Q4 2023 Earnings Summary
- Norfolk Southern enters 2024 with a safer and more fluid network that attracts business from their most service-sensitive customers, positioning the company for outperformance during the up cycle. ,
- The company is focusing on improving productivity by driving discipline and rigor in their merchandise network, which presents the single biggest opportunity and accounts for two-thirds of operating costs.
- Investments in service and resiliency are expected to lead to cost savings and support growth, as a faster network reduces costs such as recrews, overtime, equipment rentals, and improves fuel efficiency.
- Persistent operating margin gap: Despite efforts to improve efficiency and reduce costs, Norfolk Southern continues to lag behind peers in operating margins. Even with a planned improvement of 100 to 150 basis points annually over the next three years, analysts question whether this will be sufficient to narrow the margin gap with competitors. , ,
- Modest revenue growth outlook amid macroeconomic uncertainties: The company projects revenue growth of approximately 3% in 2024, which analysts deem conservative given easy volume comparisons and pricing opportunities. Macroeconomic uncertainties and a weak freight environment, particularly in the first half, may limit revenue growth.
- Near-term cost challenges impacting operating ratio: Norfolk Southern anticipates operating ratio deterioration in the first quarter due to seasonality and lingering cost pressures. Higher expenses related to service recovery efforts and other headwinds are expected to keep costs elevated in the near term. ,
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Margin Improvement Plan
Q: Are you narrowing the margin gap with peers?
A: We've committed to industry competitive margins and plan to improve margins by 100 to 150 basis points per year over three years. While we've made progress in enhancing safety, service, and attracting new business in 2023, we acknowledge our cost structure is too high for our revenue base. We're focusing on productivity improvements, especially as we get into the second half of the year. This isn't an endpoint; we aim for continuous productivity improvement as part of our balanced strategy. -
Cost Structure Reduction
Q: Will costs come down from here?
A: Yes, our cost structure is too high, and we're addressing this by focusing on productivity. We're looking at every cost, including discretionary and management costs. As we move into 2024, operating on plan will help drive out service recovery costs and improve productivity. -
Pricing Impact on Margins
Q: Is pricing accretive to margins in 2024?
A: Yes, we have a strong price plan for 2024 that will produce value every quarter. We feel good about where we are with price, and it will be part of the equation in achieving better margins. -
Volume and Growth Outlook
Q: How will volumes trend in 2024?
A: We see sedate volume opportunities in the first quarter due to uncertainty, but expect a steady progression of volume improvement throughout the year. Volume improvement will lead revenue and yield improvement for us. -
Productivity Initiatives
Q: What are the key productivity initiatives?
A: We're focusing on driving discipline and rigor inside our merchandise network, our biggest opportunity for productivity. Initiatives include reducing recrews, taxis, hotels, overtime, and equipment expense. We'll improve capacity as cars per carload improves, creating a flywheel effect. -
Operating Ratio Outlook
Q: What is the OR outlook for 2024?
A: We expect OR to step back in the first half due to seasonality but anticipate much stronger incrementals and drop-through in the second half as headwinds unwind. We're committed to improving OR by 100 to 150 basis points per year. -
Service Improvements
Q: How is service performance impacting growth?
A: We've delivered the best intermodal service in several years, and customers are rewarding us with volume. Improvements in service and safety have led to attracting business from our most service-sensitive customers. -
Capital Allocation and Share Repurchases
Q: Is share repurchase suspended?
A: Yes, we don't expect to have remaining cash to do share repurchases in 2024 due to the CSR purchase and other cash uses. We aim to resume a more normal capital allocation cycle in 2025. -
Eastern Ohio Incident Impact
Q: How does the Eastern Ohio incident affect costs?
A: While there are lingering incremental costs from safety measures implemented after the incident, they are not consequential. We're running a safer railroad with a 42% reduction in mainline accident rate this year. -
Structural Margin Gap
Q: Is there a structural margin gap with peers?
A: We believe we have significant runway for cost improvement and are focused on narrowing the margin gap. Each franchise has unique strengths, and we are committed to industry competitive margins.
Research analysts covering NORFOLK SOUTHERN.