Norfolk Southern Corp (NSC) — Q4 2023 Earnings Call Transcript

Thank you, and good morning, everyone. Please note that during today's call, we will make certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or future performance of Norfolk Southern Corporation, 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 disclosure of those risks and uncertainties we view as the most important. Our presentation slides are available at norfolksouthern.com in the Investors section, along with the reconciliation of any non-GAAP measures used today to comparable GAAP measures. Turning to Slide 3, it's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

Good morning, everyone, and thank you for joining Norfolk Southern's fourth quarter 2023 earnings call. Here with me today are Mark George, our Chief Financial Officer; Paul Duncan, our Chief Operating Officer; and Ed Elkins, our Chief Marketing Officer. Last year was historically challenging, with a major derailment to start off the year, followed by network disruptions and compounded by a stubbornly weak freight market. The Eastern Ohio incident tested our resolve. I'm proud that our team responded decisively and responsibly to protect this great franchise and our shareholders, and to address the community's concerns. With an unwavering commitment, we have strengthened our safety and service. We have kept and will continue to keep our promises to make things right in Ohio, to improve our service to our customers, and to make a safe railroad even safer. A crisis allows you to accelerate change, and we acted. This includes a number of positive changes to how we design the network and assemble trains with measurable results. As we show on Slide 4, our improvement in safety is already being highlighted by a dramatic 42% reduction in our mainline accident rate in 2023. 2023 was also historically important for Norfolk Southern because we began to implement and advance our new strategy to position our business for sustainable growth and success. The Intermodal Service Composite chart on the right side of Slide 4 tells an important story that speaks to the clear gains we have made in both resiliency and service, following significant strides in service in 2022. With our investments in resiliency through leadership plan and resources, we demonstrated the ability to execute our strategy to run a safer railroad that delivers a compelling service product to our customers and handles increased business, a balanced approach to safely delivering service, productivity and growth. We overcame multiple significant network disruptions in 2023, and exited the year with the best intermodal service we have delivered in over three years, all while intermodal volume grew 5%. Entering 2024 with a safer and more fluid network that is attracting growth, we have the platform to narrow our focus to specific areas to drive increased productivity, and we are building positive momentum by executing on our strategic vision. Part of that strategic vision is our commitment to industry-competitive margins, and we are determined to deliver on that promise just as we have delivered our promises on service and safety as volumes grew. We will leverage our PSR operating plan with our current resource base to meaningfully improve velocity and resilience within our merchandise network, which accounts for two-thirds of our train starts. As we achieve a high degree of compliance to the plan and merchandise, we will reduce variability, complexity and costs. We are driving that forward now with the results already seen in December and January. It will drive asset velocity that will lead to productivity gains and cost savings. And in 2024, we are targeting a double-digit percentage improvement in terminal dwell, which is a good barometer of the health of our and fluidity of our merchandise network. Paul will go into more detail about how we are planning to build on our success in intermodal, deploying changes to accelerate our merchandise network, which I have noted will be a major source of productivity for Norfolk Southern in 2024 and beyond. To further describe what we are doing to improve profitability and drive smart growth in 2024, Ed will talk about how his team is winning business and pushing hard to negotiate price in excess of inflation. Importantly, we are streamlining our cost structure and eliminating inefficiencies. We invested in 2023 to enhance safety and service. We will see the benefits of this in our cost structure in 2024. We'll take actions this year to reduce costs in other areas. This includes a program to reduce management headcount by roughly 7% to help offset increases in critical operating areas. Our groundbreaking transformation will take time. We recognize the necessary investments in resiliency and service have temporarily increased our cost structure, particularly visible during the trough in this freight cycle. On Slide 5, you'll see we laid out the scenario where during a down cycle, we may modestly underperform in order to be coiled to secure volume and incremental margin when the freight cycle recovers. While we didn't expect 2023 to be a continuation of a soft freight market, coupled with numerous disruptions, we are optimistic that recovery is on the horizon and our investments will yield returns. We will deliver near-term margin improvement as we implement our strategic vision, a balance between safe service, productivity and smart growth. We are on the path to achieve that balance. In the aftermath of the derailment and network disruptions, we have improved safety and service in a responsible manner and are in securing new business. With a stabilized network and a high degree of compliance to the plan, we will continue to iterate the plan, reducing complexity and enhancing executability and balance. All of this will unlock productivity and fluidity, which, in line with our strategy, will allow us to attract more volume at accretive incremental margins and deliver top-tier revenue and earnings growth at industry-competitive margins. With strong franchise advantages that will serve us well as we move through this economic cycle, we are poised for a bright future as we balance safe service, productivity and growth. I'll turn it over to Mark and the rest of the team, who will add some context around the timing and magnitude of our planned improvements in performance and profitability.

Thank you, Alan, and good morning, everyone. I'll start on Slide 7 with an update on our costs related to the Eastern Ohio derailment. During the fourth quarter, we reached a significant milestone with the bulk of the soil remediation being completed. It's an encouraging achievement, however, as you'll note, we incurred a $137 million charge in the quarter, which related to an extension to the timeline for ongoing testing as well as additional work that will be completed in nearby streams. There was another $89 million incurred in legal costs and other fees. But of note, we received $76 million of insurance recoveries, bringing the total recoveries in 2023 to just over $100 million. From a cash perspective, the net outflow in 2023 was $652 million after the insurance recoveries. While we're pleased with our remediation accomplishments, we currently expect ongoing monitoring efforts and cleanup efforts will continue through 2024. There will be additional costs in the future related to legal settlements and fees, although the amounts and timing cannot currently be estimated. Moving to Slide 8, where we illustrate the impact of these fourth quarter results on our results. Our GAAP results are in the first row, while on row two, we isolate the accounting to our Q4 financials related to the incident. At the bottom of the chart, you'll note the comparisons of the adjusted results to prior year. I'll be talking about our adjusted results for the remainder of the discussion. Revenues were down nearly 5%, while adjusted operating expense was 3% higher. The adjusted operating ratio for Q4 2023 was 68.8%, which represented a year-over-year deterioration, but notably was a 30 basis point sequential improvement from our third quarter performance. The sequential improvement is encouraging, but we fell short of our expectations as service-related costs did not come down as we anticipated. While our recovery efforts related to the IT outages in late Q3 restored service quickly for our customers and allowed us to handle more business, it costs more money in the form of crew-related expenses that persisted well into the fourth quarter. On an adjusted basis, operating income was down 19% year-over-year. Net income and EPS were down 19% and 17%, respectively. Turning now to Slide 9, adjusted operating expense for the quarter was up $59 million. The increase excluding fuel decline was up $123 million. The largest drivers of the increase were employment growth as well as inflation across all categories. In comp and benefits, looking to '24, we plan to keep overall headcount levels flat versus the year-end 2023 exit rate with some additional mechanical craft hiring to be offset by upcoming reductions in the non-agreement category that Alan discussed. Purchased services was up due to higher costs associated with technology spend, as well as increased mechanical services, including repairs around our auto fleet as we prepare for growth opportunities in 2024. The increase in rents was driven by short-term locomotive resources and increased car supply for our auto fleet. We expect quarterly rents in 2024 to remain slightly above these fourth quarter levels due to more adverse TTX equity costs and volumetric-related increases, partially offset by benefits coming from improved velocity. The increase in materials relates to locomotive and freight car repairs. Claims were lower year-over-year. Recall that in Q4 2022, we had a large adverse adjustment. The other component is unfavorable, driven mainly by fewer real estate gains. Moving now to Slide 10. Last quarter, we introduced this slide to help investors think about our service costs and resiliency investments, which are two components of our current cost structure. On the left side, we see costs that should not be part of our cost structure and have grown out of service that has not met planned levels, mainly related to recrews and overtime. These costs did not step down as expected in Q4 due to the crew-related costs we incurred to accelerate service recovery for our customers after the IT outages. So, while service has been at strong levels exiting the year, Q1 costs will remain somewhat elevated in part from the cold weather we are seeing here in January. Overall service costs should meaningfully unwind in Q2. On the right hand, we show costs tied to our investments in resiliency, mainly related to additional T&E crews that we have added in locations where we were understaffed, as we position Norfolk Southern to realize outsized growth in revenue and margin in a growing volume environment. Our total T&E headcount is now on an appropriate level that will allow us to absorb volume growth in '24 and beyond. There will be some additional hiring in mechanical crafts that will be offset by reductions in non-agreement positions. The additional craft hires mean that resiliency costs will settle in roughly in the $55 million per quarter range in 2024. Adding those resources will drive benefits over time of being an even safer and higher velocity operation. Moving to Slide 11 and results below operating income, other income of $38 million was up $4 million in the quarter, driven by higher interest income on the extra cash we are carrying ahead of the CSR closing. The adjusted effective tax rate was 19.2% due to a rate adjustment on our deferred state income taxes and tax-free gains on favorable company-owned life insurance. For 2024, we expect our tax rate to be in the usual 23% to 24% range. Turning to Slide 12 and recapping our full-year results. We started the year planning for modest top-line growth that would afford a level of expense growth to help drive our strategic track toward resiliency. The disruptive events of the year and an adverse macro environment upended this. Revenue declined 5%, which was meaningfully affected by about 6 points of pressure from lower fuel surcharge revenue and a sharp year-over-year decline in storage fees. At the same time, OpEx rose 5%, fueled by inflation and investments in our business. As a result, operating income fell 18%, with the operating ratio rising to 67.4%. Favorable below-the-line items and benefits from share repurchases held the EPS decline to 15%. In 2023, free cash flow was $1.4 billion lower than the prior year, representing the impact of the $650 million derailment-related outlays, as well as the lower operating income, coupled with higher CapEx. Shareholder distributions in '23 were $1.8 billion, with two-thirds being driven by our rock solid dividend and the remainder from share repurchase activity. I'll mention that we did issue debt in November and built up our cash balance to $1.6 billion at year-end, as we prepare to fund the strategic CSR purchase that is scheduled to close on March 15. As a result, we will see higher interest expense in 2024, and we will temporarily suspend share repurchases while we absorb the asset and bring our credit metrics back into our target range. It's important to remember that CSR is a highly strategic critical artery in our network, for which we had a rare window to secure and guarantee control of the asset forever. This also enables us to control longer-term costs that could have begun to escalate sharply with the upcoming lease renewal. I'll now hand over to Paul, who can provide an update on our operations.

Thank you, Mark, and good morning. Turning to Slide 15 to begin our operations discussion with safety. We made progress in enhancing safety in 2023. We finished the year with our second-best injury rate in eight years, but we are striving for better. We enhanced our conductor training program and continue to leverage our partnership with Atkins Nuclear, a foremost expert in safety across all industries. We also closed 2023 with a 42% reduction in our mainline accident rate and the fewest mainline accidents since 1999. Thank you to all of our craft colleagues and leaders for enhancing safety at Norfolk Southern this last year. While these are very noteworthy accomplishments, we must become even safer. When the major incident in Eastern Ohio happened in early 2023, we were already in the process of reviewing and adjusting our train makeup rules and it was a high priority of mine. We ended up accelerating that work significantly. What we produced was an even better product than we already had, which helped us make such progress in mainline accidents, and we are striving to become even safer. This is the platform for which we can now leverage our train plan to deliver productivity and growth. Though the change in our operating rules was implemented on an accelerated timeline and caused network disruption, we know it was the right move for the long term and we kept our promises to restore fluidity and service levels in the second half of 2023. The future of our operation is very bright and I am proud of the work we did in 2023 on this front to keep our promises. Moving to Slide 16 for further discussion on service levels. We took a modest step backward to begin the quarter related to the system outages that we experienced, but quickly regained footing and continued our glide path of improvement in November and December. It is important to note that we deliberately chose to deploy additional resources so that we could balance restoring fluidity while delivering peak volume. We were successful on that front. We delivered a very strong service for our intermodal customers during peak season and pushed overall volumes to their highest levels in over two-and-a-half years, as you will hear more about from Ed. But as you heard from Mark, it did result in higher-than-planned service recovery costs in the quarter. We remain sharply focused on reducing those and have actively been unwinding more T&E crew expense in recent weeks in areas such as temporary deployments, overtime, recrews and other crew-related expenses. This has included reducing our intensity of Go Team members deployed on the network. Now that we have made this next step function improvement in intermodal service, we expect to remain there as we transition to leveraging our resources to drive greater productivity and growth. Turning to Slide 17 for a discussion on productivity. We've improved 4% sequentially within workforce productivity and expect an improving glide path to continue. We are driving this in four ways: one, by improving fluidity; two, by maintaining strict discipline and accountabilities to plan compliance in our operation; three, through discrete productivity initiatives that we'll discuss in a moment; and finally, through converting trainees to productive employees. As promised last quarter, we ended the year with 600 conductor trainees. We are now confident with the overall size of our T&E workforce to efficiently serve the growth that is on the horizon. On the locomotive front, referencing our service commentary, miles per day remained lower as we kept additional power and service to jumpstart the network with peak volume. This is an area that will benefit significantly from further improvements in velocity, as faster train speeds allow us to drive our locomotives in the terminals on time and send them back out on their scheduled connections. And lastly, fuel efficiency finished flat despite the additional locomotives online, thanks to our initiatives, and this is an area we are intensely focused on improving in 2024. Moving to Slide 18, the next phase of our operational improvement will be marked by enhancing the velocity and resilience within our merchandise network. Recall that our TOP|SPG operating plan, which we launched in 2022, brought further PSR principles to our intermodal network, driving enhancements to container velocity and resilience within intermodal. That successful evolution enabled intermodal service to remain strong throughout 2023, particularly in Q4, where we delivered the best intermodal service in over three years, while delivering on peak season. Now we are building on that success with further enhancements in our merchandise network. First, we are improving our execution and discipline to run with a higher level of planned compliance. We're tying together the improvements we've made around our operational strategy, leadership accountabilities, and resource allocation by sweating our assets further and strict execution to the plan. Next, we are leveraging precision train building processes embedded into our terminals to optimize connections and depart trains on time. We're already seeing the benefits that arise from success in driving scheduled network velocity. Our success will be demonstrated by making sustained improvement in terminal dwell, whereas Alan mentioned in his opening remarks, we expect to drive a low-double-digit percentage improvement in 2024 versus 2023. Investors can also track our progress in the AAR train speed, particularly the subset of manifest train speed, which has an outsized impact on our cost structure as well as merchandise trip plan compliance and car velocity, the outcomes of improving speed, dwell and disciplined execution of plan. Of course, there is always week-to-week noise in these measures, so we would look for improvements in trends on a rolling 12-week basis. On Slide 19, I'd like to provide more detail on how sustaining these velocity improvements will drive down our cost structure. First, we will see reductions in various buckets of T&E-related expense, and that will also help to lower our headcount intensity. Next, as we spin up the flywheel, we'll get cars moving faster, a critical element to scheduled railroading and overall productivity. Having our yards and mainlines more fluid will indicate that cars are flowing unimpeded through the network. This will drive a capacity and productivity dividend within our fleets in our yards and on our mainlines. That, in turn, will allow us to bring on growth at low incremental cost, lifting overall workforce and locomotive productivity and achieving service resilience that will allow us to take further share from trucks. Driving these benefits in our operation by improving the velocity and resilience of the merchandise network will be a key aspect of delivering progress in 2024. Thank you, and I'll now turn the call over to Ed.

Thanks, Paul, and good morning to everybody on the call. Beginning on Slide 21, let's cover our commercial results for the fourth quarter. Overall volume improved 3%, led by growth in intermodal and our automotive markets. Now, despite volume growth, total revenue and revenue per unit declined for the quarter due to lower revenue from fuel surcharge and intermodal storage and fees, along with negative shipment mix within the portfolio continuing from last quarter, as well as headwinds from a weak truck price environment due to the persistent overabundance of capacity. Looking at merchandise, volume was flat compared to the prior period, and revenue was challenged by lower revenue from fuel surcharge compared to that prior period. Revenue per unit less fuel increased 1% as price gains more than offset the impacts from negative mix. This increase set a new quarterly record for Norfolk Southern and marks the 34th of the last 35 consecutive quarters of year-over-year growth in merchandise revenue per unit less fuel. We're committed to driving value through price, and this commitment is demonstrated through quarterly records set in our automotive market for revenue, revenue less fuel, revenue per unit and revenue per unit less fuel. Let's move to intermodal. Volume in the quarter increased 5% year-over-year with gains in both our domestic and international lines of business. Revenue for intermodal was down 13% year-over-year, primarily driven by significantly lower revenue from storage and fees in the prior period. Also, lower fuel prices and an excess supply of available trucks, as well as negative mix within our international business, impacted revenue per unit negatively. Excluding the impacts of fuel and elevated storage and fees, which are related to supply chain congestion, intermodal revenue per unit declined 1% in the quarter. We’re confident our domestic franchise is a coiled spring, positioned to yield strong incremental value as the truck market recovers. Turning to coal. Overall volume increased slightly with strong demand for export more than offsetting declines in our utility coal franchise. The market for utilities confronted persistently high stockpiles and low natural gas prices. Coal revenue was down 4% year-over-year, with lower commodity prices and lower revenue from fuel surcharge negatively impacting revenue per unit. Now, let's turn to Slide 22 and review results for the full year. Total volume came in at 6.7 million units, a 1% decrease from 2022. Volume declines were most significant in intermodal and our energy-related chemical commodities. On the positive side, lower ocean freight rates, advanced demand for international intermodal, and rising vehicle production activity drove growth in our automotive franchise, both of which contributed meaningfully to offsetting larger declines. Revenue for the year was $12.2 billion, down 5%, or $590 million from 2022, driven by lower revenue from fuel surcharge and storage fees as well as lower volume. I do think it's important to point out, however, that if we exclude the $650 million revenue hit from fuel and storage fees, which is essentially a post-pandemic normalization of those items, underlying revenue was actually positive, even with volume down 1%, which speaks to our commitment to core pricing and smart growth. Revenue per unit, excluding fuel, intermodal storage and fees, increased 2% as we realized above-budget price results in merchandise and in coal. In fact, we set annual records for merchandise revenue, revenue less fuel, and revenue per unit less fuel. Objectively, the freight environment in 2023 was soft, with weak demand for goods, lower levels of manufacturing activity, and generally less freight coming in from overseas. These conditions amplified the excess capacity in transportation, pressuring margins and growth opportunities. Our focus throughout the year was creating value with a resilient network to drive growth. In the fourth quarter, we saw that growth materialize with improved volume, and that volume will bolster our revenue performance in the coming year as we execute our pricing strategy to grow core revenue per unit. Let's look ahead to 2024 on Slide 23. Our market outlook is for modest volume growth. In merchandise markets, overall volume growth is expected to be driven by gains in steel shipments. Automotive will grow on continued strength in vehicle production, including new EV business. Improved fluidity and increased network velocity will lift our effective capacity in both of these markets. Shifting to intermodal, we are optimistic that increasing levels of international trade will boost demand for both our domestic and international services. There's still uncertainty around how quickly capacity in the truck market right-sizes. Additionally, the strength of the consumer could pressure growth if the economy softens. Lastly, our coal outlook is for relatively flat volume levels compared to last year. Demand for export coal is forecasted to be high, but some of this demand will be met via a shift of historically domestic coal to export markets. Utility demand will be driven by stockpile levels, which are forecasted to remain elevated in 2024, aside from extreme weather events. Looking at price, we expect strong pricing conditions in our merchandise markets, aided by our improved service product. However, as mentioned, a persistently weak truck market will mute the opportunity for intermodal prices, with contract truck rates expected to trend roughly sideways from their current levels throughout 2024. We also faced some headwinds on coal pricing this year related to difficult comparisons for seaborne coal prices, with additional pressure from high stockpiles and weak natural gas prices. All said, we still expect to generate pricing above rail inflation in 2024. When we take this all together, we are reasonably confident that overall market fundamentals will create opportunities for us to bring on new freight and further the volume trend we achieved in the fourth quarter of 2023, while delivering incremental top-line revenue growth through core pricing gains as we price into the value of our enhanced service product. Finally, let's turn to Slide 24. I'd like to give you some examples of how our customer-centric approach is yielding smart and sustainable growth. Last February, our team met with FedEx Ground with the intent to enhance Norfolk Southern's service for their transportation network. We listened to their business forecast and made strategic adjustments that we knew would set us up to better serve this valued customer. We charted a better way forward for both of our organizations. As a result, we were able to significantly increase our volume for FedEx Ground during peak season, and we look forward to continuing that growth into the future. We also landed a new plastic recycling plant in Ohio with our new customer Pure Cycle, which is expected to launch this quarter. This is a great example of the circular loop that is possible within the plastic supply chain and how Norfolk Southern can deliver that resin in a carbon-friendly manner. Finally, 2023 was another successful year for the Norfolk Southern Industrial Development team. We partnered with 62 customers to facilitate the completion of strategic industrial development projects in 2023. Collectively, these projects represent $3.1 billion in customer investment and the creation of more than 4,150 new jobs along Norfolk Southern lines. As we look into 2024, we're encouraged by the continued robust pipeline of customers that are looking to locate facilities along our lines. These successes in 2023 are indicative of the success that we expect in '24 and demonstrates our strategy to deliver a better way forward for our customers, our communities and for our shareholders. With that, I'll turn it back over to Alan.

We overcame a number of challenges in 2023 and we are moving forward with confidence. Our resolve to deliver on all aspects of our strategy has never been stronger. We restored service and improved safety in a responsible manner to protect our franchise and long-term shareholder value. We ended 2023 with the best intermodal service we've seen in years and with an encouraging 5% increase in intermodal volume. Now, we enter 2024 with a fluid network, which will drive productivity gains and further growth this year. Turning to our outlook. We anticipate roughly 3 points of revenue growth in 2024. This growth, combined with our productivity initiatives, will yield strong accretive incremental margins, with operating income growing in excess of revenues. Net income and EPS growth will be suppressed in 2024 versus 2023, owing to higher interest expense from the highly strategic acquisition of CSR, along with the temporary suspension of our share repurchase program. As for the progression through the year, typical seasonality suggests that second quarter and third quarter should be our strongest in terms of margin performance. Obviously, the first quarter will have some industry-wide impact from widespread cold weather in January, and our first quarter still has year-over-year headwinds from storage fees, fuel revenue and export coal price. In-line with the Investor Day guidance, over the midterm horizon, we anticipate delivering strong incremental margins, presuming a normal freight cycle and mix, and 3 points to 4 points of revenue growth. A combination of volume absorption, productivity initiatives and a commitment to cost control will be key drivers. We aren't going to give you a specific margin target, but it should result in between 100 basis points to 150 basis points of margin improvement annually, on the pathway to narrow the margin gap with peers and deliver industry-competitive margins. You'll start to see progress along those lines in 2024, once we lap some of the revenue comparison challenges in the first half. We see a path to outsized gains on the upcycle, leveraging volume growth within existing resources, ample productivity runway, and strong core pricing that can outpace inflation pressures. As we narrow our margin gap over time, the secular growth prospects of our powerful franchise will deliver shareholder value through earnings momentum and free cash flow generation. And with that, let's open the call for questions.

Yeah, hi. Thanks. Good morning. I wanted to think a little bit about the bigger picture here, Alan. You talked about the 100 basis points to 150 basis points of OR opportunity per year over a three-year period. As we kind of think about you guys relative to some of your closer peers, that's about half of the gap that exists today. So, I guess as you think over, is there more opportunity beyond that? It just takes time to get there? Do you think that there is the potential for a structural gap between you and your closest geographic peer? I just want to get a sense of how you think about the opportunity maybe beyond that three years and how it might play out.

Chris, we've committed to industry-competitive margins. And in '23, we overcame a lot. We made a lot of progress on our strategic plan. We enhanced safety, we improved service, we attracted new business, we overcame challenges. As we look into '24, it's really a focus on productivity, and we feel like we're going to be on that pathway of 100 basis points to 150 basis points a year, particularly as we get into the second half of the year and lap some of these revenue comps. But we gave a three-year outlook, but that's not an endpoint. We have talked about continuous productivity improvement as one of the three components of our balanced strategy of safe service, continuous productivity improvement, and smart growth.

Hey, great. Good morning. I guess I'm still surprised by that timeframe, right. Should seem like there's still moves that would get you that leverage a bit quicker, I guess, just compared to some moves we've seen some other rails. So, maybe just was the impetus for some of these changes the headcount, the three-year OR targets? There's been some activist chatter in the market. Is that something that's edging you behind in terms of making some of these changes? And then, I guess ultimately the question is, is pricing accretive to margins in '24? Thanks.

Hey, Ken, with us entering the third year of a freight recession and with the investments that we've made in safety and service that are delivering meaningful results, it's clear that our cost structure is too high for our revenue base entering 2024. And so, we addressed service, we addressed safety, we addressed growth in '23. We did it in a responsible manner to protect our franchise and our shareholders. Now, as we enter 2024, we've got a much more fluid network, much safer network and a network that is attracting growth, and it's a focus on productivity. And so, yeah, we're looking at every cost out there. And we're looking at discretionary costs, we're looking at management costs, and we're focused on productivity, because it is a balanced plan. I'll let Ed talk about price.

Yeah. We were successful in '23 on price. And in '24, we have a good price plan that's strong and really is going to produce value every quarter of this year. So, we feel good about where we are with price. And there's a couple of things that I'll add to that. We're feeling really good about where we are with our service trajectory at this point. We're hearing from customers that they appreciate the value that we're providing for them, and we're doing it at the facility level, going out and talking to customers, focused on that first and final mile and how we add value, and that's going to produce value for us and for our shareholders all year long.

Thanks. I appreciate it. And I know one question, but I'm just trying to understand, are you saying then we get better margins in '24? Is that pricing outpacing that cost? Sorry, just trying to understand the answer there.

That's part of the equation. Yeah, that is part of the equation, for sure.

Hey, thanks. Good morning, guys. So, Alan, you've been telling us for a little while now that maybe we'll see weaker decrementals at the trough, but then we'll see better incremental on the way back up. I think about Q4, where we started to see the way back up. We saw some pretty good volume growth, and the incremental margins were still really muted even with a nice fuel lag tailwind. So, how do I think about why we didn't see it this quarter? And then, maybe just going-forward, you just said the cost structure is too high. I don't know that I heard that you're telling us that costs come down from here maybe I misheard. Or do costs come down from here? And then, I don't know, just to put it all together, Mark, sometimes you just give us some color on near-term OpEx and margin. How to think about Q1? That would be helpful. Thank you.

We faced significant challenges in 2023 and made careful investments to improve safety, service, and drive growth, especially in our most service-sensitive markets. As we enter the fourth quarter, we are still dealing with a service product that is not meeting our goals, leading to added complexity, variability, and costs. The freight environment is quite challenging, and we are also contending with significant inflation compared to last year, while still managing difficult comparisons related to fuel surcharge and storage revenue.

And mix. And so, as we move into '24, those things are going to start to unwind themselves, right? We've got a much more fluid network. We're operating on plan. That will drive out our service recovery costs. And then, after that, we're going to continue to iterate to our plan. That's going to help drive productivity, and we're going to attract new business. And as you noted, our strategy is all about outperforming during an upmarket. I don't see that in the next six months. When the economy does recover, it always does, when the freight market does recover and it always does, we're going to be called for growth.

Mark, could you provide some insight on the operating expenses and the operating ratio for Q1? I'm unsure if I fully understand your earlier comment about the cost structure being too high. Will it decrease or not? I'm looking for clarity on this.

So, I think as you go into Q1, you're going to have some of the normal seasonality that has an impact on your OR. So, I think you need to expect that the first half, Q1 in particular, is probably going to step back, but then we feel much better as we lap a lot of the headwinds that we've been talking about from this first half, the intermodal storage charges, some of the fuel price and some of the other RPU challenges we're having on coal price, I think as we get to that back half is where you're going to really start to see much stronger incrementals and drop-through.

Thanks. Hi, everybody. Thanks for taking my question. I guess, Alan, if we look at the three-year plan, I think if you ask every railroad in North America, they tell you that they also would expect to improve margins by 100 basis points to 150 basis points a year from where we are today. So, I guess the negative implication of that outlook is that you're not actually narrowing the gap, you're just improving your position from where you are, but the gap actually stays intact. So, I'd be curious to get your perspective on that. And I think the cost structure is high, which is you're addressing that by taking these difficult actions with non-salaried workers. And I know that's a really difficult decision. But it seems also like when I look at the cost structure, it seems like the answer to something going wrong is throwing as many resources at that problem as possible. If I look at materials expense or rents expense, and if I talk to any kind of operating intensive railroad, their answer is, you never really drown a problem with resources. That's the opposite of what you should do. So, I'm trying to understand the removal of the non-union or the rationalization of the non-union employees is one step in that direction. But are we having a rethink about how we actually operate the railroad day-in and day-out and how we respond to issues? Because it seems like that's kind of the root cause of the problem in terms of where the gap is today. Sorry for the long-winded question, but just want to get your perspective on that.

What was the first part of your question, Amit?

Certainly, Alan. Regarding the three-year outlook, it appears that there will be a 100 to 150 basis points variance that every rail on the continent will consider. Therefore, it doesn't seem like we are actually closing the gap. That was the essence of the question.

Well, that's our commitment. Our commitment is industry-competitive margins and top-tier revenue and earnings growth. And we said we were going to do that through an economic cycle. We said we would have difficulty within industry-competitive margins during a trough and the freight market. And candidly, we didn't expect some of the incidents that occurred in 2023, the network disruptions, the Eastern Ohio incident, and a continuation of a very difficult truck market. We invested throughout 2023 for the long term, and in the long-term best interests of Norfolk Southern and our shareholders. And we improved service. We improved safety. Volumes grew in the fourth quarter. Now, we can really narrow our focus, right? We can narrow our focus into productivity, and that's exactly what we're doing. And we're going to drive that by operating to the plan, a high degree of compliance to the plan, that will shed resources, that's going to shed a lot of the service recovery resources that you just referenced. As we get on plan, we'll continue to iterate the plan and look for additional ways to drive out complexity, drive out costs and improve balance.

And just adding to what Alan said, as we think back to the fourth quarter, it was all about driving intermodal service, recognizing that the service sensitivity of that was going to directly drive growth to this railroad, which we did see. The shift in the layering on now is towards driving that discipline and rigor inside of our merchandise network. We recognize that is where our single biggest opportunity is. Total T&E is as a result of that essentially troughed in October. And we expect that we're going to see greater productivity as we continue to dial-in our merchandise network. That's going to be a reduced number of recrews and all the associated costs, taxis, hotels, deadheading, overtime, car hire, equipment expense. We're going to see improved capacity in our merchandise network as cars per carload improves. So that's the flywheel impact that we're talking about. So, to your question about what is fundamentally changing moving forward, it's from where we are now moving forward, a direct focus on merchandise, recognizing that's our next single biggest lever for productivity.

That's where two-thirds of our operating costs are.

Thank you. I hate to keep on the guidance a bit, but I'm going to move up to the revenue line here. I'm just trying to understand the roughly 3%. I get that there's macro headwinds. I understand the first half may be difficult. But by the same token, you have incredibly easy volume comps, given all the disruption from February until August. And Ed talked about the continuation of the pricing above inflation. So, one would probably expect the volumes to be a little bit better than 3%, just given the comparisons. So, are we saying that all in yield may be down this year? Or is there just like a healthy element of conservatism that you're putting into the macroeconomy in the first half of the year that may be tamping that number down?

I think there is a lot of uncertainty about what will happen in the first half of the year. The Street has factored in many expectations regarding Fed actions, and we will see how that unfolds. We look at the first quarter and notice quite low volume opportunities, which has been reinforced by the recent weather events affecting the entire industry. However, we expect a steady improvement in volume throughout the year, and I believe this volume growth will likely drive our revenue and yield improvements. While we might be cautious regarding coal prices, I think that's the prudent approach for both us and the rest of the industry.

Good morning. I have a detailed question to start with and then a broader one. For Paul, given the low volume environment, should we expect train starts to decrease in 2024, or do you plan to maintain the current schedule? Moving to the broader question, investors looking at Norfolk may see a unique opportunity to optimize the system, potentially independent of the freight market. However, this isn't entirely clear. Should we view Norfolk primarily as an improvement story or more as a freight market leverage scenario? If the freight market picks up in the second half of 2025, will you be well positioned for that? I'm trying to understand the best way to approach the Norfolk story. Thank you.

Thank you for the question, Tom. We approach this not just in terms of train starts, but by focusing on overall T&E productivity, which hinges on maximizing the efficiency of our crews. We anticipate improvements driven by the recent enhancements in network velocity as well as by executing a more disciplined planning approach and implementing additional initiatives. We are already witnessing the effects of this disciplined planning with reductions in T&E expenses, as reflected in our productivity metrics. We will continue to refine our plan to increase discipline, especially within our merchandise network, which will enhance both GTMs per horsepower and T&E efficiency. Beyond just disciplined planning, we have several initiatives underway. We have made more transitions from short pool runs to long pool runs, thanks to increased consistency and velocity within the network, yielding productivity gains. We're also enhancing assigned service from a T&E perspective, with assigned crew pools and turns that are reducing costs related to hotels and transportation, while improving quality of life for our crews. This year, we will implement predictable work scheduling for our conductors. Over 80% of our network is already scheduled, and with the introduction of predictable work scheduling, we expect reductions in displacement time. We are also consolidating boards and promoting lean operations within our merchandise yard. All these efforts will lead to increased train lengths in the merchandise sector, and we see potential for further improvements. Additionally, we have planned investments in major merchandise channels this year that will enhance productivity and train length. In Q4, intermodal train length increased due to our strong service delivery, which prompted customers to reward us with additional business. We will keep pursuing these opportunities. From a bulk perspective, we have discussed our long-term initiatives with customers to invest in facilities, particularly within our network. We have several elevators that are investing, and we expect to reap the benefits of those investments in the near future.

And Tom, to your second question, as we've gone through 2023 and we've made the necessary improvements in safety, in service, and attractive growth, we can really start to focus on productivity in our own plan and execution of that plan. That provides benefit as well. And then, our whole strategy is about outperforming during the upcycle. Our franchise is built to outperform during the upcycle. You've seen us recover from network disruptions much faster than we have in the past. So, there's a proof point as well. We're not calling when that upcycle occurs, but when it does, we do believe that we will outperform, and we will attract new business with high incremental margins. So, it's improving our own operations and executability with the plan as we can now narrow our focus on really operating to the plan and driving efficiencies and then participating and outperforming during the upcycle.

Hey, good morning. Thanks for taking the question. Just quick follow-up for Paul. If you can just give us some sense in terms of how much of those productivity metrics you're talking about are actually independent of volume? I'm sure that would help. But how much do you have line of sight if volume stays flat or maybe doesn't recover in the back half? And then just to ask more broadly, do you think there's a structural margin gap that will always be here for this network versus some of your peers? You do have roughly 10 percentage points more intermodal. It's more truck competitive. You can have shorter length of haul dynamics with international as well, lighter weight, more touches. So, I'd just be curious to hear if that's something you think about in the long term in terms of closing that gap, that might be a hindrance or if there's something I'm not thinking about from a productivity density perspective, that could make that an incorrect assumption. Thank you.

Brian, each franchise has unique strengths. We have committed to top-tier revenue and top-tier earnings growth, coupled with industry-competitive margins. We're going to deliver that. We've got a franchise that faces the fastest-growing segments of the U.S. economy and a franchise that's poised for growth. We're entering the third year of a freight recession. That will unwind. And when it does, the enhancements that we've made to safety, the enhancements that we've made to service, the ability to attract business in the fourth quarter, and automotive and intermodal, which are our most service-sensitive markets, right, give us a pathway to success going forward and allow us to unlock our full potential. And Paul and his team and entire executive team are intently focused on driving out cost inefficiencies and driving productivity.

Let me just add real quick. This entire team recognizes that a margin gap exists today between where we are and where we should be, and we're focused intently on closing and narrowing that gap before we get to an area of talking about why any remaining gap exists. There's a lot of runway still for us organically and self-help.

Yeah. The specific around how much is initiatives versus volume adjust, many of those initiatives that I spoke to are going to continue regardless of the volume environment. The iterations to the plan are always going to continue, but that is going to be the lever that is most sensitive to volume. But we're going to continue to drive train life. We're going to continue to drive crew productivity regardless of the volume environment.

Hey, good morning, everyone, and thanks for taking my question. And I guess maybe the frustration from the investor side is that if we go back a couple of analyst meetings, maybe even back to 2015, the mantra here has always been that we're trying to close the gap. But I guess constructively, Paul or Ed, can you help us understand where you are in trip plan compliance with your customers? Because I think ultimately, it's consistency of service that matters, right? So, what can you talk about what did you learn through changing the make-up rules through 2023? And where is the future on service to your customers? What are you seeing today?

Well, let me start off, and I'd love to have Ed jump in here as well. From an intermodal perspective, as we look at where we finished the fourth quarter, we delivered the best intermodal service we have put across this railroad in several years, and customers rewarded us with volume as a result. We expect to maintain that level of service based on what we've heard from our customers is their expectation. From a merchandise standpoint, we continue to see improvements in merchandise trip plan compliance throughout the year. To your point around the train makeup rules, we said that we were going to recover after we had moved forward with those, meant to again drive greater safety and resiliency across our network. We feel very confident that we've seen merchandise trip line compliance continue to come up throughout the year, and we feel that we're very confident as we look at 2024 based on the further discipline that we are going to build and drive inside of our merchandise network.

I'd offer a couple of proof points just to think about that are recent. The first one is we had one of our very largest customers comment to us that emerging from the weather events that just happened in the past week, that we recovered better than just about anybody else. And we really take that to heart because they themselves are a broad survey of many other railroads. So, we think that that's really important as a proof point for resilience. As we return back to plan faster and faster after inevitable events, that's going to define a large part of the value that we're offering customers.

Thanks, and good morning. So, for 2024, there are a lot of moving pieces that you've talked about. But when you put it all together, do you think you'll be within that targeted longer-term range of 100 basis points to 150 basis points of annual improvement in the OR? And, Mark, I think you and Alan both mentioned the interest expense headwind you'll have this year. I was wondering if you could help quantify that year-over-year headwind.

Yeah. Thanks, Justin. Let's be explicit with interest. We ended 2023 with about $17.2 billion of outstanding debt. The effective interest rate is about 4.7%. So, I would model about $210 million a quarter for interest expense on the go-forward. We've essentially kind of pre-funded that CSR acquisition, so that should be relatively steady within a couple of few million dollars per quarter of that. And as we look at the moving pieces, again, we've got some headwinds here in the first half. I think as volume starts to grow as we go from Q2 to Q3 and then into Q4, we should really start to see, with the compares, a pretty good improvement year-over-year. So, I don't see so much in the first quarter certainly. I think there's a risk of regression there. But I think as we navigate the second quarter depending on volumes, but in particular in the second half, is where you'll see most of the improvement. And, look, I think that 100 basis points and 150 basis points that we're talking about kind of on the go forward, we should definitely be there in the back half. Whether it translates into a full year amount or not, I think depends on a number of other factors.

Hi, I just have a few clarifications to ensure I understand. Regarding this year, you mentioned the steadily increasing volume assumptions and the growth in incrementals, especially in the second half, along with the year-over-year improvement in margin, particularly in the latter half. My question is what needs to occur to surpass the longer-term target of 100 to 150 basis points. I assume part of the strategy for the second half is likely aimed at exceeding that target. Additionally, could you provide some insights on how cash will be utilized this year? I believe you mentioned suspending the buyback, but with high interest expenses, is debt reduction part of the plan? You also mentioned wanting to improve liquidity ratios, so where do you aim to be at the end of the year in that regard? Thank you.

Yeah, Jordan, on the cash side, yeah, we've got the big CSR purchase here in March. We've gone outside of our preferred debt to EBITDA range at the very end of the year, in part because we've had to also fund these Palestine costs. So that will continue to consume some cash as well in 2024, and then we've got the CSR purchase in addition to that. There are no debt redemptions planned this year. So, it's really an issue of operating cash minus CapEx, gets you to free cash flow. And then, in that free cash flow, we've got our CapEx budget, which is flat with last year, as well as the CSR purchase. From there, we don't expect to have remaining cash to do share repurchase. So, as we go into 2025, we should be in a better track with EBITDA growth to start to have a more normal capital allocation cycle like we've experienced in the past. So, Jordan, looking at the cost side, the service costs I outlined will begin to decrease. They might not see significant reductions in the first quarter due to our efforts to manage the cold weather, but we expect to see some reductions starting in the first quarter, with most of them likely easing by the second quarter. This will give us some momentum. Many of the improvements that Paul mentioned will take effect and contribute positively, and we believe our T&E counts may end the year slightly lower than at the beginning, indicating increased volume with potentially fewer crews, which reflects productivity gains. Additionally, we are taking actions on the non-agreement side that will also generate benefits. We feel optimistic about the second half of the year and our margin outlook. With stronger revenue, we believe we can surpass the 100 to 150 basis points improvement in the latter half and possibly achieve that improvement for the entire year as a result.

Thanks. Good morning, everyone. Maybe just a high-level question here, maybe going back to some of the previous questions asked and just tying it up. I mean, look, there's obviously a margin gap to your peers and it's kind of easy to point the cost to the reason why. But you guys have been cutting costs for many years and you've taken a lot of resources down and you've done a lot to improve the service product. I think you have the lowest cost per carload of any of your peers. At what point is this not really a cost problem and is more of a revenue problem and that needs the bulk of the resources addressing that rather than trying to take out more cost?

Look, it's a balanced approach, and we overcame a lot of Norfolk Southern specific headwinds in 2023. And we enter 2024 with a safer network, a more fluid network and a network that is attracting business from our most service-sensitive customers. Once we get through this freight recession, and we will, we are poised for outperformance during the upcycle. That is the essence of our strategy. We're doing what we laid out at our Investor Day 14 months ago. And I'm proud of the way that we've overcome these obstacles in 2023 and set the stage for margin improvement in 2024, while protecting the best long-term interest of our shareholders and the Norfolk Southern franchise.

Yeah. Make no mistake, Ravi, this franchise, this network is built to handle a lot more volume, but we have a lot of cost runway ahead of us. And that's what we're focused on right now and we're certainly going to welcome the revenue when it comes. And I think again that's going to drive the high incrementals at that point. Thank you.

Hi, thanks guys, and thanks for taking the question. So, Mark, on the topic of cost, I think there were some headlines last night about some headcount actions, non-union workforce. Is there a specific cost program in place with a quantifiable number that we can be thinking about in terms of pursuit of sort of the non-operational costs as we kind of await the flywheel starting to spin?

Regarding the non-agreement program, I assume that's what you mean. We previously mentioned that our target was about 7%, which involves over 300 people. The timing for this will likely begin to take effect in the second quarter, based on how the voluntary program operates. We expect to see cost relief during that period, but the total savings will depend on the mix of participants. We have an internal estimate, and we'll see how it ultimately pans out. In addition to this, we're targeting other areas for improvement. We're not satisfied with our spending on purchased services. Last year posed several challenges, including getting our network back up and running due to various issues like weather and accidents. We invested significantly in external services to quickly enhance both the mechanical and engineering aspects of our network. We're hopeful that these issues will stabilize. My focus, along with Paul’s, also extends to our technology spending, which has increasingly included software as a service and cloud-based services. These appear under purchased services rather than capital expenditures, which has intensified the pressure on that category. We need to manage that growth as well. Additionally, we cannot overlook the impact of inflation. In 2023, inflation affected our cost structure significantly, exceeding 4%. As we head into 2024, I anticipate inflation effects will be reduced, potentially halving that impact, which will serve as a positive factor. Thank you for the question, David. Yeah. Look, I think the biggest issue is these costs could have quickly run away from us upon lease renewal. We did not control what the lease rate was going to be. We knew that, that would go to arbitration and it could be a significant multiple of where we were. So, it's really a benefit when you think about what it could be on the go forward, overall. There is some above-the-line benefits that we have in our depreciation today, that lesson, as well as the rent payment that goes away. But again, the interest burden and a pause on share repurchase provides a temporary hurdle for us. All right, we've got it wrong. We got another question before we wrap up here.

Thank you for having me. Alan, I want to clarify our discussion about top-tier volume growth at competitive industry margins. When I look at the consensus estimates for next year, the margins for your peers are expected to be in the 60% to 61% range. Even if there are no changes to their operating results and I consider the midpoint of your projected improvement of 100 to 150 basis points, it appears to take about six years to reach competitive margins. Is that the correct interpretation of our conversation? Am I looking at this the wrong way? I would appreciate your insight on this.

We've provided a roadmap for the next three years on how we plan to close the margin gap with our competitors. Our goal is to achieve industry-competitive margins. We've outlined our direction based on market observations. If the freight market experiences an upswing, I fully expect us to surpass expectations, thanks to our investments in safety, service, and our ability to attract growth in the fastest and most service-sensitive markets, which will benefit Norfolk Southern and our shareholders during a positive market cycle. However, we are not making that prediction yet.