Norfolk Southern Corp (NSC) — Q1 2019 Earnings Call Transcript

Thank you, Rob. And good morning. Before we begin, please note that during today's call, we may make certain forward-looking statements, which are subject to risks and uncertainties, and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important. The slides of the presenters are available on our website at norfolksouthern.com in the investor section, along with our Non-GAAP reconciliation. Additionally, a transcript and downloads will be posted after the call. Now it is my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires.

Good morning, everyone, and welcome to Norfolk Southern's first quarter 2019 earnings call. Joining me today are Alan Shaw, Chief Marketing Officer; Mike Wheeler, Chief Operating Officer; and Cindy Earhart, Chief Financial Officer. At our recent Investor Day in Atlanta, we described our team's commitment to reimagining what’s possible for Norfolk Southern, and that commitment is unwavering. We find that the more we adopt new practices and ideas, the more we can drive bottom line growth and shareholder value. The results showed in the first quarter, as indicated on slide four. Income from operations was $966 million, an increase of 16%. Net income was $677 million, up 23% over the prior year, and EPS was $2.51, representing a 30% increase. The operating ratio improved 330 basis points versus last year to 66%. All of these figures were first quarter records. Underlying these financial achievements were dramatic improvements in network performance. Key service and productivity measures also moved in the right direction. The stage is now set for the implementation of our new operating plan, Top 21, which will drive further operational, service, and financial progress. To provide details on our first quarter results, Alan will cover revenue, Mike will cover operations, and Cindy will go over the financial results. I'll now turn the call over to Alan.

Thank you, Jim and good morning, everyone. I'm pleased to discuss our first quarter results that demonstrate our ongoing progress in driving top-line growth and margin expansion, enhanced by the initiatives introduced at our February Investor Day. Our results highlight our yield-up strategy with a focus on testing the limits of market-based pricing, reflecting the value of our network and product, allocating resources to opportunities with the greatest return, and reducing network complexity to develop a valued service product we execute every day. Our continued emphasis on collaboration between Norfolk Southern and our customers strengthened our ability to deliver pricing increases and service improvement, resulting in solid revenue growth. As Mike will discuss in a few minutes, our customer-facing metrics are trending in a positive direction. As we continue to improve our service product, we are effectively aligning with our customers for our mutual goals of more reliable and frequent service with better velocity. This provides both Norfolk Southern and our customers with a platform for growth while we both compete in an evolving marketplace. Our initiatives are delivering results. Slide six highlights our first quarter year-over-year growth of 5%, the ninth consecutive quarter of year-over-year revenue gains, and a record for first-quarter revenue. Strong pricing in all business groups and higher fuel surcharge revenue improved revenue per unit by 4%. Our pricing success increased merchandise revenues by 5% year-over-year, despite a 1% decline in volume in the first quarter. Strong service levels and demand increased corn and feed volumes, offset by decreases in our automotive business impacted by declines in U.S. light vehicle production and railcar availability due to disruptions across the U.S. multi-level network. Our intermodal franchise continues to thrive, with first-quarter revenues increasing 6% year-over-year on a 2% volume gain. In particular, international growth is up significantly due to a rise in import volumes as a result of tariff uncertainty. These gains were partially offset by declines in domestic shipments that face difficult comparisons to double-digit growth last year and were negatively impacted by winter weather and lane rationalizations as part of our strategic initiatives to yield up and optimize our network. In our coal franchise, our efforts to realize the value of our service product through pricing resulted in a 6% improvement in revenue per unit, maintaining revenue of $435 million despite a 5% reduction in volume. First-quarter volumes declined in the export market due to decreases in metallurgical coal availability and weaker thermal seaborne pricing. Utility volume was relatively flat as gains from improved network velocity were offset by planned outages and inclement weather. All business groups posted significant gains in revenue per unit, with merchandise and intermodal delivering records in revenue per unit less fuel. Our yield-up initiatives generated strong pricing in the quarter, and we are committed to leveraging our long-standing customer relationships and our improving service product to ensure we deliver value to our shareholders. These gains mark nine consecutive quarters of year-over-year total revenue per unit growth despite the negative mix associated with continued strong growth in our intermodal franchise. Assessorial charges increased during the quarter. As we stated, our intent is to align our assessorial program with the mutual goals of Norfolk Southern and our customers to turn equipment faster, increasing network fluidity and velocity while improving our service product, and creating a capacity dividend that facilitates growth, both for Norfolk Southern and our customers. These efforts, along with other strategic initiatives, have improved our service product and reduced cars online. In the first quarter, we saw some customers turning back leased equipment while continuing to grow on Norfolk Southern. We are achieving better operating alignment between our customers and Norfolk Southern, generating capacity in the process. Moving to slide seven, our customers are optimistic about growth and the economic outlook remains positive. With consumer spending rebounding in March, consumer sentiment at elevated levels, manufacturing still in expansion mode, and jobless claims at the lowest level in 50 years, the truck market remains tight by historical standards, although certainly not as tight as last year, and continues to benefit our intermodal and merchandise businesses. We expect our merchandise volumes for the remainder of the year to be relatively flat compared to 2018. Forecasts for manufacturing and consumption are positive, with increased demand expected for most of our customers. However, pipeline activity is expected to negatively impact demand for NGLs and limit overall volume growth. Intermodal is expected to continue with its growth trend, albeit at a slower pace than in 2018. Improved service levels, continued relative tightness in the trucking industry, and forecasted growth in consumer spending will drive demand for domestic shipments, while our franchise strength will continue to improve international volume. Overall coal volumes are expected to be down in 2019, with utility demand continuing to be impacted by lower natural gas prices. Export is expected to decline in the second quarter due to lower API II pricing, supply issues at select mines, and difficult year-over-year comparisons related to high mine inventories during the same period last year. We anticipate sustained pricing growth throughout 2019 across our merchandise and intermodal business groups. Coal pricing will be influenced by the seaborne market; continued improvement in our service product and collaboration with our customers will enhance our pricing and yield-up initiatives as we work to fully leverage the value of our product. In summary, our focus on yielding up to drive revenue and margin growth supported by our improving service product delivered strong top-line results in the first quarter. We're on the right path and will continue working to achieve the objectives we outlined at our Investor Day. We look forward to a strong year for both Norfolk Southern and our customers, as we work together with common goals to be more efficient and meet market demand. I will now turn it over to Mike for an update on operations.

Thank you, Alan. Today, I will update you on the state of the railroad and the status of our Top 21 operating plan. First quarter 2019 was a quarter in which we drove significant service improvements for our customers and achieved a record-first quarter operating ratio. Moving to slide nine, our focus on strengthening our network is evident in our performance metrics in the first quarter as well as the positive feedback we received from our customers. We are sustaining the performance and driving further improvement in the second quarter. Specifically, our terminal dwell for the week ending April 12th was the lowest on record. We are also pleased with the resiliency and how well we bounced back quickly from February's polar vortex and winter weather. This operational performance has been achieved by the earlier than anticipated completion of our initial round of clean sheeting and through implementing 60-mile-an-hour speeds for non-intermodal trains on primary routes. We have established an excellent foundation for our new Top 21 operating plan that will be fully implemented by the end of July. Turning to our service and productivity metrics on slide 10, which we presented at our Investor Day in February, these metrics align with our new strategic plan, which is built upon our implementation of key PSR principles and providing a service product that will allow us to continue to grow. The blue bars represent our respective goals for 2019, which I will speak to regarding our progress. Starting with the service delivery index, which is the on-time delivery performance of our scheduled shipments indexed to 2018. This is a customer-facing metric, which combines shipment consistency, a measure of plan adherence for general merchandise and automotive traffic along with intermodal availability. Due to our improved execution, we are on track to meet our goal for 2019 as we are delivering significantly more shipments on time to our customers. I personally met with many customers who are confirming the improvements we are seeing in this metric. We are on track to meet the T&A productivity goal for this year. Throughout the first quarter, we were able to reduce T&A headcount as a result of improved velocity and fewer re-crews, a trend that will continue for the rest of the year as we fully implement our Top 21 plan and onboard fewer conductor trainees. Now, we are currently flat on train weight; this has been driven by reduced train lengths during the polar vortex and our initiative to speed up the coal network by running shorter, faster trains. We are confident we will achieve this goal for this year as our new Top 21 plan will reduce train miles and security. The plan also creates heavier trains. We are tracking ahead of our locomotive productivity goal for this year as we aggressively store the older, less reliable locomotives and return leased locomotives. Lastly, our velocity improvements increased service frequency to our customers and aggressively scrapping older, lower capacity cars have allowed us to accelerate our progress on reducing cars online and exceeding our goal. Not only has this freed up capacity that can be used for growth, it's also allowed our customers to reduce assets in their fleet, which will continue to reduce cars online overall. Additionally, as you may recall, this number includes cars in storage, which is approximately 11,000; they are, however, available to our customers as we look to continue to grow with them. All of these initiatives contribute to the capacity dividend we spoke to at Investor Day. I would also like to update you on the progress of our new Top 21 operating plan on slide 11, which is well underway. As you may recall from our Investor Day, our new operating plan will have four major objectives: run one network, a balanced train plan between terminals, serve our customers frequently, and reduce dependence on major terminals. We have already implemented some of our operating plan changes. These targeted implementations of train plan changes are before we roll out the full Top 21 operating plan. This year's iteration of Top 21 is focused on our general merchandise, unit train, and automotive business. Future iterations will focus on intermodal. Two key pillars of the new operating plan will be expanding the use of distributed power, which utilizes locomotives on the head and middle of the train, as well as driving more unit train business to manifest, which we have already implemented some targeted conversions similar to the coal riding the intermodal train 23-G, which we showed you at Investor Day. We have also converted some coke business coming out of the Central Appalachian coal fields going north, as well as some stone and ethanol business in the south, just to name a few. As previously mentioned, increasing the merchandise train speeds from 50 miles per hour to 60 miles per hour, which is the speed intermodal trains currently operate at, allows us to continue to commingle networks. These routes are shown on the map. Additionally, we're working closely with our customers to collaborate on the new operating plan changes. This year's iteration of Top 21 will be fully implemented by the end of July. After that, we will begin on the next iteration of the operating plan. We will also identify additional opportunities to realize incremental improvement. As we eliminate work, we will shed out headcount and take out yards and locomotives, all while improving or maintaining customer service. We are excited about the strong momentum we're delivering across our operations and for the full implementation of our new operating plan to unlock the value inherent in our network. I will now turn it over to Cindy, who will cover our financial achievements.

Thank you, Mike, and good morning. I'll start with our record operating results on slide 13. The 5% increase in revenues, when combined with a slight decrease in railway operating expenses, resulted in a first-quarter record for income from railway operations of $966 million, 16% higher than last year. We also achieved a first-quarter record operating ratio of 66%, improving on last year's results by 330 basis points. We have started 2019 with positive momentum and are on track to deliver at least a 100 basis point improvement in our full year operating ratio, as we discussed at Investor Day in February. Let's take a look at the component changes in operating expenses in more detail on slide 14. In total, operating expenses were $8 million lower than last year's expenses. Fuel, materials and other, and compensation and benefits were all lower than last year. These were partially offset by higher depreciation and purchase services and rents. Lower fuel prices drove the decline in fuel expenses. Materials and others were lower due to increased gains on the sale of operating properties and the reduction in network velocity related costs that we experienced last year. Compensation and benefits were also down due to lower employment levels, higher capitalized labor, and a reduction in overtime and re-crew expenses. These decreases were partially offset by higher wage rates. We expect headcount for the remainder of the year will continue to decline, and that our year-end headcount will be down at least 500 compared to the prior year. Depreciation was up reflecting capital additions. Finally, purchase services and rents were up due to intermodal volume-related increases and increased IT spending, partially offset by favorable equipment rent expenses, which is attributable to improved network velocity. Summarizing our financial results on slide 15, income from operations was a record $966 million for the first quarter. Other income increased by $36 million, primarily due to higher investment returns on our corporate-owned life insurance. Interest expenses on debt were up $13 million over last year, due to a higher overall debt balance compared to March of last year. Wrapping up our bottom line results, net income was $677 million, up 23%, and diluted earnings per share were $2.51, a 30% improvement, and both of these measures were first-quarter records. Slide 16 depicts our first three months of cash flow. Cash from operations totaled $881 million, generating $414 million in free cash flow. We are committed to returning capital to shareholders, as evidenced by our $730 million of capital returned in the form of dividends and share repurchases during the first three months, a 45% increase over last year. Our first-quarter record results reflect progress implementing our new strategic plan, improved network velocity, and the additional capacity generated by Clean Sheeting set the stage for the implementation of the new operating plan in the coming months. As a result, we can achieve our financial goals. Thank you for your attention. I'll turn the call back to Jim.

Thank you, Cindy. The operational and financial progress we made in the first quarter gives us increased confidence we will achieve our full year and longer-term goals. All of us are energized and united in our focus on delivering value for our customers and shareholders. Thank you for your attention, and we'll now open the line for Q&A.

Thanks. Good morning. I just had a couple of housekeeping items I wanted to ask about. But first, could you quantify the gain on sale, and then in the compensation and benefits line, what was the benefit from capitalized labor? And did you receive any payroll tax refund from the Railroad Retirement Board?

Yes, hi Allison. In terms of the gain on the sale of operating property in the quarter, it was about $11 million higher than last year. The capitalized labor increase was about $8 million, and we did not have anything included in compensation and benefits related to any kind of refund this quarter.

Okay, that's helpful. And then in terms of the decline in domestic intermodal, are you guys seeing a shift back to truck because of looser capacity? And are broadly lower truck rates a risk to your overall pricing outlook? And if not for 2019, is it for 2020? So if you could help us think through that. Thanks.

Allison, we're still very confident in our pricing plan and our volume outlook for our intermodal franchise. As I discussed, we're here with some pretty tough weather conditions, which impacted not only our network but the overall freight movements, and we had some lane rationalizations which in the near term slightly impacted volumes. Going forward, we're optimistic about growth in domestic as our channel partners, and we're pleased with the progress of rate increases that we're seeing as we're going through bid season right now.

Okay, thank you.

Thanks, operator. Hey Jim, hey Alan, hey Cindy. I'm going to stick with intermodal, but I am going to go on the international side here. How should we look at volume growth going forward considering that you guys talked about benefiting a little bit from a tariff pull forward in 1Q?

Jason, as you noted, it was above norm in the first quarter at pretty close to 10% volume growth in the international network. We certainly don't expect that to continue as we move throughout the year, and we expect it to move back towards trend. Go ahead.

And that's going to be still a little lower single digit.

That's lower single-digit GDP plus. But we're encouraged by the way it's continuing to stick in there. And part of that is our alignment with the vessel companies and the shipping lines that are adding capacity to the East Coast.

Okay, that's good color. My follow up is going to be about sort of dealing with customers, dealing with the Service Transportation Board, sort of a similar question I asked you, Alan, when you were down at Neer's. How's that going? I mean, we normally don't see railroads implement PSR and there's no problems, but there's immediate service improvements. Has that been easier dealing with customers and dealing with the Surface Transportation Board? And do you think it's actually helped you any in terms of going to the customers for price increases?

Jason, it's Jim. Let me take the original part of that that relates to the STB. We are in constant communication with the Surface Transportation Board and we are looking forward to telling our story at the upcoming hearing. We think we have a great story to tell; our service is significantly improved over last year, our network is running very well, and we think that the way we have implemented accessorial charge increases is pro-customer as well because they are aimed at increasing efficiencies that will benefit both of us. Alan?

Jason, we've been very clear from the beginning that as we implement PSR, we're going to pivot a little bit. We're going to do it over time, we’re going to collaborate with our customers, and we're going to be very transparent, and we're going to be pro-growth. And we've done all of that. Our customers see it; they appreciate it. More importantly, they see the improvements in velocity. They see the improvements in the reliability of our service, and it reduces their overall costs because they're turning back equipment. They want a service provider that's going to provide a platform for growth. That's who we are.

Okay, appreciate the time as always, everyone.

Thanks, good morning everyone. Apologize if I missed this, can you just quantify incentive compensation this quarter versus last year? And also, I think you mentioned in your slides that you had capitalized labor as a tailwind in the comp and benefits line. Can you just elaborate on that a little bit more regarding what's driving that? And how we see that trending for the rest of the year?

Ravi, yes, in terms of the incentive comp year-over-year, it's very similar between both periods. On the capitalized labor, it was $8 million for the quarter. That relates to the fact that we had additional capital spending in the quarter. If you look back at the cash flow statement, you can see that the velocity of the network really gave us the ability to get out there early in the year and perform work at a lot faster pace than we were doing this time last year. And so that's how that capitalized labor relates.

And is that a similar level we can expect for the coming quarters?

Yes, I think that's very similar.

Got it. And just a follow up on the truck market again, you've been very clear with the yield-up strategy here. Just how environment sensitive is that? I mean, if we do see the truck market loosen more and potentially volumes start shifting back to truck, are you guys going to stay the course with pushing for big price increases, or will you be assuming a little bit of the wind is blowing?

We are fully committed to testing the limits of market-based pricing. We've been able to grow our intermodal franchise in tight truck conditions and in loose truck conditions. Right now, the truck market is not nearly as tight as it was last year, but it's still tighter than overall balance. There is an inherent advantage to intermodal relative to truck in terms of cost structure. As we continue to improve our service product and provide that capacity for growth, we're aligned with our channel partners on providing them a good service product that allows them to compete and allows them to grow.

Great, thank you.

Hey, thanks. Good morning, guys. So on labor productivity, I see a three-year target of 34%. How come this year is only 3%? What changes that is so backend loaded? And then I think Cindy mentioned a reduction of at least 500 for the year, you've already done 400, so are we done sort of reducing headcount or is there upside to that 500?

Well, Scott, Cindy said at least 500 this year. Yes, we have made more progress than even we expected in the first quarter in terms of headcount, so we are off to a good start. The implementation of Top 21 will give us another big opportunity to achieve labor efficiency because we'll be running fewer trains, and that will result in fewer crew starts and less work.

Okay, that's helpful. And then maybe for Alan, just a couple of things on coal. Sometimes you give us guidance on sort of how to think about the quarterly run rates on export and domestic, if you can maybe do that? Maybe talk about how much of the export thermal was locked in for the year given where API is, and if we think export thermal is going to be dropping off, what should that mean for coal revenue per unit going forward?

Scott, what I pointed you to were pressures in the export coal market, particularly the thermal side. I also note that last year in the second quarter was our highest volume quarter in export coal; we handled a little over 7.9 million tons before dropping into the 6 million-plus ton region in this third and fourth quarter. So the costs will be more difficult in the second quarter of this year. On the utility side, stockpiles are down, so there's the opportunity for stockpile rebuild, although natural gas prices have certainly declined as of recent. On the thermal side, our pricing may be locked in; however, not necessarily with our suppliers. That puts pressure on volumes moving forward, although theoretically that coal could just move into the utility market.

So when you think about all the moving pieces, how should we think about coal revenue per unit going forward?

I think there's going to be pressure on coal revenue per unit because you're going to potentially see pressure on metallurgical seaborne coking coal pricing, still at elevated levels that allow U.S. coals to compete, but not at levels that we saw in the third and fourth quarter of last year.

Makes sense. And then, Alan, can you just real quickly give us the increase in accessorial revenue this year?

It was $23 million for the quarter.

Higher year-over-year?

Yes.

Thanks everybody, congrats on the good results. First question, obviously, on the strong operating ratio; first quarter obviously is the high watermark for operating ratio in a typical year, and you do usually see a significant step down in subsequent quarters. I'm just trying to square that with the guidance for at least a 100 basis points of improvement, given that over 300 basis points improvement in the first quarter. I know there's some maybe outsized benefits in the first quarter, but anything worth highlighting that maybe will shift how we think about the sequential progression in the operating ratio for this year?

Well, you're correct; the first quarter typically is the high watermark for the operating ratio. We would expect to see the operating ratio trend favorably from here, and we expect that we will achieve overall for the full year at least the 300 basis points improvement in the operating ratio versus last year's reported operating ratio.

If I look at the last three quarters for the last two years versus the first quarter, there's over a 300 basis points decline in average operating ratio in the last three quarters versus the first quarter. Is that a similar type of magnitude this year, or is just the progress in the first quarter so significant that we should think about it differently?

We made a lot of progress in the first quarter, and we've got a nice running start on the year. Yes, we would expect to see sequentially lower operating ratios and for the full year an operating ratio at least 100 basis points lower than last year's reported operating ratio.

Okay. Just one follow up from me on the yield-up initiative; obviously, there's some good traction there. We saw it in the quarter, but maybe you can just offer some thoughts and just educate me a little bit on how much of your book of business that you've actually gone out to pursue the limits of market-based pricing. That's really just in the context of maybe what's contractual, what's not contractual, when that contractual business rolls. Is it just a repricing of what comes up for repricing, or are there some service adjustments that we should think about that may impact the top line as well?

Yes, Amit, we generally touch or have the opportunity to reprice, renegotiate 50% of our business in any given year. We've got about 40% left to renegotiate for this year. It also includes not only pricing but looking at lanes that make sense for us and frankly lanes in which we don't, which we have too much complexity. We've talked about a little bit about that regarding some of the intermodal lane rationalizations that we affected in the first quarter. That's an ongoing initiative for us. We have rationalized our intermodal network in each of the last six years starting in 2013. It's general housekeeping. We did it last year and still we're able to grow our revenues by 18%. It's all part of - it's not just about pricing. It's not just about productivity; it's all part about margin improvement and making sure that we've got an efficient and reliable service product out there that we deliver every day. We're pricing to the value of that product in the market.

So just so I'm understanding your comment correctly, only 10% of the book of business today reflects your yield-up initiative. So there's 90% left over the course of the next year and a half. Is that the right interpretation?

No, because we've been doing this for quite some time. So we have renegotiated 10% of our book so far this year.

Okay, all right. Thanks a lot. Appreciate it.

Great. Good morning. Alan, if I can just stick on the intermodal just to clarify some of the network rationalization. Have you quantified what percent of lanes have been rationalized either last year? And maybe is there still a set percentage that's still to come as you think about the network? And then is there anything about that 60-mile-per-hour speed that's peak for the network? I don't know if that's more of my question, but - or is that just so you can match the intermodal speeds on the merchandise side?

Why don't we start there? And then Alan you can come back to the question about lane rationalization. Mike, talk a little bit more about speed increases.

Yes, as we comingle traffic onto trains, a train becomes a train, and we really don't want to have an intermodal speed and a merchandise speed out there. So we've raised them up where appropriate to all run at 60 miles per hour and take advantage of that velocity improvements and keep everything moving.

Good morning, Ken. With respect to the lane rationalization, it's a very, very modest amount. We really would not expect it to have any sort of material impact on volumes as we look over the course of a year. But we implemented these in mid-February, but we've been talking to our customers about it for several months in advance. It gives them the opportunity to look for alternative routing on Norfolk Southern. It may have an impact in the first month, but over the course of a year, it won't have any sort of impact at all. As I noted, we did it last year, and we still grew our intermodal revenue by 18%.

Wonderful. And then, Jim, I guess as a follow up, I don't know if this is for you or Mike, but what changes now that you've almost finished the Clean Sheeting and as you go into the next phase of Top 21 on the operational side? Is the Clean Sheeting done? And now you jump to how you're starting the trains? What is going to be different when you move to that next phase?

Yes, we've wrapped up our initial round of Clean Sheeting that has contributed to the network performance improvements we've seen. We view that as laying a foundation for Top 21, which as Mike mentioned, we will implement - the first phase of which we will implement in July of this year. That's where we really go in and reconfigure the operating plan itself. We have laid the foundation by going locally with Clean Sheeting and doing the work in the terminals and with local operations. Then we layer on top of that a new operating plan focused on the four things that Mike mentioned before.

The Clean Sheeting has really given us a lot of capacity out on the railroad to put in this new operating plan, and that's what we're so excited about. So we're in good shape going into that because of the Clean Sheeting completion.

Appreciate the comments, guys. Thank you.

Yes, good morning and congratulations on all the progress you're making on the initiatives. I wanted to ask you a little bit further about Top 21; how do we think about the magnitude? I think you're talking about it in terms of Mike you're saying this year's iteration of it, which implies you do some more next year, and maybe even the following. How do we think about the magnitude of change to the train schedule? And maybe some of the bigger changes are in the train schedule with Top 21?

Yes, so obviously, two big drivers of the new operating plan are going to be reduced train miles and reduced security at the car level. So both of those are good news from a productivity standpoint and a good news from the customer part. As we said, we'll be implementing that by the end of July, and the resources then will start rolling out later on in the year.

Okay. So - I'm sorry go ahead.

Hey, Tom, this is Alan. And we will be communicating the impact of those changes with our customer base well in advance. It's customer-specific; it's lane-specific, and it's known.

We're all very encouraged by what we're seeing so far because it will improve our velocity and will reduce our security in our train miles, making our railroad more resilient and give greater capacity for growth.

Yes.

So is there a magnitude that you can - so you're saying reduced train miles; that makes a lot of sense, but is that 1%, is that 10%? What's the kind of ballpark for change we might anticipate in this first iteration?

It's really allowing us to hit the goals that we've put out on the service and productivity metrics. This operating plan is what's going to drive us to ensure we hit those goals.

Okay. And what about - I guess for the second question, you haven't really talked about yard productivity. How should we think that presumably as you implement Top 21 there'd be some effect not just on the schedule when the yards are linked together. So how do we think about the changes that maybe take place in the yards and potentially timing for when you'd review how you use yards kind of how many hump yards you need, that type of topic?

Yes, well, I'll tell you some of our small local serving yards we've actually already kind of taken out and stopped using them. They're just little ones here across different areas of the network that we got out of the Clean Sheeting. On the large terminals, as we implement the new train plan, the work will go away at some terminals, and as that work goes away, we will rationalize those assets.

We use the dependence on terminals, classification yards in particular, being one of the four fundamentals of Top 21, the other three being run one network, balanced flows, and more regular servicing.

So we could see evidence of that in the second half, given you're completing, I guess, the rollout in July?

Certainly.

Yes. Okay, thanks for the time. Appreciate it.

Yes, hey, thanks. Good morning. Maybe first just real quick on weather: was there any impact from weather on the network on the system? Get called out from a cost perspective in the quarter?

No, we did see the network slow down during the vortex in February, but as Mike pointed out, we bounced back quickly and we did not call out any special costs related to that February period. We had a couple of episodic areas, but we bounced back quickly and not real expensive, so yes.

Okay, that's helpful. And then, Alan, I know we could come back to this, but wanted to sort of talk a little bit about your comment about testing the limit to market-based pricing, but maybe think about it from the merchandise angle there has been a lot of focus on intermodal. But just want to get a sense of sort of what that opportunity looks like as you're taking this next run through the book of business. How sustainable and sort of how much opportunity do you feel like you have? It seems like there is a window for you to continue to price through that, maybe more than just the 2019 story, but wanted to get some perspective on that.

Well, Chris, yeah, I agree with that; we've had 12 consecutive quarters of revenue per unit growth in our merchandise network. Our primary form of competition is truck. Our franchise is rich with highway to rail conversion opportunities with over 50 million truck shipments a year in excess of 500 miles touching our network. We're focused on conversion opportunities within the merchandise network. If you look at our rate of year-over-year pricing increases, it has improved every quarter for the last six quarters, so there are opportunities there as we continue to improve the reliability of our service product, and we layer on top of that a best-in-class consumer-oriented customer experience that's going to make us highly competitive with truck.

That's really helpful. Then just real quick in terms of that sort of 40% of the book that's still available for pricing this year, any way to break down of what sort of merchandise versus intermodal or potentially coal in that?

It's relatively well balanced between the three.

Hey, thanks for taking my questions. Can you guys give us an update on where attrition is running across the network right now headcount wise?

Cindy?

Sure. I mean, typically, attrition for us is around 2,000 people a year. I think we're pretty much - that's pretty consistent this year as it's been in the past.

Okay, thank you for that. And going back to the KPIs you laid out and reiterated from the Investor Day for the PSR implementation. Appreciate the transparency in setting the 2019 goals incrementally here. It looks like you also raised the service delivery goals, so that's great. But for the current year, if we take a step back from where you are right now, which is the most stretch of those five things that you laid out? Maybe which do you think is going to be most correlated with margin improvement that we can see for the company as a whole? Thanks.

All five metrics are important to the success of the plan, and that's why we've laid them out publicly. I think we're progressing well on each of them. We noted some where things are progressing even better than expected, cars online for example. You can see in the cars online goal for 2019 that we're already at 2021. In other cases, we saw some temporary things in the first quarter. Mike mentioned changes in the coal network that detracted somewhat from our train weight goal. But over the course of the full year, we believe that we can hit the goal shown for train weight as well. I think things are really going well across the board with the productivity initiatives, with the service delivery index, and with cars online. Top 21 will be a big step change and a big driver of further success, particularly in the productivity metrics.

Thanks. Good morning and congrats on the quarter. So to start with the yield-up initiative, you've talked about growth in higher return businesses. When you look across your different businesses today, where do you see the highest incremental returns? I know intermodal isn't your highest margin business. But given it seems to be a key growth area, you mentioned the multi-year revenue CAGR of around 10% at the Investor Day, would that be your highest incremental ROIC business? Or would you say that some areas in general merchandise would be at the top of the list?

We think we have margin opportunity across the board. In terms of the top-line initiatives, that's what yield-up fundamentally is about. There's incremental margin potential in all three major lines of business. Merchandise naturally has some significant incremental margin potential because of the way the trains run, and adding one more car on the train comes at very low variable additional costs. The natural economics of that business favor the incremental. But as we saw last year, we posted very strong incremental margin in our intermodal businesses as well. That's partly because of the pricing trend that we were able to drive last year with our customers and our channel partners. Alan, any other reflections on...?

Yes, I'll talk a little bit less about pricing. I'll talk about productivity. Within intermodal, we've worked with our channel partners to provide a more productive, less complex network. As a result, that, coupled with the strong pricing that we've achieved in the intermodal franchise over the last six quarters, has really driven strong incremental margins in our intermodal network. It now competes very favorably for capital with us. That's one of the reasons we have the most robust intermodal franchise in the East, and it's a growth driver for us and why we're confident about a 10% revenue CAGR in intermodal. I'll talk about productivity within merchandise. I previously talked about pricing strength and the momentum within merchandise. I'm confident that with the implementation of Top 21 this summer, which is targeted towards our merchandise network, we're going to see even better incremental margins in our merchandise network.

Okay, that's helpful. And secondly, a couple of quick things for Cindy. So Cindy, any updated thoughts around the magnitude of gains on sale this year? Just curious what's getting baked into the 2019 guidance? And then, also just longer-term thinking about the 60 operating ratio target that's out there, could you talk about what that assumes for the progression of export coal versus where we are today?

Justin, in terms of gains on the sale of operating property, I think, at the Investor Day, we gave guidance of around $30 million to $40 million annually. That's very lumpy; it's very hard to predict. We've said in the past that we're going to continue to look very hard at properties that we no longer need to use in the business and try to monetize that. We're continuing to do that. I think that we would update the guidance a bit for this year, probably more in the $50 million range right now is a good guide. In terms of export, Alan, if you want to comment.

Justin, what we had talked about at Investor Day was a slight decline in coal revenue over the course of the next three years, and that's reflective of increased pressure from renewables and natural gas. The expectation is that the elevated seaborne coking coal prices will decline, and you can see that in the forward curve.

Okay, I'll leave it at that. I appreciate the time.

Yes. Thanks very much. Good morning, everyone. So on the tax rate, the tax rate came in a little bit lower. Cindy, I was wondering if there's anything that you would flag in terms of items in that tax line, and does that adjust? I believe you are guiding us at 24%. Would that cause you to change your 24% guidance on a go forward basis?

The effective tax rate in the first quarter was 21.4%, which had tax benefits for stock-based compensation, which is pretty typical in the first quarter, but we also had the benefits associated with those higher returns on company-owned life insurance. For the full year, I would expect that the effective rate will be somewhere between 23% and 24%.

23%, 24%. And then back to kind of 24% run rate after that, is that right?

Correct.

Okay, all right. And then, Alan, when I look at and I try to put together all the guidance you gave in terms of the coal market down. I think you said your merchandise is going to be flat for the rest of the year, and then intermodal up, but not quite as - not at the same growth rate as the year prior. If we put all that into the mix, it seems, and feels like we're getting a flat to slightly up type of volume growth for the rest of the year. If I'm off mark there, let me know. But is there anything going into 2020 absent, and let's just not even discuss coal right now, but any of your other markets that would suggest that you would see any volume lift that would take you above this kind of flat, 1%, 1.5% level for the full year based on that guidance?

Yes, I would make sure that you recognize when I talk - if I do talk about slowing growth in intermodal, it's not relative to the first quarter, it's relative to the 18% growth that we had last year in our intermodal franchise. Yes, I think the big one of the lists that we're going to continue to benefit from is our improved service product, and that takes time for customers to see that and for them to fit that into their supply chains. You can see that in our results as our velocity has picked up in March; our merchandise volumes picked up in March as well. So we're confident that as we have an improving service product and put on a best-in-class consumer-oriented experience, we're going to continue to compete very well with truck, and it's going to enhance our competitive position. The economy is still pretty strong; as I look at where we are today relative to our outlook, not much has changed at all. We feel pretty good about where we are and we're confident about where we're headed. Also, recognize that our primary focus is on yield-up and margin improvement, not volume.

Okay, thank you very much.

Hey, good morning. Thanks for taking my question. I guess, Alan, along those lines more specifically, you called out a 5% revenue CAGR for three years in merchandise and 10% in intermodal at the Investor Day. Is there any reason why you can't attain those levels this year in those segments?

I think we're very confident about our three-year plan. We're confident about this year; we're just - within intermodal we're coming off a very, very difficult comps related to last year.

Okay. But I guess in that context, as you improve your service, I mean, should we be expecting this as all yield for those next three years, or should there be more volume in that mix looking forward through 2021?

We're certainly yielding up, and you can see that in our revenue per unit across all three of our business units. But it is a component of volume and price.

Okay, appreciate that. I know it's been a long call. But Mike, if we can come back to the security comment you made about fewer train miles, I mean, is this just a function of consolidating train starts running longer trains and more direct, or what was going on in the past that's going to change the security of the network?

No, you're exactly right; it's commingling the different lines of business and running them direct, which ends up running bigger, heavier trains, and that results in fewer trains out there and less train starts.

All right, thank you.

Hey, good morning. Thanks for getting me on the call here. Just two quick ones. Alan, you mentioned customers are starting to get interested in the improving service product. What areas of growth do you think you'd see the biggest upside? And have you started to have those conversations yet? Or is it just too early to tell?

Absolutely, we're having these conversations. We're having them every day and they're data-driven. We have shared KPIs with our customers. Those KPIs help form the service delivery index that Mike has talked with you about. Where service is driving additional volume, you can see it in merchandise; we're going to see it in intermodal. We've also talked about how improved service enhanced our utility coal volumes in the first quarter, although offset by some weather disruptions and some production issues and planned outages.

All right. And then, Jim, if you can just talk about the leadership team, both the executive and sort of the field operational level, you made some changes recently you've got a new Chief Transformation Officer. I imagine that was part of the plan initially, but maybe if you can just talk about who you've brought on, if there's anybody external with more PSR implementation experience. Do you think you can fill those needs internally, or are there any other big changes or hires that you feel like you need to make, given you've got some good momentum going here to kick off the plan?

We are focused on driving shareholder value in the leadership transitions and changes that we have made; that's the goal. Just being in the first quarter of the new strategic plan, it made sense to us to shuffle things around a little bit and get people focused on working intently from a leadership standpoint on the key initiatives in the strategic plan. That was what was behind the realignment. We have brought in others with PSR experience into our operational layout to help us push out Top 21. We're fortunate to have on staff a couple of individuals with that sort of experience that can work with us and help lead us as we move through Top 21 in the months to come.

And Jim, those folks are in the MNC, or are they at a higher strategic level? Can you give some more context as to where you go, perhaps there?

Sure. You had a chance to meet Mike Farrell in Atlanta at Investor Day. He's running transportation for us, including the MNC. We have working in our NPL a couple of individuals with PSR experience from other relevances, NPL being kind of the nerve center for Top 21 rollout.

All right, thanks for the time.

Hey, guys. I want to circle back to the T&E productivity metrics on slide 10. Just that 2019 to 2020, 2020 to 2021 ramp of sort of 15% gains in T&E productivity after the 2019 period, one would think that most productivity programs like you get a front end loaded benefit, not a backend loaded benefit. What specifically is going to change after this year that's going to get you that material shift in T&E productivity into 2021?

Well, Mike talked about iterations of Top 21 with more to come in 2020 and 2021 after we implement the first phase of Top 21 this year. That's what's behind the further increases in T&E productivity in the out years. I would say this: our overall strategy is to take away the work and then push labor productivity, but we want to make sure the activity is out of the network before we work on the labor productivity side of things. For that reason, the T&E productivity is a little bit backend loaded.

And just when you look at the metrics though, it seems like there's a lot backend loaded. I'm just trying to get my sense for like what operationally is going to be different about the Top 21 plan after you get out of 2019 that's going to get you that 15% gain for the year?

So just remember, when we start this in July as Jim noted, we start taking the work out, and the resources come out after that. You get a run rate after that that flows into the following years, and then as we do the next iteration, we expect to do the next iteration quicker. That will put in the next implementation of the plan, take the work away, and those resources come out as well.

All right. And maybe Cindy, just as a quick follow up on the free cash flows; the cash flow statement there was about $150 million of proceeds from prior land sales. Is there a range of cash that you know is going to be coming in as we get across the rest of this year from prior transactions?

No, David, I wouldn't say so. I mean, I think we had a large sale in the first quarter related to our Atlanta office buildings, which we're leasing back. That's pretty unusual.

So that number should be kind of flattish for the rest of the year?

Yes.

It's just smaller, related to whatever you assume.

Okay. All right, thank you.

Thank you to everyone who participated in today's call. In our quest to reimagine what is possible for Norfolk Southern, the first quarter of 2019 was just the beginning, and we look forward to updating you as we continue implementing our new strategic plan. Thank you.