NORFOLK SOUTHERN CORP Q4 2024 earnings call

Good morning, and thank you, everyone, for joining today. I'm joined here by John Orr, our Chief Operating Officer, Ed Elkins, our Chief Marketing Officer, and Jason Zampi, our Chief Financial Officer. Following our strong Q3 performance, we are very pleased to close out 2024 with another quarter of solid results, which further narrowed the margin gap to peers. Our strong operations enabled us to move 3% more volume in the quarter, yielding a 2% increase in revenue ex-fuel. We continue to deliver on our commitments while building momentum to position Norfolk Southern for sustainable growth. Our network is running fast. Our terminals are efficient. Service metrics are as strong as they have ever been. Our customers are noticing and rewarding us with more business, and we continue to exercise strong cost discipline.

When you put it all together, we delivered a Q4 that was in line with the guidance we gave, wrapping up a year where we delivered or exceeded on all the commitments we made. We removed nearly $300 million of cost, $50 million more than the $250 million we committed to in the spring. Our adjusted operating ratio ended at a 65.8, surpassing the guide we laid out of improvement between 100 to 150. And our second half OR was 64.1, at the favorable end of the range we outlined. The organization worked hard to deliver these results. I am proud and grateful to all the employees in Norfolk Southern. It's not just the financial results that are worth celebrating.

Our safety metrics improved dramatically throughout the year. Our employees are embracing safety as a guiding value, protecting one another as well as the communities we serve. Our employees are driving positive change and propelling the company forward. As you evaluate the operating and productivity improvements, remember that we did this while taking on 5% more volume in 2024. I'm excited for John, Ed, and Jason to share our results with you. Let's start with John.

Good morning. Thanks, Mark. I'm excited to update you all on our safety and operating performance. Turning to Slide 6, safety is the value through which all operating decisions are made. Our entire team is committed and engaged in our pursuit of safety excellence. The improvements to date are a testament to the rigor of our safety protocols and a strong indication of the positive outcomes we can achieve in 2025. Our FRA reportable injury ratio increased from 1.1 to 1.15, and I'm encouraged that our Q4 results improved by 13% compared to the same period last year. In fact, in December, our FRA ratio was 0.61 and was the lowest reportable injury ratio since December of 2020. Our FRA train accident rate for the full year improved by 27%, and in both cases, we are carrying positive momentum into Q1 and building on these strong results.

For example, we finished 2024 and started 2025 injury-free for over a million man-hours across all operations. At Norfolk Southern, people are at the heart of our strategy. Our Thoroughbred Academy is educating thousands of leaders. Its curriculum offers an integrated approach that combines technical training with skill-building in operational readiness, business planning, and management engagement. We are proactively driving safety performance and enterprise excellence. We are building generational railroaders. Turning to Slide 7, our PSR 2.0 approach is delivering simultaneous efficiency and service improvements. In 2024, our network performance progressively gained traction, anchored by dwell and velocity. We are dwelling less in yards, moving faster between terminals, and rightsizing the fleet. This is generating fluidity and capacity, aligning our active fleets to volume, decreasing fleet maintenance expenses, and reducing capital. Year over year, our system speed improved by 10%.

Taking it down a level, in the quarter, intermodal train speed gained 3.1%, and the true success stories were the remarkable gains in merchandise and unit train speeds, up 11% and 17%, respectively. As we drove up velocity, we took out assets, grew the business, and we did more with less, ultimately growing volumes by 5%. For example, year over year, car miles per car day rose over 13%. We are seeing similar benefits in our locomotive fleet. Velocity allowed us to store more locomotives, decrease our material expenses, increase our fleet reliability, and drove overall fleet productivity. Year over year, GTMs per available horsepower improved by 19%. We also delivered record fuel efficiencies both for the quarter and the full year. As we drive operating efficiencies, we are also delivering a quality product for our customers. After all, we're a company committed to outstanding service.

We finished the year very strong, culminating with a successful intermodal perfect peak season, year over year handling 7% more parcel volume per day with zero controllable failures. Turning to Slide 8, Needs Matter. In 2024, we committed to tackle network underperformance and to close our margin gap. As Mark said, through a total team effort, we exceeded. For example, our car maintenance war room meticulously drilled down to root causes, fine-tuned our repair processes, and provided near real-time feedback for the field. As a result, year over year, running repair and repair dwell were down 31% and 23%, respectively. Improvements are also coming from our need for speed war room, whose mandate includes designing speed into the network, overcome historic speed barriers, and drive out infrastructure bottlenecks. The need for speed war room has contributed to our year-over-year 10% AAR speed increase.

They are now turning their attention to challenging every permanent and temporary slow order to actively reduce stops and drive additional fuel efficiencies. Over-the-road interruptions decreased by 25%, delivering significant gains in crew productivity and crew availability. For example, year over year, crew overtime and terminal detention costs were both down 19%. When I say this is a team effort, I'm talking about every NS railroader. We are working cross-functionally, cross-structurally, and broadly across the entire enterprise ecosystem to eliminate waste, increase revenues, and drive efficiencies. These disciplines have allowed us to restructure our capital requirements, freeing up funds for key projects without compromise. We are entering 2025 with tremendous momentum, and we are unlocking productivity value for our network. The next phase transformation of our operating plan is in development. The new plan will roll out in Q1.

It will further reduce handlings, introduce tighter standards for terminal times and connections, and will require us to continue stretching for improvement in our operating processes. In 2025, we will focus on fuel and mechanical infrastructure. These are big rocks for efficiencies and savings. I'm incredibly proud of the results the operating team has achieved in 2024. They rose to every challenge, showing NS grit, tenacity, and drive. Coupled with PSR 2.0, their capabilities are driving network value creation and closing the service and productivity gaps with our peers. I will now turn it over to Ed.

Thank you, John. Good morning, everyone. I apologize upfront for my cold and ask that you bear with me here. Let's start on Slide 10. Overall volume for the fourth quarter improved 3% year over year. That was led by our intermodal and agriculture groups. Our total revenue and RPU declined primarily due to lower fuel surcharge revenue, along with negative mix within the portfolio and rate pressure within intermodal and coal that we've noted for most of the year. Merchandise volume improved slightly from higher soybean and corn shipments driven by new business and some spot opportunities, but these gains were offset by declines in automotive, metals, and energy-related markets. The quarter saw a 2% increase in RPU less fuel, which marks another quarterly record in that metric with 38 out of 39 consecutive quarters of year-over-year growth.

We also set quarterly RPU less fuel records for both industrial products and for automotive. In intermodal, we realized a 5% year-over-year volume increase with gains in both domestic and international through sales pipeline wins, increased freight demand, and empty container volumes. Premium continues to face market headwinds. Truck prices remained low, causing domestic intermodal rates to be generally in line with last quarter. However, note that RPU less fuel finished up 2% due to a lift from contract recoveries and rate true-ups. Let's turn to coal. Volume decreased 1% with coal prices driving a 9% decline in revenue. Utility experienced reduced burn demand due to continued low natural gas prices, while lower seaborne prices impacted our export business. Okay, moving to Slide 11, let's talk about full-year results. We achieved strong 5% volume growth.

Overall, revenue was flat as we faced significant fuel headwinds of $261 million, along with lower coal rates. The intermodal unit led the company in volume growth, and an important bright spot in revenue was the merchandise business unit that achieved record revenue, revenue per unit, and RPU less fuel for the full year of 2024. Let's go to Slide 12 and look ahead. Our 2025 outlook is for modest volume growth driven by the reliable service product that our customers are enjoying now. For our merchandise markets, we expect lower vehicle production due to weaker-than-expected sales and some inventory build. We expect improved manufacturing activities supported by lower interest rates and strength in our chemicals markets, such as plastics and waste. However, the potential for new tariffs will introduce some near-term uncertainty in the many markets that we serve.

Despite these uncertainties, we are confident that we're well-positioned to recapture market share and deliver the value that our customers expect of us. Turning to our intermodal markets, USMX and ILA reached a tentative agreement, which helps remove a key source of uncertainty. Strong import and export demand has been a growth driver. However, new tariffs will probably create some headwinds. We expect volume growth driven by new business and continued empty repositioning to partially offset these headwinds. Truck pricing has yet to recover, but excess capacity has finally started to come down.

We're seeing some gradual improvement in some of the key industry metrics, such as increasing tender rejections, and we expect falling export prices in coal, along with softer demand for utility in our territory due to lower natural gas prices and generally elevated inventory levels. We're going to continue to keep a close eye on these factors as the year progresses. 2024 was a transformative year for us, and we now have reliable service that's consistent, resilient, and is built to grow in the markets that we serve. I just want to end by once again thanking our customers for their partnerships and their trust as we move into 2025. And with that, I'll turn it over to Jason Zampi to review our financial results.

Thanks, Ed. I'll start with Slide 14, which reconciles our GAAP results to the adjusted numbers that I'll speak to today. There are four items I'd highlight for you. First, a net benefit of $43 million related to the Eastern Ohio incident. Insurance recoveries exceeded the incremental cost in the quarter. I'll recap where we are with these costs here momentarily. We also recognize a $53 million gain related to the finalization of the Virginia line sale transaction, the first portion of which was recognized last quarter. Additionally, we continue to sunset certain technology projects, resulting in an additional $27 million in restructuring costs. And finally, as we have wound down the proxy campaign and signed the cooperation agreement, you'll note the final tranche of advisory costs incurred below the line in other income. Adjusting for these items, operating ratio for the quarter was 64.9, and EPS came to $3.04.

Slide 15 provides a recap of the Eastern Ohio derailment-related financial impacts. You'll see that to date, we have incurred nearly $2.2 billion related to the incident, with incremental costs in the current year related to the class action settlement, further environmental remediation efforts, and other community assistance. However, the pace of insurance recoveries accelerated, bringing in $650 million this year alone, and we have now recorded over $750 million in total. Moving to the comparison of our adjusted results versus last year and last quarter on Slide 16. We generated 390 basis points of operating ratio improvement in the face of revenue headwinds driven by strong productivity gains, and that drops down to high single-digit net income and EPS growth.

From a sequential perspective, the operating ratio was up 150 basis points, a little better than we projected due to the approximate $20 million in contract recoveries that we recognized at the end of the quarter, as Ed just discussed. Drilling into the $153 million of year-over-year expense decline on Slide 17, you'll note improvements in all expense line items except depreciation, which was up on our larger asset base. Strong productivity improvements within labor and fuel efficiency drove over half of the expense improvement and helped to offset wage inflation and higher incentive comp accruals. In addition, purchased services was down $40 million year-over-year in the face of higher volumetric costs. Great progress in this cost category. You'll also note the materials expenses come down as we continue to store locomotives, yet another benefit of our fluid network.

Turning to the full-year results compared to 2023 on Slide 18, we had guided to a 100 to 150 basis point operating ratio improvement, and you'll see that we exceeded that commitment and delivered 160 basis points of improvement, and that's despite revenue being down slightly. It really comes down to a productivity story. John and his team over-delivered on productivity gains, exceeding our original $250 million target and delivering nearly $300 million of year-over-year cost savings. So we're moving into 2025 with a lot of momentum from all fronts: operational, commercial, and financial. I'll turn it over to Mark to wrap up and discuss how we're thinking about 2025.

Thank you, Jason. So you heard about the really strong performance to close out 2024. We have powerful momentum entering 2025. While markets are hard to predict at this point, we will lean into our outstanding service and the resolve of our people to capture share. We made that happen in 2024, and we are confident we will do it again in 2025. Turning now to guidance on Slide 20, we are planning on 3% revenue growth with positive volume and healthy core pricing, more than offsetting headwinds from fuel and coal. One thing fully in our control is productivity. We exceeded our 2024 target of $250 million of cost takeout, and we are again looking to exceed the original $150 million target for 2025.

That equation translates to margin expansion of 150 basis points, which is at the high end of our long-term baseline guidance range that called for OR improvements from 100 to 150 basis points per year. Ultimately, we will continue to close the margin gap with peers, whatever the volume environment. CapEx will be in the $2.2 billion range. And with strong free cash flow driven by our operating performance, our balance sheet restoration will be complete in 2025 and allow us to resume share repurchases. So with that, let's get into Q&A.