Norfolk Southern Corp (NSC) — Q2 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 Investors 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 second quarter 2019 earnings call. Joining me today are Alan Shaw, Chief Marketing Officer; Mike Wheeler, Chief Operating Officer; and Cindy Earhart, Chief Financial Officer. With the results in the second quarter and the first half of 2019, we are on track to meet the commitments we made to shareholders in February, namely an operating ratio this year at least 100 basis points below 2018 and a 60 OR by 2021. Our railroad is performing very well. The transition to our new PSR-based operating plan TOP21 went flawlessly and we are already seeing the financial benefits with more to come. TOP21 and Clean Sheeting exposed numerous opportunities for cost savings in the second half of this year and beyond, which we are now aggressively pursuing. These savings coupled with the modest top-line growth we expect in the back half give us confidence we will achieve our stated goals even amidst economic uncertainty. Turning to the financial results for the second quarter. Income from operations was $1.1 billion, an increase of 4%. Net income was $722 million, up 2% over the prior year, and EPS was $2.70, an 8% increase. The operating ratio improved by 100 basis points versus last year to 63.6%. First half net income and EPS experienced double-digit percentage growth, while we reduced our operating ratio by 210 basis points to 64.8%. Looking ahead, we expect continued year-over-year improvement in the operating ratio in the second half, leading to an OR for the full-year at least 100 basis points lower than 2018. Before turning it over to Alan, Mike, and Cindy, let me say a few more words about TOP21 and our outlook. As you know, the first phase of the new operating plan, which we fully implemented on July 1, focused on our merchandise network. As Mike will highlight, TOP21 reduced plans circuity for merchandise and auto traffic by 20%, and that's in addition to circuity reductions accomplished earlier in the year through increased fluidity. Eighty-seven percent of the cars in the merchandise network are now operating with new trip plans. Despite these sweeping changes, crucial network performance metrics, train speeds, terminal dwell and Cars-On-Line, and corresponding customer service metrics have held steady at new record-best levels. As we implemented TOP21, it's also important to highlight that we successfully addressed adverse weather conditions, including floodwater from the Missouri River, which severed our line to Kansas City for more than a month. As I highlighted during our Investor Day, we are transforming our culture to ensure that every employee is focused on achieving our goals and is aligned with how Norfolk Southern will pursue them. Our engineering department is a perfect example of this winning culture. Despite the challenges presented from the flooding conditions I highlighted; they didn't miss a beat. They work together to execute our plan, quickly restore our track, and get us moving again. This is just one example of why this team is the best in the business. Since launching TOP21, we have seen no adverse effects on network performance or quality of our customer service. The benefits of TOP21, reduced circuity and improved velocity are already apparent, as we can now serve the majority of our customers with more predictable trends at times and fewer assets to move their freight. As I noted, we are already seeing a favorable financial impact from TOP21 as well. In conjunction with velocity improvements from Clean Sheeting and pre-implementation work earlier this year, TOP21 has enabled us to reduce employment levels well ahead of plan, which Cindy will discuss later. We saw this in the second quarter, with decreases in headcount related expense, materials expense, and equipment rents. We're confident that as the new plan takes hold in the second half, favorable year-over-year comparisons in TOP21 related expense categories will accelerate, and we've already started work on Phase II of the plan. Turning to our outlook for the balance of 2019. We expect modest volume and revenue growth. As Alan will explain, the growth is expected to come from select merchandise lines of business and from a resumption of Intermodal growth consistent with commentary by our channel partners. Even as we pursue growth, we are determined to exploit every efficiency we uncover from the new operating plan. As a result of TOP21, we see opportunities for additional cost savings in serving yards, local operations, and locomotive maintenance among other areas. At Investor Day, I described our belief that to keep up in a rapidly changing world a company must constantly reexamine its culture. Openness to new people and new ideas is critical, as is having the right leaders in the right jobs, doing the right things, committed to shareholder value. That remains our mantra. As new leaders across a broad spectrum of functions dig deep into established ways of doing business. All of us are working together and seeking ways to improve service for our customers, manage our assets, control our costs, operate safely, and develop our people. We continue to transform Norfolk Southern and are excited about the progress we are making. With that, I'll now turn the call over to Alan.

Thank you, Jim, and good morning everyone. In the second quarter, we continued to execute our strategic plan of leveraging our improving service product to yield up and drive greater margins. The outcome of these efforts allowed NS to grow revenue and income in a challenging freight environment. We partner with our customers daily on these initiatives through constant communication and collaboration. This has proven an effective approach, clearly demonstrated as we successfully completed the implementation of the TOP21 operating plan on July 1. Throughout the second quarter, we worked in concert with our customers on the impending improvements through numerous face-to-face meetings. This collaboration, coupled with a flawless execution by our operating team, resulted in a seamless implementation. As shown on Slide 6, we delivered a second quarter revenue gain of 1%, despite a 4% volume decline. This marks Norfolk Southern's tenth consecutive quarter of revenue growth, building on last year's second quarter revenue increase of 10%. Slower economic growth drove volume declines in Intermodal, export coal, and steel. Volume decreases were offset by the continued implementation of our strategy to price to the value of our improving service product, generating a 5% increase in revenue per unit. Merchandise delivered a record for quarterly revenue with a 2% revenue gain, despite a 3% volume decline. Revenue growth was driven by improved pricing and volume gains in our aggregates and agriculture franchises from increased network velocity. Midwest flooding adversely impacted merchandise volumes, primarily in our automotive segment. Steel volumes were down 8%, due to tariff impacts and lower steel prices. Pipeline activity continues to decrease NGL volumes. Increased truck capacity, higher inventories, and Midwest flooding negatively impacted Intermodal revenue, which declined 2% year-over-year. Intermodal volume declined 4%, due to reduced domestic volume that was partially offset by 7% growth in our international franchise. Revenue per unit increased 2% year-over-year with solid pricing, reflecting the value of our service product offset by the negative mix associated with increased international volume. Coal revenue was flat year-over-year, as strong pricing was offset by a 6% volume decline, primarily in our export market. The pricing helped increase revenue per unit by 7%. RPU was also enhanced by the positive mix associated with increased volume in our utility south market. Production challenges at several mines and low seaborne coal prices resulted in lower export volume against difficult comparisons. Utility volumes improved year-over-year, due to weather delayed tons from the first quarter, service improvements, and stockpile replenishment. Pricing to the value of our service product continues to produce positive results, with RPU growth in all three business units and a 5% RPU improvement overall. This gain highlights the successful execution of our plan and contributes to the foundation of our long-term success. Moving to Slide 7. Consumer confidence remains high. Unemployment is near a 50-year low, and consumer activity is still strong. The ISM manufacturers index is dropping, although it is still in an expansion range. Tariff uncertainty remains a headwind, primarily in the manufacturing sector. Taking it all together, we remain confident in continued growth in the economy, although at a lower rate than what we experienced in 2018. Based on this economic backdrop, we expect modest year-over-year improvement in revenue, volume, and RPU in the second half of the year, with the bulk of that growth in the fourth quarter. This growth is a result of our strategy, the success of our TOP21 operating plan, and our continued focus on customer alignment. Increased pricing is the largest driver of growth projections, with RPU in the second half expected to increase despite lower diesel rates and difficult comparisons to the second half of last year, as well as the impact of lower seaborne pricing in the export market. I will now highlight some of the primary drivers of our expectations in each of the business units. Within merchandise, we expect oil price differentials will support demand for crude oil shipments to the East Coast. Based on a forecast of a 3% increase in U.S. light vehicle production, automotive volume is projected to increase in the second half. Aggregate and sand volumes are anticipated to benefit from improved service levels and a normalized spend throughout the year. Pipeline activity is expected to continue to negatively impact shipments of natural gas liquids, while steel markets will be disadvantaged by weak demand, tariff impacts, and low commodity prices. Our continued focus on pricing to the value of our service product is expected to increase revenue on flat annual volumes. Intermodal volume is projected to finish 2019 slightly above 2018 levels, as expected growth in the second half will offset first half declines. We project second half growth in both the international and domestic markets resulting from sustained year-over-year growth forecast for consumer spending. Although domestic growth will be tempered by increased capacity in the truck market. Our coal markets will likely continue to decline in comparison to 2018. API 2 prices are forecasted to remain at low levels in the second half, while seaborne coking coal prices are projected to decline impacting both volume and RPU. Utility volumes will be impacted by natural gas prices and weather. In summary, we expect total coal volume to finish below 2018 levels, while RPU is also pressured. We continue to leverage the value of our service product and secure opportunities that set the stage for long-term success. We remain focused on margin improvement and growth initiatives supported by a consistent and efficient service product that the market values. 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 successful implementation of our TOP21 operating plan. In the second quarter, we continue to drive service improvements for our customers, finalized our new TOP21 operating plan, and achieved record operating ratios for a second quarter and the first six months of the year. We continue to build on our strong momentum and are confident in our ability to deliver strong value for shareholders and support for our customers. Moving to Slide 9. Our continued focus on execution of our plan and the principles of precision scheduled railroading is evidenced in our performance metrics. Specifically, our train performance, terminal dwell, shipment consistency, and car level velocity for the second quarter were the best on record for any quarter. These achievements are due to the relentless execution by our operations team and laid a firm foundation for our new TOP21 operating plan. We want to thank our field employees for their unwavering and relentless focus on safety, service, and efficiency. Turning to our service and productivity metrics on Slide 10. These metrics are aligned with our strategic plan, which is built upon providing a service product that will allow our customers to grow with us. As before, the blue bars represent our respective goals for 2019. 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 that combines shipments consistency, which measures trip plan adherence for general merchandise as well as automotive traffic and Intermodal availability. I am pleased to report that we are on track to exceed our goal for 2019, due to our first half service performance and flawless implementation of the TOP21 plan. As noted on the previous slide, we are delivering a record number of shipments to our customers on time. We are trending ahead to where we thought we would be with the T&E productivity goal for this year. We anticipate this trend will continue for the rest of the year as we fully implement our TOP21 plan. As mentioned during the last call, our train weight goal is backend loaded and we will be monitoring and working on this goal for this year as our new TOP21 operating plan is implemented. We are already seeing improvements in our general merchandise train weights, which are offset by headwinds associated with Intermodal and Coal volumes. Locomotive productivity continues to be another strong metric for NS, and we are tracking to meet or exceed our goal for this year. Locomotive as well as T&E productivity are being negatively impacted by the decline in gross ton miles. But we are actively adjusting resources to ensure we remain on track to meet our goals. Our team is flexible, dynamic and will adjust to ensure we hit our targets as business levels change. And the Cars-On-Line is trending very positively, thanks to our fast and consistent service product. It should also be noted that this number includes cars in storage of approximately 15,000, up 5,000 from the prior quarter. This is the capacity dividend we have referred to previously, which we created in part by the timely adjustment of our equipment distribution to match market conditions. I would also like to update you on the progress of our new TOP21 operating plan on Slide 11. As you may recall from our Investor Day, our new operating plan has four major objectives: Operate as one network; have a balanced train plan between terminals; serve our customers frequently; and reduce dependence on major terminals. This iteration of TOP21 primarily focused on our general merchandise, bulk, and automotive business. As Jim noted, we are already working on the next iteration of our operating plan while we continue to harvest the opportunities from the newly implemented operating plan. We implemented some of our operating plan changes throughout the second quarter. These targeted implementations were concentrated primarily around the edges of our network. The successful implementation of the full plan on July 1, which involved over 180 iterations before implementation, was a partnership between network planning and optimization who modeled the plan, marketing who was involved in both developing and communicating the plan, and transportation who executed the plan. As promised, we have been and will continue to work closely with our customers to collaborate on the new operating plan. Prior to TOP21 implementation, we held 19 joint customer employee Town Halls across the network and had one-on-one meetings with all large customers. This provided our customers the opportunity to better understand TOP21 and the benefits of the plan. Turning to Slide 12. I would like to give you a comparison of the final TOP21 plan that was implemented on July 1 versus the baseline plan. A key pillar of the new operating plan is expanding the use of distributed power for our merchandise and automotive trains. TOP21 will also drive at least a 20% reduction in circuitous miles by utilizing capacity at regional yards, focusing less on creating density at hump yards. There will also be a 15% reduction in train miles for manifest, automotive, and locals, as well as at least a 10% reduction in train starts. This was a significant undertaking with just under 90% of merchandise and automotive traffic receiving a new trip plan. This will result in a more efficient network with fewer trains as shown on the graph on the right. We are confident that the execution of our new operating plan will drive further improvement in the near and long-term. I will now turn it over to Cindy, who will cover the financials.

Thank you, Mike, and good morning. I'll begin with our operating results on Slide 14. Income from railway operations was $1.1 billion, a 4% improvement over the prior year and a second quarter record, driven by a 1% increase in revenues and a 1% decrease in operating expenses. Our operating ratio was 63.6%, also a second quarter record and a 100-basis point improvement on last year's results. We continue to make significant progress on the financial goals of our strategic plan and expect that our full-year operating ratio will improve at least 100 basis points over the prior year. Slide 15 illustrates the changes to operating expenses. In total, operating expenses were $12 million lower than last year's expenses. As we recognize the benefits associated with our improved network velocity ahead of the full TOP21 implementation in early July. And looking at each of the income statement line items, lower fuel price during the quarter drove the decline in fuel expense. Purchase services and rents were down, due to a decline in equipment rents, a function of improved network fluidity and lower volumes. These decreases were partially offset by planned increases in technology spending. Materials and other were slightly higher than prior year. Our operational initiatives drove a reduction in the number of locomotives in service and freight cars-on-line, resulting in $10 million of savings associated with materials. These expense reductions were offset by higher claim costs of $12 million, driven by increased environmental and loss and damage expenses. While compensation and benefits expense was up slightly, we continue to see a decline in headcount. Average headcount for the second quarter was down over 1,200 sequentially, compared to the first quarter. The operational improvements from Clean Sheeting and running a consistent plan every day have resulted in the pull forward of benefits from reduced headcount. We expect headcount for the remainder of the year will continue to decline as we reduce resources as a result of our TOP21 implementation. During the second quarter, we had savings of $24 million due to lower employment levels over time and recruitment. In addition, we also had lower incentive compensation. However, these savings were offset largely due to the absence of last year's employment tax refund as well as higher wage rates. You will recall that second quarter 2018 benefited from a $31 million refund from employment taxes on stock-based compensation. Finally, depreciation was up, reflecting our increased capital base. Let's move to our summarized financial results on Slide 16. During the second quarter, we recognized a $28 million impairment loss related to certain natural resource assets that we seek to monetize. We continue to execute on our strategic initiatives, and that includes evaluating all non-core assets to ensure we are driving the greatest return for investors. This loss included in other income was offset in part by gains from non-operating property sales and higher investment returns on our corporate-owned life insurance. Interest expense on debt was up $22 million due to a higher overall debt balance compared to June of last year. Wrapping up our bottom-line results, net income was $722 million, up 2% and diluted earnings per share was $2.70, an 8% improvement. Both of these measures are second quarter records. Slide 17 depicts our cash flow for the first half of the year. Cash from operations totaled almost $2 billion, generating nearly $1 billion in free cash flow. We are committed to returning capital to shareholders as evidenced by the $1.5 billion of capital returned in the form of dividends and share repurchases, a 36% increase over last year. We are executing on our strategic plan and are confident we will continue to produce improved financial performance that drives shareholder value. Thanks for your attention. I'll turn the call back to Jim.

Thank you, Cindy. As the first half of the year demonstrates, we are laser-focused on executing today while planning for tomorrow. And as we have done before, we won't rest when we reach our goals. Each and every member of the NS team is working in unison to achieve our efficiency and growth objectives. Thank you for your attention. And we'll now open the line for Q&A. Operator?

Good morning. Thanks. Just given the current weak volume backdrop and the negative freight indicators and economic indicators, do you have less confidence in the long-term revenue CAGR targets that you set out at the Analyst Day? And maybe if you could also speak to whether you've seen any change in the pricing environment sequentially?

Good morning, Allison. Let me begin by saying that we are focused on the things that we can control, and those things are delivery of revenue growth. Alan described our modest growth objective in the second half through pricing to the value of our service and volume growth in select merchandise verticals, which I'll turn it over to him in a minute to describe further. At the same time, we are very focused on the productivity and efficiency opportunities that we have uncovered through Clean Sheeting and through TOP21 implementation. So, we're focused on the things that we can control and we are very confident that we will hit our goals this year, at least 100 basis points improvement in the operating ratio over last year and 60 by 2021. Alan, why don't you dig into the outlook a little bit further.

Sure. Allison, we remain fully committed and confident in the execution of our strategy. As you know, it's a balanced strategy and that's delivering service growth and productivity. We've got the most powerful Intermodal franchise in the east, which is married to the consumption part of the U.S. economy, and the economy continues to move in the direction of the consumer, and the consumer-related economic indicators are still relatively strong. We've got a diverse merchandise franchise, which offers many opportunities for growth in the second half of the year. We're looking for growth in automotive consistent with projections for improved U.S. light vehicle production. We're looking for growth in the crude oil markets. We're looking for growth in sand and aggregates as well due to improved service, and more normalized shipping patterns. Our read of the take is that this is going to offset some headwinds that we're seeing in other markets, such as NGLs and the steel market, and our Intermodal franchise outlook is very consistent with what we're hearing from our channel partners. With respect to pricing, we continue to see strength in pricing. This past quarter was the second-best quarter in year-over-year improvement in pricing in the last seven years. And we've had seven consecutive quarters of sequential year-over-year gains and pricing in our merchandise franchise. So, we've got a rapidly improving service product. We're building credibility with our customers and we're pricing to the value of that product.

So, Allison, to sum up, we are determined to realize revenue growth opportunities wherever we can in the second half and for the duration of the plan, and I'd like to turn it over to Mike, if I may just to talk a little bit more about the productivity and efficiency opportunities, which we are also aggressively pursuing right now.

Yes, sure. So, the first thing we're doing is, working on harvesting the opportunities out of the new operating plan, as the new operating plan was put in place. It's uncovered even more opportunities for us to become efficient and take costs out, and that includes an additional tranche of DP trains that will help us as well. The other thing we're looking at is making sure we're really synced up well with the local operating plan, with the implementation of the new train plan, and that will also give us opportunities to create some efficiencies while still ensuring that we give a good service product to the customers. The other thing we continue to look at is the locomotive fleet. We see some opportunities there in the locomotive fleet, as well as how we maintain the locomotive fleet and what are the opportunities going forward there. And then last, but not least, we are already starting to model the new— the next phase of the operating plan, which encompasses all our traffic on the network, which we'll plan on rolling out early next year. So, a lot going on to continue to work on productivity and efficiency.

So, to sum it all up, ours is a balanced plan that positions us for enhanced shareholder value in any environment.

That's all really helpful and definitely encouraging to hear the pricing comments. If I could just ask one more question on the comp and benefits per employee. Cindy, it was really helpful when you outlined some of the year-over-year factors there, but in terms of sort of thinking about this on a dollar basis or per employee basis. Is this kind of the right range to model this going forward?

Well Allison, yes, thanks for the question. As you've noted, we had really good head start on reducing our headcount. Year-over-year we're down about 1,500 and as I said, sequentially about 1,200. When you look at the reductions that we've made so far in that 1,200, 1,500, about half of the ones we've made were conductor trainees. So, obviously they are at a much lower pay rate than you would say our average employee. So, you've seen a little bit of that impact. In other words, the take-out it's not quite as high as you would normally think for an average employee. But going forward, we are going to continue to work on headcount. You saw what Mike presented in terms of TOP21. The number of train start reductions they’re looking at. So, we're going to continue to push to reduce headcount, not only in T&E, but in all areas of the company, we're looking for additional productivity.

Great. Thank you, guys.

Yes. Hi. Good morning. So, the service metrics, many of them are looking good like dwell and velocity pointing in the right direction, which suggests that PSR is kicking in. I'm just sort of wondering, I know you sort of reaffirmed the 100-basis points improvement, but how do you think about how that starts to really dig in and move that operating ratio lower as we move through the second half of the year and into 2020 and beyond, from a timing standpoint I guess more than anything?

Thank you, Jordan. The service metrics and the network velocity metrics are trending very favorably and that's something we're extremely proud of, as I guess is obvious. Having just cut over to a new operating plan with far-reaching effects on our traffic. So, we've seen that in all of the metrics that you mentioned and, in the metrics that Mike went through as well. That service platform and the service delivery index goal we've set for ourselves, which we're trending well toward, are the basis of everything we're trying to do, in terms of the revenue and on the expense and productivity side as well. So, yes, we do expect to see. We already are seeing significant opportunities for savings as a result of TOP21 implementation and the Clean Sheeting that preceded it.

Great. So, I mean – yes, I mean, basically, I'm just trying to get a sense that you know obviously you're literally early days in terms of flipping the switch July 1, but presumably as the metrics improve, operating ratio improves, I mean it's – that's how it translates from here whether it be headcount whether rents, etc.

Yes, of course. And so, we are still expecting to produce an operating ratio at least 100 basis points better than last year for the full-year 2019 and are confident we're going to get there. Now remember that we did have a significant property sale in the fourth quarter of last year and that resulted in a gain and we’re comparing to that fully loaded 2018 result.

Just one more quick question. The Phase II, I assume of TOP21 will include the Intermodal network sometime early next year. While you're doing that network change, will you – do you expect to continue to be able to push for volumes on the Intermodal network as you're undergoing that portion of TOP21?

We do, we do. Intermodal has been our volume growth engine and it has been a significant contributor and growing contributor to revenue and bottom line as well. So yes, we continue to expect to grow in that network even as we begin considering how and how much of it two-fold into the TOP21 operating plan.

Hi, good morning. Thanks for taking my question. I just wanted to ask Mike, when you look at the operating metrics, fuel efficiency, got a little bit worse. When you look at GTMs for this quarter, was that something that you expected coming out of — the cut over from the operating plan or was that something else that was going on from a mix perspective? If you look at the other results of some of the class ones this quarter, they start to see some pretty good increases in efficiencies. So, it's not one of the metrics you've talked about too much in the past. I just wanted to get your thoughts on how that trends for the back half and into next year?

Yes. The fuel efficiency was really not impacted by the TOP21 plan. It was really driven by the drop-off in gross ton miles. So, we've got a lot of initiatives to help drive that. And the coal volumes down hurt that a little bit too. But, yes, we're keeping an eye on that. A lot of initiatives to work on that as well. And that's in our plan.

Brian, we recognize that we have some ground to make up when it comes to fuel efficiency. Running bigger, heavier trains as a result of TOP21 implementation, very late in the second quarter, early in the third quarter should help with our overall fuel efficiency. And in addition, as Mike mentioned, we have numerous initiatives in the energy management area that we believe will result in an improvement in fuel efficiency going forward.

And with the conversion of the locomotive fleet that you see, would that be a step change in that function as well?

That will help.

Yes, it is necessarily it's a step change because this is something that we're going to do over the next several years, but it does help because you're able to handle more tonnage with fewer locomotives.

Okay, thanks. And then just a quick follow-up for Cindy. Can you give us an update on the headcount guidance for the year? I think last time I heard it was down at least 500 for the year. It seems like it's moving along pretty well, but the mix may be a little bit different with the trainees coming out first and then considering we're looking at a fully loaded comp with land sale gains to get it at last this quarter. What's the outlook for land sales kind of all in, when you look at the back half of the year? Thank you.

Well in terms of headcount, you're exactly right. I mean we guided to at least 500 down by the end of the year, compared to the end of the year in 2018. And as I said, we're already down 1,200 sequentially from the first quarter. We aren't guiding to a specific headcount number, but as I mentioned previously, we do expect that headcount is going to continue to come down as we reduce work associated with TOP21. We're going to be looking at all areas of the company, mechanical, G&A all of those areas as we continue to push on the productivity. In terms of land sales and operating property, I think we had guided to between $80 million and $100 million with gains for a year and I think that's still a — I'm sorry, $30 million to $40 million — hold on one second. $50 million for the year. I'm sorry. And that's still good guidance for the year.

Now, Brian, the item you mentioned was in other income was actually a non-operating item and there we did incur a loss.

We did.

As a result of marking down certain assets. Cindy, why don't you explain what was going on with that?

Yes, we did call out the $28 million loss that was related to some of our natural resource assets that we seek to monetize. We continue to execute on our strategic initiatives, and that includes evaluating all non-core assets to ensure we are driving the greatest return for investors. This loss included in other income was offset in part by gains from non-operating property sales and higher investment returns on our corporate-owned life insurance. Interest expense on debt was up $22 million due to a higher overall debt balance, compared to June of last year. Wrapping up our bottom-line results. Net income was $722 million, up 2%, and diluted earnings per share was $2.70, an 8% improvement. Both of these measures are second-quarter records. Slide 17 depicts our cash flow for the first half of the year. Cash from operations totaled almost $2 billion, generating nearly $1 billion in free cash flow. We are committed to returning capital to shareholders as evidenced by the $1.5 billion of capital returned in the form of dividends and share repurchases, a 36% increase over last year. We are executing on our strategic plan and are confident we will continue to produce improved financial performance that drives shareholder value. Thanks for your attention. I'll turn the call back to Jim.

Thank you, Cindy. As the first half of the year demonstrates, we are laser-focused on executing today while planning for tomorrow. And as we have done before, we won't rest when we reach our goals. Each and every member of the NS team is working in unison to achieve our efficiency and growth objectives. Thank you for your attention. And we'll now open the line for Q&A. Operator?