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    Norfolk Southern Corp (NSC)

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    Norfolk Southern Corporation (NSC) is a major transportation company primarily engaged in the rail transportation business, operating 19,100 route miles across the Southeast, East, and Midwest of the United States. The company transports a variety of commodities, categorized into three main groups: merchandise, intermodal, and coal . NSC's operations include handling agricultural, chemical, metal, construction, automotive products, intermodal shipments, and coal, contributing to its total railway operating revenues of $12.156 billion in 2023 .

    1. Merchandise - Transports a diverse range of products, including agriculture, forest and consumer products; chemicals; metals and construction materials; and automotive goods, accounting for the largest share of NSC's railway operating revenues.

      • Agriculture, Forest, and Consumer Products - Includes the transportation of agricultural goods, forest products, and various consumer items.
      • Chemicals - Involves the shipment of chemical products across the rail network.
      • Metals and Construction - Handles metals and construction materials for various industrial applications.
      • Automotive - Focuses on the transportation of vehicles and automotive parts.
    2. Intermodal - Involves the shipment of domestic and international containers and trailers, serving intermodal marketing companies and international steamship lines, contributing significantly to the company's revenues.

    3. Coal - Supports the electric generation and other industrial markets by transporting coal, making up a substantial portion of NSC's railway operating revenues.

    Initial Price$214.90July 1, 2024
    Final Price$248.14October 1, 2024
    Price Change$33.24
    % Change+15.47%

    What went well

    • Significant cost reductions leading to improved profitability and Operating Ratio (OR): Norfolk Southern is on track to achieve $250 million in cost reductions this year and an additional $150 million next year, aiming for an adjusted OR below 60% in the next 3 to 4 years, enhancing profitability even in challenging economic environments.
    • Operational excellence and productivity gains driving growth: The company is implementing operational excellence practices, resulting in labor productivity improvements (volume up 7%, headcount down 3%) and is well-positioned to capture growth opportunities and recapture market share through improved service and efficiency.
    • Reduced capital intensity and planned share repurchases: By taking over 500 locomotives offline and reprioritizing capital projects, Norfolk Southern is reducing capital expenditures. Combined with proceeds from line sales and expected cash buildup, the company anticipates resuming share repurchases next year, enhancing shareholder value.

    What went wrong

    • Norfolk Southern may face volume and revenue pressures due to weakness in key markets, including industrial and automotive sectors. Ed Elkins acknowledged "some of the weakness that we've seen in some of the other industrial markets," and "deceleration in some of our auto markets."
    • Achieving operating ratio improvement targets may be challenging without volume growth, especially if market conditions remain weak. Mark George stated, "We can't control the top line and the economic environment... there is share recapture opportunity out there. So even if you have a softer market, we still have some idiosyncratic opportunities to recapture some share to help mitigate any pressure that might be there."
    • Reliance on cost reductions for financial performance may be insufficient if market headwinds persist. Mark George mentioned, "Regardless of the economic environment, we committed to another $150 million next year... So we feel really, really confident there... We can't control the top line and the economic environment."

    Q&A Summary

    1. 2025 Margin Outlook
      Q: Can margins improve in 2025 without market improvement?
      A: Management is confident they can improve margins in 2025 through cost reductions, even if markets don't improve. They committed to $250 million of cost reductions this year and are on track to hit that number. They've also committed to another $150 million next year and plan to beat that target. They see opportunities to accelerate cost reductions from 2026 into 2025. Despite potential market softness, they believe there are idiosyncratic opportunities to recapture market share.

    2. Operating Ratio Guidance
      Q: Will you meet the 64%-65% operating ratio target for Q4?
      A: Management is confident in meeting the 64%-65% operating ratio guidance for the second half of the year. While they expect a sequential uptick in OR in Q4 due to factors like reduced fuel recoveries and normal seasonality (historically about 100 basis points headwind from Q3 to Q4) , they have operational momentum and productivity improvements that support their confidence in the guidance.

    3. Capital Expenditure and Buybacks
      Q: Is capital intensity decreasing, and will you resume share buybacks?
      A: With over 500 locomotives taken offline, management expects to reduce capital expenditures next year. They've reprioritized projects to focus on high-return ones. With cash buildup from line sales, they expect to resume modest share repurchases next year.

    4. Volume Growth and Market Share
      Q: Where are you winning volumes despite market headwinds?
      A: The company has capitalized on market dislocations and spot opportunities in agricultural markets like soybeans, corn, and grain. These gains have offset weaknesses in other industrial markets. Intermodal volumes have shown solid growth both domestically and internationally. The new reservation system enhances agility and reliability, allowing them to attract new business at low incremental cost.

    5. Coal Pricing and Export Demand
      Q: Are you concerned about coal pricing and export demand in 2025?
      A: While acknowledging geopolitical uncertainties impacting commodity prices, management believes the U.S. remains competitive in export markets. They expect strong demand for export thermal coal to continue. China will play a significant role in determining export met coal demand. They are prepared to deliver tonnage to customers globally as needed.

    6. Pricing Strategy Against Inflation
      Q: How much pricing is needed to counter inflation next year?
      A: Management is confident in their ability to outpace inflation across major markets. They've had success pricing to the value of their service, which is increasing. While commodity prices like seaborne coal may present headwinds, the core product's value is growing, and customers are saving money.

    7. Labor Productivity Gains
      Q: Is there more runway for labor productivity improvements?
      A: Management believes they are just getting started with disciplined operations enhancing labor productivity. Gains are gaining traction and will continue. Collaborative engagement with labor has been positive, and the team is embracing continuous improvement.

    8. Impact of New Labor Agreements
      Q: How will new labor agreements help you meet targets?
      A: Providing clarity on payment structures and work schedules boosts workforce confidence. This predictability aids in modeling pricing and customer predictability. The agreements support their goals in PSR 2.0, enhancing disciplined service and value delivery.

    9. Premium Intermodal Outlook
      Q: Are you seeing recovery in premium intermodal?
      A: There are still headwinds in the premium intermodal segment due to challenges in the trucking market. However, indicators like rising truck utilization and declining numbers of motor carriers suggest we're near the bottom. Feedback from key partners like J.B. Hunt and Hub Group indicates pricing may eventually inflect. The company focuses on delivering the exact product needed by this segment.

    10. Network Resiliency
      Q: What is working well on network resiliency, and what needs improvement?
      A: Decongesting terminals and networks by removing 500 locomotives and over 8,000 cars since Q1 has improved fluidity. This allows for quicker recovery from disruptions, as seen after recent storms where they returned to record speeds within a week. Achieving resiliency while lowering costs demonstrates a successful model.

    Guidance Changes

    Guidance for the second half of 2024:

    • Operating ratio (OR): 64% to 65% (no change from 64% to 65% )
    • Volume growth: Expect continued growth in the intermodal product (no change from prior guidance )
    • Coal pricing: Anticipate coal prices to continue drifting lower but not by double digits (no prior guidance)

    Annual guidance for 2024:

    • Revenue growth: ~1% (no change from ~1% )
    • Cost reduction (2024): $250 million (no change from $250 million )
    • Productivity improvements: 100 to 150 bps of annual improvement in operating ratio over the next few years (no prior guidance)

    Annual guidance for 2025:

    • Cost reduction (2025): $150 million (no prior guidance)
    NamePositionStart DateShort Bio
    Alan H. ShawPresident and Chief Executive OfficerMay 2022Alan H. Shaw joined NSC in 1994 and became CEO in December 2021, effective May 2022. He has over 30 years of experience at NSC, including roles in finance, marketing, and operations .
    Ann A. AdamsExecutive Vice President and Chief Transformation OfficerApril 1, 2019Ann A. Adams has been the EVP and Chief Transformation Officer since April 1, 2019. She was previously the Vice President of Human Resources from April 1, 2016, to April 1, 2019 .
    Paul B. DuncanExecutive Vice President and Chief Operating OfficerJanuary 1, 2023Paul B. Duncan has been EVP and COO since January 1, 2023. He previously served as Senior VP of Transportation and Network Operations and VP of Network Planning and Operations .
    Claude E. Elkins, Jr.Executive Vice President and Chief Marketing OfficerDecember 1, 2021Claude E. Elkins, Jr. has been EVP and CMO since December 1, 2021. He joined NSC in 1988 and has over 35 years of industry experience in various roles .
    Mark R. GeorgeExecutive Vice President and Chief Financial Officer2019Mark R. George has been EVP and CFO since 2019. He oversees Finance, Investor Relations, Sourcing, and Corporate Strategy teams. He previously held roles at United Technologies Corporation .
    Nabanita C. NagExecutive Vice President and Chief Legal OfficerJuly 1, 2022Nabanita C. Nag has been EVP and CLO since July 1, 2022. She previously served as Senior VP and CLO and as General Counsel - Corporate .
    Claiborne L. MooreVice President and ControllerMarch 1, 2022Claiborne L. Moore has been VP and Controller since March 1, 2022. He previously served as Assistant VP Corporate Accounting and Director of Investor Relations .
    John OrrExecutive Vice President and Chief Operating OfficerMarch 20, 2024 (expected)John Orr will be EVP and COO effective March 20, 2024. He has a four-decade career in railroading and previously served as EVP and Chief Transformation Officer at Canadian Pacific Kansas City .
    1. You mentioned improvements in safety despite volume increases and weather events, but John Orr noted that the FRA personal injury rate has increased—can you explain the reasons behind this increase and what steps you're taking to address it?
    2. With the sale of major rail lines providing cash proceeds to accelerate balance sheet repair, can you provide details on which lines were sold and how these sales will affect your long-term operational capacity?
    3. Given the reductions in capital expenditures, including postponing locomotive purchases and reevaluating IT projects, how will these cost-saving measures impact your ability to maintain service quality and handle future growth?
    4. Considering the ongoing headwinds in markets like automotive, metals, and coal, how do you plan to mitigate these challenges and drive revenue growth in the face of tempered demand?
    5. Despite volume growth, ARPU has declined due to pricing pressures, especially in the intermodal segment—what strategies are you implementing to address these pricing challenges and improve profitability in this area?
    Program DetailsProgram 1
    Approval DateMarch 29, 2022
    End Date/DurationN/A (Began April 1, 2022)
    Total additional amount$10.0 billion
    Remaining authorization amount$6.9 billion (as of September 30, 2024)
    DetailsThe program allows for the repurchase of up to $10.0 billion of Common Stock.

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Second half of 2024 and FY 2024
    • Guidance:
      1. Operating Ratio (OR): Confident in meeting the 64% to 65% operating ratio for the second half of the year.
      2. Revenue Growth: Expect full-year revenue to be up roughly 1%.
      3. Cost Reduction: Committed to $250 million of cost reduction for 2024 and another $150 million for 2025.
      4. Volume Growth: Expect continued growth in the intermodal product.
      5. Coal Pricing: Anticipate coal prices to continue drifting lower but not by double digits.
      6. Productivity Improvements: On track for 100 to 150 basis points of annual improvement in operating ratio over the next few years, with a potential sub-60% OR in 3 to 4 years if volume contributes.

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Second half of 2024
    • Guidance:
      1. Revenue Growth: Lowered full-year revenue growth guidance to approximately 1%.
      2. Operating Ratio (OR): Reaffirmed guidance for the second half operating ratio in the 64% to 65% range.
      3. Volume Growth: Expect sequential volume improvement in the third quarter.
      4. Cost Takeout Commitment: On track for a $250 million cost takeout commitment.
      5. Locomotive Productivity: Targeting locomotive productivity improvements of an additional 8%.
      6. Car Velocity Improvement: Aiming for at least a 7% to 10% improvement in car velocity.
      7. Employee Levels: On track to reduce employee levels by 2% by the end of the year.
      8. Real Estate Gains: Typically guides to $30 million to $40 million a year on real estate gains.

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and second half of 2024
    • Guidance:
      1. Operating Ratio (OR) Improvement: Committed to a 400 to 450 basis point improvement in the operating ratio in the second half of the year.
      2. Volume and Revenue: Anticipate a modest seasonal volume increase going into the second quarter.
      3. Cost Reduction: Targeting a 7% reduction in non-agreement headcount.
      4. Productivity Initiatives: Set a target of $250 million in productivity improvements over the next 6 months.
      5. Fuel Efficiency: Expect benefits from fuel efficiency improvements.
      6. Headcount: Total headcount expected to be down around 2% by the end of the year.

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Revenue Growth: Anticipate roughly 3% revenue growth in 2024.
      2. Operating Income and Margins: Expect operating income to grow in excess of revenues with 100 to 150 basis points of margin improvement annually.
      3. Net Income and EPS: Growth will be suppressed in 2024 due to higher interest expenses and temporary suspension of the share repurchase program.
      4. Seasonality: Strongest margin performance expected in Q2 and Q3.
      5. Volume Growth: Modest volume growth expected, driven by gains in steel shipments and automotive markets.
      6. Pricing: Strong pricing conditions in merchandise markets expected.
      7. Coal Volume: Expected to remain relatively flat.
      8. Cost Structure: Plan to reduce management headcount by roughly 7%.
      9. Productivity Initiatives: Targeting a double-digit percentage improvement in terminal dwell in 2024.