Q3 2024 Earnings Summary
- 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.
- 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."
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue Growth | Q3 2024 | ~1% [N/A] | 2.7% increase (from 2,971In Q3 2023 to 3,051In Q3 2024) | Beat |
Operating Ratio (OR) | Q3 2024 | 64%–65% [N/A] | 47.7% (calculated from 3,051Total revenue and 1,596Operating income) | Beat |
Volume Growth | Q3 2024 | Expected sequential volume improvement [N/A] | Sequential revenue rose from 3,044In Q2 2024 to 3,051In Q3 2024 | Met |
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.
Research analysts covering NORFOLK SOUTHERN.