add on to that? It seems like you're in a pretty good spot for this year.
Yeah. We feel like we're in a good spot.
I mean, if you think about our year-over-year on the top end of our range, we're saying we're going to go from $12 a share to $14 a share on the top end. That equates to about $100 million of earnings before tax. $70 million of it is initiatives. It's the combination of those things I talked about, the synergies from our recent acquisition. We've got a really good line of sight, the repricing of our leases that we're in the final legs of doing that. We've shown that we can get that. The maintenance initiatives we also feel pretty good about. We feel good about that $70 million. We got $15 million only from rental recovery.
We've got somewhat of a recovery in the back half of the year, not a significant one, partially offset by used vehicle gains still being down year over year because we're not assuming a lot happens on the used truck pricing yet. That represents about $15 million. The other $15 million is really cost management, cost takeouts. We have a zero-based budgeting process that we've run for now, I don't know, seven, eight years. We always leverage that each year to try to find more cost takeouts when we need them.
Can you talk a little bit more about the Cardinal acquisition, maybe how it started, how it's going?
Yeah.
Because it's what, former Ryder folks there. I'm assuming you knew them for a little while. How's that? Sounds like it's going pretty well so far.
It's going very well.
Ryder's dedicated operation is what we call more customized or specialized dedicated. That means that it's not typically just a driver who's driving into a dock door and loading a dry van trailer. It's going to require the driver to do more than just drive the truck. When they get there, they have to do their special handling required or special types of equipment. Think about steel companies where you're driving a flatbed with a bunch of steel behind it. You got to deliver that steel. That's one of the things that we do very well. Delivering to a retail store that is in a mall, not in a big box that you can just pull in. The driver has to get out and move some totes in. Those are the types of dedicated operations that we run.
Cardinal had a very similar profile of customer that aligned really well with Ryder's customer base. That has been a really easy, I would not say easy, but it has been a favorable blend to bring those organizations together. Culturally, also, I think a good fit. Really, the synergies have been primarily from just the equipment. Cardinal was going out buying their own trucks, doing maintenance through third parties. You bring that through the Ryder network. There are just savings in that we can buy the trucks better. We have really optimized maintenance operations, and we are able to bring value there. Obviously, the consolidation of some of the back office and overhead is also helping us get those synergies.
Is this something you can sort of scale? Are there Cardinals around there?
Maybe not at the same size, but is this a pattern you can not do one every year, but maybe one every other year in terms of building out that structure maybe a little bit faster than doing it organically?
Yeah. We'd be interested in doing that as we're always in the market looking. We find another again, we want to have it like Cardinal, well-run company, good customer contracts. We are in the market looking for other Cardinals like that that we can bring in because it also gives us some density on freight, which is important for the if you think about what's the next $150 million of initiatives that we would look for is now, how do I optimize this dedicated business across customers? Because right now, we kind of operate most of them as standalone customers providing service to that customer.
There are opportunities to leverage drivers, to leverage power, to leverage broader equipment. That is an opportunity, as we see, as the next wave. The more density we can get in a geography, the more opportunities we are going to have to do that.
That would, excuse me, that would be the flex operating plan model. Maybe.
Correct. Yeah. We talked a little bit about that.
Yeah. I think that was at the investor day not too long ago. Is that just fitting more backhauls together, more density, more stops, slip seating? What are some of the concepts? Because, like you said, it is not quite like the dedicated that maybe most of us are familiar with.
Yes, backhauls, doing more backhauls. We always try to do that.
This is also having the visibility across accounts to be able to take a driver that might have some additional time still available and put them on a different account route, take equipment that may be sitting on one account for a certain period of time and put it on a different one. We do not do a lot of that today. I think flex is really about that, first doing it manually. We also have a technology we are developing that is going to help us do that on a more automated basis.
If there are any questions in the room, go ahead and raise your hand. Thought we might have one. Down here in the front, please.
You mentioned that your drivers do more than just pull up and say, "Hey, take my stuff." Do you train them? How do you recruit?
How do you manage the chronic truck driver shortage?
Sure. That's a great question. We have about 13,000 professional drivers who are employees of Ryder. We have, I would say, a vast driver recruiting organization. It fluctuates, but anywhere between 80-100 folks that are out there. They're in the markets. I say we can typically find drivers where private fleets can't. We do have training programs that we put in. We don't typically hire a driver unless they've already driven somewhere for a period of time from a safety standpoint. What's attractive about Ryder is that they're working for a company. This is what we do for a living. It's not a private fleet where you're just sort of a support. They're home every night because, for the most part, I think 85%-90% of our routes are home every night.
You're not over the road for long periods of time, which can be difficult on the work-life balance. You're also at a company where you've got multiple options. If you're on one account, you're doing a good job, but you want to either move to another part of the country or you want to do something different, we've got a lot of different accounts that do something a little different, gives you some variety in what you do. Obviously, pay. We make sure that we're paying well within the market for drivers. Our turnover is somewhere in that 30%-40% range, typically, where if you look at the truckload carriers and the over-the-road folks, they've got a much higher turnover.
A couple of minutes left, Robert. Maybe we can talk about technology broadly within the company.
Some of the initiatives that you have focused on in the past, it's been visibility, connectivity, obviously, productivity in general. What are some of the top things you're working on from a tech perspective in Ryder?
We purchased, I mentioned, a company called Baton about two years ago now. It was a startup that we had originally invested in through our Ryder Ventures organization. It was a group that was working on optimizing truckload deliveries. The more we got to know this group, we realized we thought, first of all, a really smart group doing really neat things. We felt that that technology could be better applied to the Ryder network and all the freight and trucks that we have visibility to. We have invested in them, built up that organization now that is really a technology lab for Ryder.
They are working on visibility, not just visibility, which we have through Ryder Share, but also how do I optimize now? How do I take all this freight that I have visibility to? How do I do a better job of optimizing across dedicated, across our supply chain business? Ultimately, the vision is, and this is way out there, but ultimately, the vision is to have a Ryder ecosystem where if you are leasing a truck from Ryder, you can plug into the Ryder ecosystem, and then you get the benefits of being able to see all the freight that we see and what you might have opportunities for backhauls. You might have opportunities to move a load for somebody else. They are working on the backbone of that technology. That is probably phase three or four I am giving you.
Phase one and two is just really taking that visibility and now looking for the opportunities to cross-utilize equipment. On the fleet management side, we've got Ryder Guide, which is our visibility for folks that just lease trucks from us. What are their trucks doing? Which trucks are idle? When do trucks need to come in for maintenance? Which trucks are costing them more on a cost-per-mile basis? That type of visibility we've got out there. We've also rolled out, it's not a technology, but it's a new service called Torque, where we're doing mobile maintenance, so retail mobile maintenance. This is for customers that aren't interested in a full-service lease necessarily. They want to just, on a retail basis, have a truck show up at their location and do the maintenance for their trucks at their location.
We're finding that to be a pretty good business. We've done a few little acquisitions and rolling this thing up. We'd like to, over time, build a broader network that we could service trucks for that segment of the market. Again, just being able to penetrate that segment of the market with a mobile maintenance offering.
Okay. Very good. We are just about out of time, so we'll end it there. Robert, thanks very much for your time today. Really appreciate it.
Thanks, Brian. Thanks for having us.
Here. It's different.
We are going to keep things rolling here on the transports track of the Industrials Conference. Again, I'm Brian Ossenbeck, cover transports logistics for JPMorgan. We are going to talk with Norfolk Southern here. We've got Jason Zampi, the CFO, John Orr, the COO. Thanks a lot, guys, for coming.
Really appreciate your time today. Clearly, no shortage of things to talk about in railroading in the broader freight market in general, but we've got a nice full room. If there are questions people want to throw in there, get my attention. We'll get you a microphone as well. Maybe we'll just start off a little bit kind of state of the railroad. How are things operating at this point in time? Obviously, there's a little bit of a challenging. There's always weather. There's always winter. This one felt like it was a little bit abnormal. How are things running at this point in time coming into what's usually the most important month of the quarter for freight in particular?
Yeah. Thanks, Brian, for having us. It's a pleasure to be here. I'll tell you, you're right.
Winter in 2025 had a different flavor than it normally has, especially in the U.S. At NS, we've had over 17 major storms that include polar vortexes. Most recently, we had a 2-inch rainfall that manifested into a 49-foot flood in West Virginia in our major corridor. What do you do about stuff like that? As a Canadian, you prepare for winter. Some of my team were giving me a little grief that, "Hey, you're overpreparing us. We don't get winter like that that you're thinking about." As luck would have it, we did. For a short period, we had over a 100-mile stretch after that flood that we had wash-outs and at risk where we had to take out the main line, put it back in, and then the floods came again, and we had to do it all over again.
I believe in putting all the resources to getting restored. We restored ourselves twice over a period of four days. We are back up and running to over a billion GTMs within a week. It is that capability to respond, respond acutely, prepare, overprepare in a lot of cases, and then be ready to engage. That is kind of the transition that we have been leading NS into overall, not just winter. You saw it during the hurricanes last year. We cannot just say we are at the mercy of cold weather. We cannot just say that floods are going to shut us down. We have to be able to drive as deep into issues as we possibly can, come out of them as fast as we can.
As the team matures and gets more capability and really gets confidence in speaking up to issues, we're able to respond a lot more quickly. I was just in Williamson last week, really checking in on the people affected by the flood. Thankfully, nobody was killed in our area, but there were several fatalities on both sides of the state line and it really reinforced the emergency capability, but then challenged them to get back on track faster. We called it March Madness and got into really pushing hard like a college team to focus on the prize at the end of the month, really restoring as much as possible for the quarter. Winter has affected us, in some cases, affected our customers even more. Between Jason and I and Ed, we're really focused on what's out there, what can we recover.
I'm really, really proud of how we're picking it up.
Jason, you've been around for a little while at the network, and John kind of laid out some of the things that have changed or he's working on right now. What would have happened last year or prior to the plan if something like this similar would have happened at the network?
Yeah. Exactly like you said, Brian, 18 months ago, two years ago, this would have put us down for quite some time. We're not talking this incident kind of days. We'd be talking months to kind of revamp from something like that. It's really incredible the resiliency that we've been able to build into the network. You've seen it with this storm, the series of storms this winter, the hurricanes last year, all kinds of disruptions.
John and his team had this operational momentum that really helps us get out of these situations very quickly. The other thing, when you think about resiliency, I think about the speed of recovery, but it's also the agility that John and his team have been able to show. Whether that's port strikes and freight completely shifting to a different coast, or it's things like the Baltimore Bridge outage and what we had to do there to continue to serve our customers, that agility and resiliency never existed before. Both of those things are super important right now as we come into a time that's pretty uncertain with a lot of other things going on. It's really just incredible what the team's been able to accomplish.
You've talked about the number of days and number of storms and whatnot.
First quarter is always a bit tough from a operating ratio and financial perspective. Are you able to put any more context or color or quantify what it has cost so far?
Yeah. I would say just starting off, we're super focused on our full-year guidance, right? And just as a reminder, that's at least $150 million of productivity savings. And it's 150 basis points of year-over-year operating ratio improvement with about 3% revenue growth. That is our key focus. Like you said, Brian, first quarter is typically the high watermark from an operating ratio perspective. If you think about it sequentially from fourth quarter going into first quarter, it's probably about 200 basis points of headwind there.
With these winter storms that we have just gone through here, and yes, winter happens every year, I think John kind of pointed out these were really abnormal impacts on us. From an expense perspective, kind of incremental to that seasonality, we probably have upwards of $40 million of expense that is going to hit us this quarter. Obviously, it is going to have some top-line impacts as well. John and Ed and the whole team are really focused on, and we are recapturing a lot of that volume that was lost over those couple of weeks, months where we had these big disruptions. We will not be able to get all that back by the end of the quarter. What it has really created is kind of a timing challenge. We will get that revenue.
We're confident we'll recapture all of it, but most likely not all within the first quarter. That adds kind of another headwind to the first quarter. I think you're going to see some elevated results in the first quarter from an OR perspective. Having said that, all in, we still feel very confident in our full-year guide.
One of the other big pieces of uncertainty, obviously, is just tariffs and the on-and-off nature of that. I don't know if anything's come on or off since we've been speaking, but possibly. In your conversations with shippers and John just preparing the network for that, I imagine railroads historically don't do, or freight in general just doesn't do well with on-and-off. I guess, firstly, have you seen any behavior changes?
Have you seen or felt any sort of impact from those on the network side?
Yeah. Brian, I've had the privilege of working in Canada, the United States, and Mexico. A lot of those are import-export operations. I can tell you this, that uncertainty in any environment is not healthy, whether it's a relationship or a business. We saw that even with the East Coast port strike threat and a three-day strike manifested into a lot of disruption in the supply chain. I think we took a lot of pages from that. Number one, even though there was some repositioning of freight to the West Coast, we were able to interchange and effectively move it within our catchment, whether it came from the East Coast or the West Coast.
We had enough capacity and capability and line of sight and trading relationships with our West Coast rail exchangers to be very responsive. It is very much the same. Right now, we're jumping on everything. We've got locomotives in reserve. We've got them hot and ready, and we've got them deployed wherever we need them. We've got a resource in cars that are still parked, and we're pulling them out. One of the most front-and-center commodities is steel. We've been very responsive to our steel producers in pulling out some cars that are stored to help them move as much as they can. We're ready to do that with any of our customers. We want our customers to win in their markets. We're willing to use the resiliencies that we've accrued to be as agile and responsive as we can.
We have the resources ready to go. I think despite all the turbulence on the surface of water, there is steady state underneath it. I think those steady states will come. For all of the reasons that the tariff talks are on, there will be a healthy outcome at some point. We are ready to work through the turbulence as well as the steady state. I think when you have a railway working as closely as we are and as customer-centric as NS is, we have, what I would say, a unique ability to be more responsive than perhaps others. That is our wheelhouse. We will continue to serve our customers, be really agile, and help them win despite the turbulence.
Jason, from a, I guess, end-market perspective or financial and the volume side, are there any commodities or trade flows that you're watching in particular that could be, as written, the tariffs are going to cover a wide range of things, but export coal, for example, possibly export agriculture, obviously steel, autos. What do you look at kind of the exposure as they stand right now on the network?
Yeah. First, adding on to your previous question, I think, like most people, customers, manufacturers, everybody's kind of in a wait-and-see approach, right? Just seeing how all this uncertainty plays out, obviously keeping a close handle on what's going on. From our business perspective, about 75% of our business is domestic. We move the U.S. GDP. Wherever the manufacturing occurs, wherever our shippers are, we stand ready to serve them.
I think that's the great part about the agility that I just mentioned and what the work John and his team have done. If the volume's there, we're ready to move it. We've got the capacity, the resiliency, and the agility to handle it. We'll see how it plays out, but I think we've got a good line on being able to move that traffic.
On a related topic, I guess, with agility, if we do have a share shift back to the East and Gulf Coast, which I assume we would, but it's hard to say for sure, would that be net positive, negative, neutral?
Is it a different way of trade flows, obviously, or the freight flows rather, but would you be happier having more back on the East and Gulf Coast, or does it not necessarily matter because you're getting some of that interchange from the West Coast anyway?
Yeah. I don't know if you have an opinion operationally, John, but the way I think about it is, to your point, we'll see how it shakes out, right? I mean, tariffs may impact that, but assuming freight does kind of come back to the East Coast, which makes sense for certain things instead of going from LA to New York, comes in on the East Coast, I'd say we're kind of agnostic to it. There's puts and takes, benefits, and detriments each way.
As an example, something comes in on the East Coast where we've got a lot of density there that we can serve, but we've got shorter length of haul. If it comes in West Coast, we've got longer lengths of hauls, but you could have some traffic leakage in some of the gateway cities like New York or Kansas City. I think there's puts and takes to both. We've shown that wherever that traffic wants to come in, we'll move it. I think we'll take it wherever it comes.
Yeah. For me, I invest in generational railroaders, really focus on terminal performance and first-mile, last-mile capability, and of course, over the road. When their first mile starts on our territory, you've got the opportunity to really set the clock on PSR 2.0 really relies on a lot of accuracy and then stability.
If they're coming on to us, then you don't have a multi-thousand-mile journey that could be plus or minus several hours to make a connection or to optimize your train yield. When they're coming to us, then we can really have more influence on that and more of the quality of the first touch into the country and then the last touch into the marketplace. Either way, we've got some really good railways that we interchange. We've got a very, very robust network that includes a lot of sophistication on how we move cars from one company to another. From a financial position, I agree with Jason. Just from an operating person, I like to control what I can control. I'd prefer it to be on me. We take it either way.
One more kind of operational freight flow question.
If we see these fees, levies, whatever you want to call them, on port calls for vessels that are tied to China in some shape or form, what I've heard is that's going to create more bunching, potentially more congestion as these vessels just visit the larger ports on the East and the West Coast. I don't know if you've heard anything different from your conversations with your ocean carrier partners, but would that be something you think the network would be able to handle, just broadly speaking, rail network in general? I tend to think of more stuff at one place at one time, potentially causing some congestion.
I won't work in hypotheticals, but just constructively, I would think that density helps rails. The frequency of departure and how we manage that is not a bad thing.
It's the consistency and stability of what that event is happening. I can tell you this as a railroad person, if I'm looking at competing modal competition and I'm a producer, I'm looking for the lowest cost, most reliable system of moving it. A lot of times, due to our service in the past or other economic drivers, including just-in-time supply, people have chosen other modes of transportation. I think the threat of increased cost or the reality of an increased cost really would drive me as a logistics person to go to the lowest cost transportation and shave money so I can provide end user a better product at a lower cost.
I think railways are positioned, especially us who really work in that industrial complex of the Eastern United States, to really be responsive and support the control over the net effect of cost within the country. I think, yeah, it depends on how much capacity you have. We've got capacity to serve. We can manage through frequency of departure, any kind of surges. We do. We saw it during port strike. We see it as vessels recover from ocean-borne storms and the sequencing gets out of kilter. It's nothing we don't do. If it becomes a part of our landscape, we just adjust to it.
I'd just add too, wherever, if that concentration does occur, I mean, we serve every port on the East Coast and the Gulf. I mean, we're well-positioned from that perspective. Like John said, we're ready to handle it.
Maybe talk a little bit more about truckload conversion. We've seen that pick up here, especially on the East, which is a little surprising considering the truck market's not recovering anytime soon, it looks like. Maybe you can talk just approaching that market. I think in the past, you've called it more flexible freight. How to get that to come to Norfolk, come to the railroad, and then stay and not just go back and forth when it suits whatever that supply chain is that we're talking about.
Yeah. I think about that kind of in two pieces. One, I would call share recapture. That's freight that we used to move and no longer do, and then share growth, right? Just new opportunities there. I think the foundation for both of those is a really good, consistent service product.
That is something that we have talked about here, but that is what John and his team have built. That is the key to either picking back up freight that we had lost or just growing with new customers. I think that is key. The next step in that is then how do we enhance the ease of doing business with us? Whether that is becoming a rail customer for the first time or it is providing that consistent, reliable service that the customer can trust that is more truck-like. I think those are the key components for us. Really, the good service product is the thing that really unlocks all of that conversion.
Yeah.
Brian, you would have seen last year in 2024, we spent a lot of time stabilizing the level of service, creating a lot more reliable service product and a couple of cranks of the operational improvement wheel on our planning, our structure, and our train service plan in general. This year, as talked about in December or January, I guess, we're taking now that capability that we've developed and turning up the heat a little bit more on ourselves, greater length of haul for our trains. That means our assets are going to be turning faster, the tighter standards within terminals so that our cars dwell and the utility of the cars are optimized. We are taking what we've done as a base last year and turning it up. As we did that, we started with safety and capability. Now we're looking at safety, capability, and business acumen.
Really helping our leadership across all the stratas understand the business outcomes that they're driving. If you can do that and still have a balance on your cost structure and your truck-like service, which that's the goal, that's one of the goals, that's going to help us now have a competitive front view and reputation from people who want to convert. They really want a lower cost, better choice to move or hedge a little bit. We are going to really go strong on our service quality, still on our cost structure and our top and bottom line focus. It's really about what do our customers need? How can we be more inclusive to onboard more people?
Maybe, Jason, you can offer some comments on how the domestic channel partners are doing during bid season.
Obviously, the truck market, as I just mentioned, is not really going up anytime soon. At least it does not look like it is bouncing around with seasonality. That is a good sign. How are the folks with the private boxes, maybe even the rail-owned boxes, feeling as they go into that sort of market? Service is certainly helping, but the competition probably not.
I think I would say I think we are around 70% of the way into that process. We are hearing good things from our channel partners. I think a lot of positivity out there. I would say you talk about truck pricing. I mean, you see the same metrics that we do, and we are not really expecting a big rebound there anytime soon. That is not in our base case scenario. Obviously, we will take it when it comes.
I think so far from where we are in the bid season, we're feeling pretty good about things as our channel partners and our beneficial owners as well.
Maybe you can talk a little bit more about pricing, Jason, as you get into, again, come back to the service product, which is improving. The time lag of catching up with inflation, certain contracts probably work that way, but still not the best market from a visibility perspective. I think you guys are a little bit unique in terms of how you're able to approach that market and approach pricing, which has been a little difficult for the industry to get ahead of cost recently. What's sort of your base case for the year and your sort of tracking along that to start?
Yeah. I mean, I think, as you said, pricing conversations are always tough.
When you have a great service product, it makes that a little bit easier. We can show the value that we're bringing to them. I think from an overall perspective, it's kind of hard to talk about pricing at the high level because there are so many different moving parts. I think if you start with coal, you think about that's kind of tied to Seaborn benchmarks, and you see what's happening from that perspective. On the IP side, we've really done a really good job of strong pricing there, been very disciplined on our pricing side, and I think beat our own pricing plan there as we moved through last year. We expect to continue that momentum.
I think what the service product does is it allows us to, like I said, number one, continue that momentum, but two, add additional volume from those customers, whether existing or new. That is what's going on, I think, in the IP side. On the intermodal side, kind of like I just talked about, really, because that is so truck competitive, we're really focused on what the truck pricing environment is. As I just mentioned, we do not have any kind of significant rebound built into our base case plan there. I think, like I said, I think it is easier to think about the pricing across those three big commodities separately and what we can do there. I think we have been really proud of what we have been able to do on the industrial product side from a pricing perspective.
Now with this consistent service product, adding volume to that as well.
John, one question I wanted to ask you for a little while now is car miles per day because we see that from typically the longer length of haul networks, like one we spoke to this morning, where it is over 200 - 215, which sounds great on an absolute basis relative to Easterns, which are a bit shorter. How do we put that? It is relatively new for Norfolk to talk about that. How do we put that into context? Do you have a view on where that can go and what that would mean?
Yeah. It probably is a reflection of my roots.
Car miles per day are important, but it's a massive asset that reflects not only on the use of a car, but the product in it and how fast it's getting to where it needs to go. I'll tell you, Brian, I don't fall in love with any one particular metric. I certainly won't allow my team to talk vanity metrics. It has to have a business reason why we're focused in on it. That is so tied into how effective we are over the road and how really precise we are within a terminal. That's what I'm focused on. I just want to keep pushing myself and incremental improvements. Really, we haven't touched the value proposition for this network yet. I don't know where the ceiling is.
I know we've created a lot of capacity for both trains, train length, train yield, throughput, and terminals. Car miles is one of those things that you've seen a lot of improvement. Even despite the headwinds that we've had this winter through the storms, we're still improving across the board on our train speeds, our car miles. Dwell gets impacted probably more than anything else, and even our locomotive utilization. I look at it as a balance. As I talk through it, I always talk through our internal assets of car, car miles, our network productivity, horsepower per GTMs, etc., and then as the customer sees it. I'm always trying to have that balance. There's probably lanes, especially in the northern corridor, where we could really crank it up, but then at what cost and what value?
I really want to make sure when I'm going in the pit to change the tires, I'm going to get faster lap times and win the race. We just got to be balanced in how we look at that. I think car miles are very instructive to how we're running, how our network is planned. More importantly, it's the deltas between expectation and reality that we have to drive into. Those help us and guide.
Another area that seems like a potential upside for Norfolk is just on the fuel economy and fuel efficiency. I know you've brought in some people to help out with that. It's always been interesting that CSX, given the shorter length of haul, has been able to lead at least the U.S. rails in that perspective. Is that achievable in your view over some period of time?
Is there a mixed differential because you have a bit more intermodal? Where does that stand? I guess you can use a baseball analogy in terms of innings.
What innings? Are we the home team or the away team?
We'll give you the home team.
Home team, perfect. It is the top of one inning or another. I would say there are a couple of pieces to that. I am absolutely committed to being the best we can be in fuel. I think we can meet and exceed our competition in the East on that. It is early days, and we have made a lot of improvements. There are administrative controls. How do we account for fuel? What processes do we have in place? How do we reconcile, right? How quickly?
We have really worked at speeding all of those things up and creating as much automation as possible. There are investments that we are prepared to make. We are in the midst of a 100-day review of all of our purchases and services and category management of those things. Front and center is fuel. That is why I brought Mina and Carlo and other people into the company. They are absolute experts at this. You will see deeper dives on that, a reconstruction of how we source fuel, how we deploy it, even some capital investment around managing those things. I would say that the nice thing is probably in the early innings of the World Series. There are not just nine innings, it is up to 63 innings. We are making a lot of progress. We are really looking at sustained improvement.
We will see inflection points where we get a lot of value and then the next iteration and improvement. You saw that last year. We are really challenging ourselves. Absolutely. Really aggressive improvement. We are tracking fairly close to that. I am excited by it. Really, really excited by it.
Great. One question we have been asking everybody here this week is we have seen more reports, and the AAR came out with one on cargo theft and how much that costs the industry. We hear more from shippers at conferences we go to as well. It does seem like it is not just any specific railroad, and it is getting more organized, more challenging for freight in general. Has that reached a level of heightened focus from your conversations, and how is the industry trying to address that?
Yeah. I will say this.
Police report to me at NS, and I take it very seriously. I want to give them all the tools and skills and support that they need to effectively protect our infrastructure, our people, and of course, cargo. I do not know how to say this politically correctly, but I do not want places like Atlanta and Chicago to experience the same kind of theft and disruption that we saw in other parts of the country. We have really been focused on how do we do that. For me, a train at rest is a train at risk. The faster we move them, the better we are going to be to insulate, especially through risk areas. We know where our risk areas are.
In order to really energize our police, I have brought in a group that I worked with in Mexico who were very skilled at assessing and action orientation around concentrically protecting key areas. We are really looking at how do we do that. How do we then do what we can ourselves and bring our partners in other railways that we interchange in some of these areas, even groups that have interest, including BCOs and other people that may want to be a part of that. We are taking it very seriously. We are able to work through it very well right now. I just do not want to give any kind of opening to further disruption.
Right. We have a couple of minutes left. If there is anybody in the room wanting to ask a question. If not, I have certainly got a few more in the back there.
Sorry, the three-day port strikes that happened, you touched on that a little bit and how it did not really have a huge disruption to your network. One of the issues with the port strikes was the automation at the ports and the union's desire to have that kind of kiboshed in some ways. How does automation at the ports affect your business? Does it affect how much you can load, when you can load? If they were to become 60%-80% automated, would that change in what way or another your business?
I think globally, we have seen the impact on progress through technology. Progress through technology does not itself lend to optimization or improvements. It is how it interfaces with people and that willingness to engage in it. Ports are going to do what they are going to do.
When they load the rail cars and if they can find more efficiencies, whether it's traditional or new ways, then we're ready to jump on that. I have worked in areas where they're more technologically advanced and others where it's more traditional. Either way, we're able to provide effective service and move the goods. I think that the benefit could, or the thesis could be, is how effective things move on that port in a constraint on acreage or limitations that are terrestrial. That will be up to the ports on how they deal with that. We are agnostic one way or the other. We have great partnerships with our ports, and they have been able to respond to changes that we have made and headwinds that we have faced. We are ready to support our trading partners in any way we can.
I don't think I've got a position one way or the other.
John, maybe I'll wrap up with a kind of related question. When you look at staffing, engagement, bench strength of the team, there's been a lot of operational changes. We've seen pretty contentious negotiation with industry and labor. We've seen work rest rules change. How are you feeling right now in terms of how all that's positioned and being able to execute down to the field level?
Brian, one of the first things I did was take the field leadership out of Atlanta and put them where they belong in the field. Our Vice President, operational vice presidents, general management, superintendents, that top three tiers of management that weren't necessarily in the field where they were able to make decisions, influence people, push them out.
That's allowed us to decentralize some of the decision-making and put in controls into Atlanta to validate the decisions. That's helped us tremendously in the agility, the responsiveness. It's helped in safety. Our safety performance last year improved over 35% in injuries and accidents. We're on track to around 37% right now on top of that as we move through the year. Stability, safety, and engagement has been improved tremendously. I'm still looking to build up the bench. That's why I'm spending a lot of time this year on clarity camps. It'll be a business acumen, communications, and capability and safety for the top 30% graduates from my safety camps will advance into business clarity camps to really drive home that need and build the bench and create that capability. We're finding ways to really develop people more rapidly within NS.
We have a great host of people with talent all over the place and finding those nuggets and moving them out into the field. We have a group of PhDs in our operations research department. I have brought them into my war rooms now. They still work for O'Neill. We are looking at the trending of traction motors and outputs of locomotives and any kind of erosion in power and traction. Sending them out into the field, they are actually riding trains and feeling what they are actually experiencing in the academic world in a practical world and connecting to our team. They are elevating. The business is improving from places I did not even anticipate last year. We will continue to do that. I think it supports us. We are early days into this transformation.
I would think that it's important to tell you across the board, whether it's the finance department, the commercial group, the back office, or the operations teams, we're really focused on improving NS, creating top and bottom line growth, closing performance gaps to our peers, and providing the best service we can possibly provide. We're moving along that purposefully with deliberate practice. We know that we don't have all the answers yet, and we're really, really focused on developing that capability even more fully so we can compete and we can win.
Okay. Great. We're out of time, so we have to wrap it up there. John, Jason, thank you very much for spending your day with us.
Appreciate it. Thank you. Thank you, everybody.