Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Norfolk Southern Corp (NSC, Financial) reported adjusted operating income of $1.1 billion, net income of $694 million, and diluted earnings per share of $3.06.
- The company achieved a 480 basis point sequential margin improvement on its adjusted operating ratio, reaching 65.1% in Q2.
- NSC posted record performance in several key merchandise measures, including automotive and intermodal markets.
- The company demonstrated significant progress in operational metrics, including a 6% improvement in car velocity and a reduction of 3% in cars online.
- NSC's commitment to safety resulted in a best-in-class mainline accident rate and a reduction in unscheduled train stops by 18% in Q2.
Negative Points
- Revenue growth expectations for the full year were lowered from approximately 3% to around 1% due to continuing market headwinds.
- Intermodal revenue was flat, with an 8% increase in volume offset by an 8% decline in revenue per unit (RPU).
- Coal revenue declined by 3% due to a 2% volume decrease and challenges in the utility space.
- The company faces a $25 million step-up in compensation and benefits costs in Q3 due to a contractual wage increase.
- Adverse mix within business lines remains a headwind, impacting revenue per unit despite volume growth in merchandise.
Q & A Highlights
Q: Are we seeing intermodal yields at a bottom, or are there potential drivers that they go down further? How do you think about the opportunity and the timing to see stronger pricing and revenue per unit in the intermodal business?
A: (Claude Elkins, Executive Vice President, Chief Marketing Officer) Mix and price make up around six of the seven points in weakness. The mix is driven by lower parcel counts and a lot of empty shipments. We think we're around the bottom and getting closer to an inflection point. Customers are expecting a real peak season this year, which bodes well for both international and domestic customers.
Q: Can you help us think about the overall cost-ex-fuel trend in NOR in Q3? And is the negative mix a cyclical phenomenon or something more structural?
A: (Mark George, Independent Director) We expect continued reductions in crew starts and overtime despite higher volumes. Fuel efficiency should continue to improve, and we are attacking purchase services. However, we have a 4.5% wage increase effective July 1, which is a $25 million step up in comp and bend, and fuel is expected to be a headwind as well.
Q: What is the upside and downside to the 64-65% OR target?
A: (Mark George, Independent Director) Sequential volume improvement is expected, which will help. Continued momentum in productivity will also aid despite headwinds from wage increases and fuel costs. We are confident in our guidance for the second half of the year.
Q: Can you discuss the potential impact of STB hearings on the rail industry?
A: (Alan Shaw, Vice President) The STB is focused on service, and so are we. We are improving service, reducing costs, growing revenue, and enhancing safety. We have a good story to tell and are aligned with the STB's vision.
Q: How do you think about headcount given the progress you're making? Should we expect further reductions in heads as we move through the rest of the year?
A: (John Orr, Executive Vice President - Operations) This is not a headcount reduction exercise but right-sizing the service and aligning asset efficiencies with customer requirements. We have frozen hiring except for acute skills needed and are focused on eliminating waste associated with overtime and other non-value-added expenses.
Q: Can you elaborate on the broad-based initiatives in purchase services and how we should think about the cadence of purchase services as we progress through the year?
A: (Mark George, Independent Director) We are focused on reducing costs in areas like fuel distribution and vendor accountability. Purchase services will be no worse than in the first half and are expected to be down year-over-year in the back half.
Q: What does it take to catalyze and start winning back more profitable merchandise volume? Is this included in the volume outlook for the back half?
A: (Alan Shaw, Vice President) Leveraging improved service product and capacity to bear as we increase utilization of equipment. Customers want to save money, and rail has a cost advantage relative to truck. We are focused on giving customers a consistent and reliable service product.
Q: How do you assess the difficulty of execution for operational initiatives to close the margin gap?
A: (John Orr, Executive Vice President - Operations) It's a blend of small and big wins, with a clear line of sight to a pipeline of opportunities. It's about leadership, planning, and disciplined execution. We are confident in our ability to deliver despite market weaknesses.
Q: How do you view the market opportunity for Mexico, especially with the new routes via CPKC?
A: (Claude Elkins, Executive Vice President, Chief Marketing Officer) Near-shoring and on-shoring are occurring, with advanced manufacturing likely coming back to the US and basic manufacturing to Mexico. We are in talks with Grupo Mexico and CPKC on opportunities, including connecting Mexico to the Southeast via the Meridian Speedway.
Q: Does the increased productivity this year set the stage for better OR improvements in the years ahead?
A: (Alan Shaw, Vice President) We are in the first year of a multi-year plan to reduce OR to a sub-60% rate. We are executing, improving service, reducing costs, growing revenue, and enhancing safety. We have a roadmap and are delivering on it.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
