Norfolk Southern Q3 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to Norfolk Southern Third Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on Tuesday, October 22, 2024.

I would now like to turn the conference over to Luke Nichols. Please go ahead.

[Luke Nichols, Senior Director of Investor Relations at Norfolk Southern]

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 most important.

Our presentation slides are available at norfolksouthern.com in the Investors section, along with our reconciliation of any non-GAAP measures used today to the comparable GAAP measures, including adjusted or non-GAAP operating ratio.

Please note that all references to our prospective operating ratio during today's call are being provided on an adjusted basis.

Turning to Slide 3, it's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Mark George.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Good morning, everyone, and thanks for joining us.

Here with me today are John Orr, our Chief Operating Officer; Ed Elkins, our Chief Marketing Officer; and Jason Zampi, our recently appointed Chief Financial Officer.

I've had the privilege of working closely with Jason during my five-year tenure at Norfolk Southern, and he brings incredible talent, experience and leadership to our executive team.

Over the last few weeks, it's been energizing to connect with labor leaders, regulators, customers and my fellow railroaders across the Norfolk Southern network. We have a strong franchise with diversified markets, high-quality customers and partners, as well as skilled employees who are committed to successfully executing on our strategy and delivering for our shareholders, customers, colleagues and communities.

Speaking of colleagues and communities, I want to thank our amazing team of railroaders who planned for and responded valiantly to the devastation that Hurricane Helene caused across our network. It was their fast and effective actions that resulted in us being able to recover and serve our communities within days. There's a lot more work to do, but we've made enormous progress.

It's the tremendous skill and dedication of our railroaders that have enabled us to deliver third quarter results that are among the best in the company's history. Together, we drove productivity, grew volumes and delivered notable sequential and year-over-year margin improvement, while overcoming a challenging landscape. We achieved 3% higher revenue compared to the prior year and adjusted earnings per share was 23% higher than the third quarter last year. Importantly, we delivered 570 basis points of adjusted OR improvement, bringing that ratio down to 63.4%, continuing to close the margin gap with peers.

You'll hear today from John about the incredible work of the operations team that is driving significant and sustainable improvements, as well as resilience in overcoming multiple weather challenges and an East Coast port disruption. Their commitment to excellence is helping us build a stronger, more efficient network.

We also accelerated volumes in the quarter. Ed will provide greater detail on the components, the drivers and outlook for our markets. And finally, Jason will provide color to a number of notable achievements in terms of productivity as well as line sales and project rationalization.

I'll turn it over now to John to start with an overview of our operational progress. John?

[John F. Orr, Executive Vice President & Chief Operating Officer at Norfolk Southern]

Thank you, Mark, and, good morning, everyone.

In Q3, our team drove system-wide improvements that are demonstrating how our focus on safety is protecting our people and our organization while serving as the foundation for sustainable service and productivity improvements. I am delighted to share our transformation agenda proof points. Our guiding value is safety. Overall, I'm very encouraged with our progress on safety. While our FRA personal injury rate has increased, serious injuries and total accidents have declined significantly, 40% and 20%, respectively.

Our blueprint for commitment starts with our people. They are value creators. Through our new Thoroughbred Academy, we are investing in the work environment and core railway skills. In the quarter, over 300 top-level operations leaders completed the first of a multi-year curriculum that builds organizational trust and drives business performance. And over the next three months, 2,300 frontline and operating officers will participate in safety curriculums.

Turning to service. With safety as our guiding value, service performance is our North Star. The team is designing out handlings and extending train schedules, which is producing gains in speed and consistency. Q3 car velocity was 13% higher year-over-year, driven by a 9% increase in train speed and progressive reductions in terminal dwell. The productivity improvements driving service are also allowing us to accelerate cost reduction and create a more competitive platform for growth.

Our flywheel of cost takeout initiatives has been robust. Year-to-date, we've reduced over 130 crew starts per day with an 8% reduction in cost per start, including a 20% reduction in overtime and the elimination of attendance and other unproductive incentives. On the intermodal front, the new intermodal reservation system is helping us develop a unique value proposition in the industry, by adding terminal visibility, accountability and rigor. Locomotive productivity in the quarter improved 18% year-over-year, allowing us to reduce our fleet and capital requirements for both rolling stock and engines. We've stored over 500 locomotives and have moved 8,000-plus cars offline since March. This has allowed us to challenge previous capital spending assumptions.

Through our new Precision Energy Management program, we've optimized HPT standards, extended train schedules, and are relaying more power from train to train, keeping assets in productive revenue service longer. As a result, fuel efficiencies are at record levels.

Our strategy is both targeted and broad, tactical and strategic, ranging across structural improvements in consumption, procurement, materials management, purchase service optimization, crew cost efficiencies and productive enhancements, and we've just scratched the surface in extolling a few of the initiatives that are within our pipeline that are helping us close the competitive gap and track confidently to our cost reduction commitments.

As we move to the next slide, I want to take a moment to state how proud I am of our response to Hurricanes Helene and Milton, especially to our engineering teams. They proactively protected our employees, communities and assets. Our recovery demonstrates the grit and capability of our team. Responders cleared over 15,000 trees, managed over 1,000 locations with power outages, repaired multiple washouts and scour locations, and supported local responders, including two instances where they led life-saving civilian rescues. This resilience highlights our preparedness and ability to recover swiftly from natural disasters. None of this is possible without an inspired and committed team. We are enriching a strong culture by blending external talent with legacy leaders in a field-first management team that is accelerating solutions and deepening ownership and accountability. Our new labor agreements enable us to innovate across our entire workforce.

So what you see is that we have established a new baseline and standards heading into Q4. These are providing next-level perspectives of our assets, their utilization and the service quality they unlocked. Working as a field-centric team, we are building a safer, more efficient and more resilient operation. Success breeds success.

Thank you and I'll turn it to Ed.

[Claude E. Elkins, Executive Vice President & Chief Marketing Officer at Norfolk Southern]

Well, thank you, John, and good morning to everyone on the call.

I'll start on Slide 10 with a review of our commercial results for the third quarter, where you'll see that the work we're putting into creating a fluid network and dependable service delivered year-over-year revenue and volume growth. Overall revenue of $3.05 billion was 3% higher than the third quarter in the prior year and volume moved up 7% year-over-year with all three segments contributing gains for the quarter, while RPU fell 4% as our price gains were outpaced by lower fuel surcharge revenue, lower coal prices and unfavorable impacts from intermodal mix. You've heard me discuss all these factors in previous quarters.

The Merchandise segment produced year-over-year volume growth, led by our grain markets and segments of our chemicals business. NS was able to deliver this growth backed by a service product that our customers can count on every day. And you've heard me talk all year long about our focus on our Merchandise business and the increased value to our customers is evident as this marks the 37th out of the prior 38 quarters where Merchandise RPU less fuel grew year-over-year.

Now Hurricane Helene impacted certain segments of our Merchandise business in the Southeast, but we expect volumes to gradually recover as our affected customers' operations normalize over time.

Intermodal revenue grew 4% year-over-year this quarter as volume growth of 9% was offset by a 5% decline in RPU. Stagnant truck prices continue to pressure domestic intermodal rates and unfavorable mix trends continue with strong gains in international and domestic outpacing our premium market volumes in Intermodal. The ILA strike negatively impacted our international volumes, but we expect the majority of this volume will be recovered in the months ahead.

Finishing up here with coal, revenue declined 2% for the third quarter. Our year-over-year volumes finished up 11% but declining export prices and an unfavorable mix within the portfolio pushed down RPU by 11%. The coal business saw headwinds from easing export prices and challenged utility segment factors to include low natural gas prices, high stockpiles and reduced demand in coal-burning regions.

Turning to the next slide, let's talk through our outlook for the remainder of the year. Overall, we expect our markets to experience tempered growth, albeit with some discrete headwinds from market trajectory and mix impacts on certain sectors. It's very important to note that the impact of fuel price normalization from the 2022 historic highs will remain the single largest revenue headwind that we face, and this has been true all year long.

We expect our merchandise business to see continued but sedate growth supported by easing interest rates and ongoing infrastructure projects, although sector-specific headwinds in various sectors in our automotive and metals markets will pose challenges. Intermodal will see strong demand driven by our dependable service product by new bid awards and import-export demand despite the interruptions caused by the ILA strike that ended on October 3rd. We're prepared to handle international shipments that were delayed during that interruption. Our outlook for coal is really a mixed bag as seaborne pricing for met coal is trending downward. On the other hand, we're seeing positive momentum in the thermal export markets.

And finally, in the wake of the destruction caused by Hurricane Helene, we stand ready to support our customers and handle the goods and products needed to help the affected regions rebuild. And as always, I will end with a word of thanks to our customers for their partnership and their support.

With that, I'll welcome Jason Zampi to the call to talk about our financial results. Thank you.

[Jason A. Zampi, Executive Vice President, Chief Financial Officer & Treasurer at Norfolk Southern]

Thanks, Ed.

I'll start with a reconciliation of our GAAP results on Slide 13, and I wanted to call out three items here in the quarter. First, the impacts from the Eastern Ohio incident are itemized as they have been for the last several quarters. I highlight that our insurance recoveries outpaced the incremental cost of the incident for the second quarter in a row. That brings the total cumulative amount of insurance recoveries to over $650 million.

The other two items are the result of specific actions we executed to further our strategic objectives, including an unrelenting focus on productivity and asset utilization. As we previewed last quarter, we completed two significant line sales, an example of us continuing to simplify the network and generate cash flows. These two sales resulted in $380 million of gains and generated almost $400 million of cash.

Additionally, under the leadership of our new CIO, Anil Bhatt, who has a relentless focus on technology delivery and ROI generation, we rationalized certain IT projects that were not generating the desired benefits. That, coupled with the discontinuance of our Triple Crown roadrailer assets, combined a total $60 million in restructuring costs. Adjusting for these items, OR for the quarter was $63.4 million and EPS totaled $3.25. That's a 650 basis point improvement in our adjusted OR since the first quarter, all while providing a safe, reliable, resilient service product, generating productivity and growing the business.

Looking at these adjusted results compared to last year and last quarter on Slide 14, you'll note that the year-over-year revenue was up $80 million due to strong volume growth, partially offset by RPU pressures. Operating expenses were down $118 million due primarily to fuel prices and productivity. All combined, these drove 570 basis points of OR improvement.

From a sequential perspective, revenue is relatively flat. However, we have continued to build off the strong momentum from our productivity and cost reduction initiatives with expenses down $47 million and 170 basis point improvement in OR.

Drilling into these sequential variances, starting with revenue on Slide 15, you'll note that the strength in coal and intermodal volumes drove an overall 3% volume increase over last quarter. Unfavorable mix, pricing pressures, particularly within the export coal market, and lower fuel surcharge revenues drove RPU lower, leading to overall revenue that was essentially flat with the second quarter.

Slide 16 breaks down the $47 million sequential improvement in expenses. The transformative actions delivered by John and his team are benefiting our P&L, and you'll see that through record fuel efficiency, strong labor productivity with T&E count down 3% on 3% more volume, and decreases in rents due to better network fluidity, while the results of our initiatives to drive down purchase services are also taking hold, all more than offsetting the wage inflation headwind that we called out last quarter.

These strong third quarter results and our operational momentum position us well to achieve our second half and full year targets.

We do expect a sequential uptick in OR as we move into the fourth quarter from normal seasonality, including headwinds that we are expecting on the top line, but also due to additional cleanup costs from Hurricane Helene's aftermath. Going forward, we are confident in our ability to continue to improve margins that will generate shareholder value. And the $400 million in cash generated from the line sales, along with our goal of reducing CapEx as we move into 2025, will help with much needed balance sheet repair.

Mark, I'll hand it back to you.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Thanks, Jason.

We are proud of our results in the quarter. Let me summarize some of what you just heard. First, we drove improvements in safety in the quarter despite volume increases and the significant weather events. Second, we leveraged attrition in the quarter while handling robust volume growth resulting in productivity gains while not compromising service. Third, we delivered strong operational resiliency, recovering service quickly following numerous disruptive weather events with Helene being the most severe. Fourth, we executed upon major line sales that we signaled last quarter, providing meaningful cash proceeds that will help us accelerate balance sheet repair. Finally, we delivered strong financial results in the third quarter, even with the volume pressures in the last eight days of September. And we are on track for our second half and full- year OR commitments, even if the full year revenue falls a little short of our guidance, which is to be up roughly 1%.

So with that, let's open it up to questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] One moment for your first question. Chris Wetherbee, Wells Fargo. Please go ahead.

[Chris Wetherbee, Analyst at Wells Fargo & Company]

Yes, hi. Good morning. Hey, thanks. Good morning. Maybe we could start with the sort of the short-term where you left off. Just wanted to get a sense of maybe how you think about the progress that you've made and how you can carry that into the fourth quarter? I know you talked about hitting the second half guide specifically around the operating ratio. I want to get maybe a little bit -- drill down a little bit deeper on maybe how that impacts in the fourth quarter.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Hey. Thanks, Chris. This is Mark. Yes, we've got really great momentum right now on the cost side. John can talk about that in a second. I think right now, we feel really good about those things that we can control. Yes, as we talked about in Laguna, we were getting a little bit concerned about the auto and steel markets and that's starting to really play out the way we previewed. So that's definitely going to be something we keep our eye on. But generally speaking, intermodal is -- we expect the peak season, intermodal should be good. Obviously, the port disruptions, we don't know exactly when and how the volumes will manifest here in the fourth quarter. But generally, we feel really, really good about the way we go in the fourth quarter.

John, why don't you talk a little bit about the momentum we've got on the cost side and then add a little bit more on the revenues?

[John F. Orr, Executive Vice President & Chief Operating Officer at Norfolk Southern]

Yes. Hey, Chris. Great question. And I would say, I'm really pleased the way we exited Q3 on safety. We finished Q3 at a 2.05% and we're into the quarter at 1.57%. And as you know, in a precision railway environment, when things are working in the rhythm they're supposed to, and first and foremost, from a safety perspective, you get a lot of momentum. And we're seeing that in the terminals. And our terminal dwell is continuing to improve. And that's being achieved not only through the terminal itself, but how we're looking at reduction in handlings and accelerating cars through terminals by extending schedules of trains.

So the work complexity is coming down, while the capability is increasing. And that's playing out in fuel, that's playing out in a lot of purchase and services, that taxi reductions, et cetera. And now we're able to negotiate and structurally change some of our vendor agreements that put more discipline around those things as a result of how we're improving.

So I would say those are some of the costs and then the puts are also as we use our resources better, we're able to create more opportunities for Ed to sell into spot markets and increase even our permits. So Ed, any color on that?

[Claude E. Elkins, Executive Vice President & Chief Marketing Officer at Norfolk Southern]

Sure. Yes. In the fourth quarter, we certainly expect to see continued growth in the intermodal product, both on the international side but also on the domestic side. We see strong demand out there and we've confirmed that with some of our key partners that we talk to every single day that they're seeing the same thing. So,we're looking for a robust fourth quarter from intermodal. The only headwind there is going to be premium and those are pretty well-known headwinds in terms of the challenges that particular market is facing.

On the coal side, we see a lot of demand on export thermal. But let's be clear, seaborne prices for met are continuing to be a drag and there's a lot of stockpile build on the domestic side. So there'll be some headwinds, some puts and takes. Mark has already talked about -- excuse me, automotive and steel. We're keeping an eye on those, but we feel very good about our ability to capture every single opportunity that we're able to get in front of.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Thank you.

[Chris Wetherbee, Analyst at Wells Fargo & Company]

Do you think that gets into the 64%, 65% range for the fourth quarter, though, when you think about the operating ratio.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Jason?

[Jason A. Zampi, Executive Vice President, Chief Financial Officer & Treasurer at Norfolk Southern]

Yes. So we really had a great quarter. We're confident in meeting the 64% to 65% operating guidance for the second half of the year that we talked about earlier. As we move into the fourth quarter, we are expecting a sequential uptick in the OR and just a couple of things to remember. First, we called out the fuel recoveries this quarter. We don't expect that to recur in the fourth to that same magnitude. But that's -- those recovery is really great outcome of running a tight railroad and the disciplined processes that John has put into place. So that's great outcome there. Second, I'd say we're expecting a more normal seasonality. Historically, that's been around 100 basis points of headwind as you move from third to fourth quarter and a lot of that's due to the revenue headwinds that Ed talked about.

I'd also call out, we're able to close on about $20 million of land sales in both the second and third quarters. And as we've talked about, those are difficult to predict. So that could provide some sequential headwind. And then finally, as we called out, we're also going to have to deal with the additional costs from some Hurricane cleanup. So that -- just on the expense side, that's around $20 million.

But offsetting all that, just on the good side, we've got a lot of operational momentum and really doing a great job here on the productivity front. So that's what gives us confidence to reaffirm that second half guidance.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Okay. Thank you.

[Operator]

Your next question comes from Brian Ossenbeck, J.P. Morgan. Please go ahead.

[Brian Ossenbeck, Analyst at J.P. Morgan]

Hey, good morning. Thanks for taking the question. So maybe for Mark and Jason, can you just talk about the capital intensity of the business going forward. If a lot of locomotives offline, cars going offline at increasing rates as well into storage, how do you see that going forward, you're rationalizing some other IT projects as well, so are you able to see a little bit lower capital intensity over the next couple of years? And how does that tie into your expectation to be back in the market buying back shares? Thank you.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Yes. Great question, Brian. You really nailed the strategy here. I think with John taking more than 500 locomotives offline, that allows us to really start to deploy capital elsewhere and actually constrain our capital to a large degree. And we brought in Anil to run the IT organization and we've been reprioritizing and really reevaluating all the projects we have in the pipeline, and we're going to focus on a more concentrated portfolio of projects that are going to yield high returns, the fastest possible projects that we can work on to generate high returns. So we fully expect that CapEx next year will come down. And obviously, with the line sales we have this year and the cash buildup that we expect to have toward the end of the year, we fully expect to be back in the market repurchasing shares to some modest level next year. Thanks for the question.

[John F. Orr, Executive Vice President & Chief Operating Officer at Norfolk Southern]

Yes, Mark, if I could just add. Yes, as far as locomotives are concerned, we're looking at pushing back as far as we can our capital commitments to locomotives. And you're right, converting that resilience railroading and the disciplined approach to resources allows us to redo all of those things and really look for capital investments that create value either in a niche area like our B3 for the warrior coal that we've got or other things that Ed might bring online and help us really achieve a faster, more precise service delivery against the -- a new business call. But we're taking a really hard look at our the IT projects that we've got, working closely with Anil, Mina and her team looking at the resource consumption are really driving that ability. So it's just it's most -- it's both OpEx and capital that we're attacking here.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Okay. Thank you, Elvis. Next question?

[Operator]

Your next question comes from Ken Hoexter, Bank of America. Please go ahead.

[Ken Hoexter, Analyst at Bank of America]

Hey, great. Good morning. And Mark and Jason, congrats on the new jobs.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Thanks, Ken.

[Ken Hoexter, Analyst at Bank of America]

Hey, I guess -- thanks, guys. So Ed, volumes are starting off, it looks like down about 1.5% in carloads. I think you said you can rebound. Are you talking about getting to positive growth? Is there a level you would think we should throw out there in terms of catching up? And then in terms of pricing with coal benchmark pricing down and I guess looking at where we are today at just over 200 [Phonetic], could we see or would you expect pricing to be down double-digits or not quite that level again?

[Claude E. Elkins, Executive Vice President & Chief Marketing Officer at Norfolk Southern]

Hey, Ken. I'll start with the last question first. I think we're going to see coal prices continue to drift lower. I don't think double-digit, but we'll see. We're taking a very conservative approach to it here.

And then on the question of overall volumes in the fourth quarter, we've seen a really nice catch-up after the disruption from the port strike and from Helene and the areas that have recovered already. And we feel very confident, and I think this is one thing that it's hard to get across on a call, but we feel very confident in our ability to recapture volume no matter where it comes from, whether it's continued West Coast imports or more East Coast flowing through in the wake of the strike. So you put that together with, what I would call some opportunistic spot moves that we've been able to pick up in the third quarter that may continue in the fourth on the merchandise side. What the network is really doing right now and John and his team are working really closely with us is we're really manufacturing a lot of capacity that we can deploy to be very agile. So you think about the rapid increased run-up in West Coast imports before the strike. And now we're much more fluid on the East Coast coming through. So I fully expect that whatever the market presents, we're going to be able to handle.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Thank you. Next question, please?

[Operator]

Your next question comes from Scott Group, Wolfe Research. Please go ahead.

[Scott Group, Analyst at Wolfe Research]

Hey, thanks. Good morning. So John, some strong labor productivity with volume up 7%, headcount down 3%. What's the runway here? Is this an incremental opportunity as we look out to next year or at some point does this get tougher?

[John F. Orr, Executive Vice President & Chief Operating Officer at Norfolk Southern]

Well, Scott, I'm glad you recognized the work that our -- all of our team is doing, including our craft labor. They are really embracing our management and leadership style and that's reflected in some of the CBAs there that we've got TAs against.

I would say that labor productivity, we're just getting started on having a disciplined approach to our operations where we're looking at not just the headcount, but how we -- how people are deployed and our train structures, designing out handlings, designing out train stops and elongating schedules allows us to increase the productivity of not only our people, but also the resources like locomotives. And so I think these gains are starting to really get traction and they'll continue to get traction.

I really think that you can't underestimate the power of leadership and the power of the team and you see our engagement with labor as being very collaborative and they're a major stakeholder in our PSR 2.0 application. Last month, we had over 65 labor leaders, including presidents of national governing bodies, coming to Atlanta and talking about issues and really understanding what we're doing and embracing our philosophy on railroading. And look, they had some really challenging questions. They had some different points of view, but we were able to work through those things and come out with a really cohesive perspective on what we need to go forward.

So I would say that I don't want to want to put the burden on any particular group shoulders to bear. I think as a team, we're bearing a lot of the discipline of change and the commitment to change and that's reflected in the women and men who work for us.

And as I've said, railroading is a tough business. It's a 365, 24/7. And when we're creating the environment where people feel that they're contributing and they feel fulfilled in what they do and who could be more fulfilled than contributing to the U.S. economy the way we do. So I think the story is just starting to be written.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Thanks a lot. Next question?

[Operator]

Next question comes from Tom Wadewitz, UBS.

[Tom Wadewitz, Analyst at UBS Securities]

Jason, also wanted to say congratulations on the new role. And John, it really looks like you're having a great effect on the railroad. So congratulations on that as well.

I wanted to see if I could ask you a bit about 2025. I know that's kind of probably tough given lack of visibility in markets and everything and pricing. But how do you think about the frame for '25 if you don't see improvement in some of the markets, right? It seems like industrial markets aren't getting better, maybe getting a little worse, and you highlight automotive and metals. So is there enough productivity that you improve the margin in 2025? So obviously, high level. Is that reasonable given John's commentary and momentum or if you don't see volume growth and some pickup in markets, is that kind of tough to do? Just wanted to see if you could offer any kind of high-level thoughts on how that -- those two kind of markets versus idiosyncratic network improvement, how to think about those two together? Thank you.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Hey. Thank you, Tom. Great question. Let's bifurcate and just say that for the things we can control, which is cost, we've got a path. You will recall that we had committed to $250 million of cost reduction this year. We are on track to hit that number. We committed to another $150 million next year. So,regardless of the economic environment, we committed to another $150 million next year in 2025. We're going to beat that. And John and I have spent a lot of time talking about this. I think there's a real opportunity to fast-forward some cost reduction from 2026 into 2025.

So we feel really, really confident there. We can't control the top line and the economic environment, except to say that 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. So obviously, there's a limit to how much you can get in any given year. But given the product that John and his team are putting out there for service, we feel really, really good about the traction and momentum we have with our customer base.

John, do you want to talk any more about the confidence in our cost reduction next year?

[John F. Orr, Executive Vice President & Chief Operating Officer at Norfolk Southern]

I would say the confidence for me comes in the power of the team. And I look at my own experience through Hunter Camp back in the early 2000s and how Hunter encouraged us to find the small wins and 1,000 small wins by an army of people who are believing in continuous improvement add up to a lot. And as we work through our investment in people and the almost 2,800 engagements that we're doing through the balance of the year, we're educating people on the specifics of PSR 2.0 and how to really contribute to it. We're promoting the culture of change and really removing the mud, as Hunter would say. And we're providing people the ability then to apply what we're teaching them on their jobs day-to-day. And that's really finding organic improvements.

And then we've got our strategy where we're unlocking the value of the network and that's the beauty of starting with two terminals like Chattanooga and Conway and really understanding how they work. And now we're able to force multiply those learnings and engage real asset utility. And now we're thinking, rethinking how we use our assets. And we see that in some of our pool distributions and our asset managements and the refinements. A great example is how we're moving the cars of out of Detroit instead of stopping them in Toledo, moving them over to Bellevue and then going to Elkhart, we're able to repurpose a secondary yard and go right from Detroit right to Elkhart removing assignments, removing car days, reducing our power, locomotive fleet requirements.

And those ideas are coming from the field up. And so it's really taking hold. It's a long answer to say, the story is just unfolding here. And as we invest in people, as we engage in clearing out the organizational mud, and the case for change is still there. There's a lot to be fixed here. And I think we're reflecting...

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Tom, when we put those targets out, they were targets. Now we're filling in that outline with real specific actions and we're realizing that we were maybe a little modest in the targets that we saw in front of us because the actions now tallied a little bit more as we're putting together our 2025 numbers. So it feels good now.

Ed, do you have any thoughts on '25 outlook?

[Claude E. Elkins, Executive Vice President & Chief Marketing Officer at Norfolk Southern]

Absolutely. And we're still working on what '25 looks like. There's clearly a lot of moving parts out there. But let's be clear about this. We're not sitting on our hands. We're not just waiting around to see what's going to happen. My team as well as John's are working together right now to build a service product that does one thing and that's produce service that you can count on delivered by people that you can trust every single day. And on top of that, we're working to build what I would consider to be a unique value proposition because of the technology that we're deploying at the customer level to make it very easy to do business with that's a process change as well as some technology augmentation. But I think it's going to be a real differentiator in 2025. We look forward to the response from our customers on both counts.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Thanks, Tom. Next question.

[Operator]

The next question comes from Brandon Oglenski, Barclays. Please go-ahead.

[Brandon Oglenski, Analyst at Barclays]

Hey, good morning, and thanks for taking the question. So Mark, congrats on the top seat here, but I guess a two-part question from me. First, structurally at Norfolk, is there any way you're looking at this organizationally that you'd like to see different at the company? And then maybe following up from that discussion on 2025 OR, there was a lot of back-and-forth on guidance earlier this year with the proxy contest. So I think you guys had committed to 100 to 150 basis points of annual improvement for the next few years, but then also said maybe a sub-60% in three to four years of volume contributed. Is that still the right framework, especially within the context of the answer to that last question?

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Yes. I think starting with your second one, absolutely, we're still on track for that and you remember the components, there were components of cost reduction there. And the 1% to 1.50% was really based on kind of a more modest topline outlook of a middling 2% to 3% type of topline growth. But then if we had a more traditional topline recovery, that would get us to the sub-60% in by the three- to four-year time window. So we stand by those guidance indicators.

Now with regard to, structurally anything different, I think what I would tell you is we are on track where we've got some great momentum. The strategy at its core is exactly what we're going to stick to and this really gets to about execution right now. And we have a really sound operating team that is executing upon the strategy to create network fluidity that will allow for a really great service product. And as we always said, with that great service product, it will enable growth. You started to see that play out last quarter and now again this quarter. We've got some idiosyncratic opportunities to grow and Ed and his team have been capturing on it.

So that worked and we told you that productivity is kind of the third leg of that strategy. And honestly, you also saw that play out in the third quarter. We had fallen out of balance with the strategy on productivity. We told you we were going to get back in balance and we're well on our way to doing that. With 570 basis points of OR improvement, thanks to a sprinkling of some volume here in this quarter, it was a real accelerant. But even the sequential improvement is very encouraging.

So execution is what's key and John and I talk about that a lot, and I kind of touched on it a little bit at Laguna, I really embrace an operational excellence mindset coming from my background in industrial products. And I believe strongly that any good operation needs a quality type system. You can call it Six Sigma, you can call it ACE like we used to call it a a mile company, which is achieving competitive excellence.

Either way, you've got to have really solid standard processes that are based on best practices, you've got to get those systematized so that everybody follows it. And when you have breakdowns in the process, you do relentless root cause analysis to identify where the problems are and then fix the standard processes, so you can mistake proof going forward. And that's this virtuous cycle that we have to get ourselves into.

And the beauty is with an operator like John and John's team, what you hear about is there's a real resemblance to what I'm describing. In fact, when John talks about the war rooms, what do you think the war rooms are? Those are relentless root cause analysis. Every time they have an issue, the war room gets to work on it, they figure out what the root cause is, they fix it. So we are in lockstep on driving that culture and I'm really excited about that.

And then I think the other thing is obviously, culturally, I want to continue to advance first our safety culture, but also a real two-way communication. John touched upon that a couple of minutes ago as well, but a two-way communication where information flows up, not just down. A lot of the best ideas that come inside this railroad are from the people who are on the ground, whether that's in the marketing organization, with what's happening with our customer base, whether that's in the operations team like John just described, we have to create that environment where people are comfortable to speak up. And it's not just process stuff. It's not just ideas for improvement, but it's also concerns that they might have. So we're going to be really working on creating and fostering a better culture for two-way communication.

And then I would say, finally, Ed and I have been having a lot of conversations about really working a lot closer with our customer base to figure out exactly how we can serve them better to accelerate the share gains and the share recapture opportunities that are out there. So that's where I'd say the focus will be structurally going forward.

And thanks a lot for the question, Brandon. Appreciate it. Next?

[Operator]

The next question is from Jonathan Chappell, Evercore. Please go ahead.

[Jonathan Chappell, Analyst at Evercore ISI]

Thank you. And Ed, on your market outlook, there's a lot more red and yellow than there is green and you've talked about some of the headwinds there and maybe some more incremental. You've also mentioned in some of these prior answers, spot market wins. So,can you just maybe put a little bit more quantitative where you're winning, how much that is if we look at a macro that's 1% to 2% industrial production growth, what's the realistic volume growth on the Norfolk Southern network as you're winning more than maybe the economy is giving you?

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Yes, I would point -- this is pretty easy, I would point to our AG markets where in the third quarter, we were able to take advantage of some market dislocations as well as some, what I would call, true spot opportunities that frankly, in prior quarters, we could never have addressed because we couldn't generate the additional capacity to do that, nor the operational agility to really respond in a way that the market could take advantage of. But this last quarter, we have, I would say, very successfully executed a number of those moves, whether it's soybeans, whether it's corn, whether it's grain, that has helped offset some of the weakness that we've seen in some of the other industrial markets where we're fulfilling all the capacity needs that our customers have, but they simply don't have that much need right now.

And I would point toward the deceleration in some of our auto markets. There's some idiosyncratic phenomenon going on there with regard to whether it's quality holds or specific plant outages. But you think about intermodal and look at the very solid growth both on the domestic and international side and the ability that our network has had to not only absorb that growth, but also produce those spot wins that I'm talking about here, which really are again opportunities that we would not have been able to take advantage of in prior quarters.

I would attribute part of our ongoing agility improvement to our reservation system on the intermodal side. And we're in the early innings of that, but I really think that over time, and John may want to comment on it, but over time, the feedback we're getting from our customers is it's going to help them know that they've got a ride on a train on a specific day, which allows them to plan and their customers to plan and allows us to make some very important operational decisions that help us be not only more efficient, but more reliable for our customers.

[Claude E. Elkins, Executive Vice President & Chief Marketing Officer at Norfolk Southern]

Yes. And I would agree. And while it's early days in the reservation system, I'm really confident that as we work through this, our customers are going to enjoy the discipline that brings to our terminals, because they've been a part of its development. And what I'm excited about is that opportunity to add 100, 200, 300, 500, 1,000 feet to our intermodal trains or existing trains as we create the discipline smoothing out our network through the rest of the year and into next year. And then being able to really project what our true capacity is as far as that growth because I think we're just on the cusp of really hitting our stroke on long trains and bringing on new business at very low incremental costs.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Thanks, John. Next question, please?

[Operator]

Your next question comes from Jeff Kauffman, Vertical Research Partners. Please go ahead.

[Jeffrey A. Kauffman, Analyst at Vertical Research Partners]

Hi. Good morning, everybody, and thank you for squeezing me in. Congratulations also to Mark and Jason. I just want to go a different direction. I know there's some things you probably can't talk about with the labor agreements. But John, can you talk about what is going to make a difference for what you're trying to achieve in these labor agreements that were reached [Technical Issues] for ratification, so you may not want to discuss some things. But just kind of talk about what's important for you to hit your targets with these new labor deals.

[John F. Orr, Executive Vice President & Chief Operating Officer at Norfolk Southern]

Yes. Well, thank you for that question. And it is a really good question. And coming from both the craft and from organized labor in the early days of my career, I really appreciate having clarity on the future as far as the payment structures and the discipline around what my CBA looks like. So I think first that extending that confidence to our workforce and predictability and how they can budget their own households and their own work schedules is really important. And that cascades then into our being able to model from a -- from the pricing and from the predictability with our customers.

And third, the -- I think it's very complementary to what we're trying to achieve in PSR 2.0 and that's really disciplined service, safety and really delivering value for our customers. And that discretionary effort that we're getting from our rent and trade crews and our operating employees is really allowing us to optimize the value of our network, build a team that's inclusive of every one of the 20,000 people who work here, and contribute to the value that we're creating. And that leadership and developing skills and capabilities is just going to help us to enhance a great product already. And I think as well then that allows us to really create a new blueprint and unlock the bigger rocks that we need to, so that we move the network further along. So it's a win-win. And I know from my experience, there's nothing you can put a price tag on that discretionary effort.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Thanks a lot, Jeff. Next question?

[Operator]

Your next question is from Jordan Alliger, Goldman Sachs. Please go ahead.

[Jordan Alliger, Analyst at The Goldman Sachs Group]

Yes, good morning. I just want to talk about network resiliency, if I could. You had some pretty strong volumes in the third quarter. So I'm just sort of curious on what's working well on resiliency, what still needs to improve really just to get a sense what needs to be done to ensure the network can run fluidly for the foreseeable future, so you could do the things you're talking about like taking share off the highway, et cetera. Thank you.

[John F. Orr, Executive Vice President & Chief Operating Officer at Norfolk Southern]

Well, I would say, again, I would get back to we're trying to do things better in every area of the business. And in order to do that, we have to bring up our efforts and our capabilities to completely another level. But I would say the six things that we focus on, the network health, our asset efficiencies and our customer-facing metrics are the guiding metrics that we're going to use to drive that. And as we continue to improve those things under the hood, there are going to be a lot of ability to put more discipline, engineer out inefficiencies and engineer in optimization, things like the reservation system that are just going to unlock so much discipline around our terminals and intermodal as our growth and to have better discipline around that just gives us such an advantage as the market comes roaring back in the U.S. economy. And as trucks tighten up, we'll be able to really leverage from a pricing perspective. And I think Ed has talked about that numerous times.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Jordan, I think what John has done, decongesting the terminals and networks, it goes a long way to improving resiliency. I mean, laying down 500 locomotives, over 8,000 cars since Q1, you create a lot more fluidity in the network. And when you have little bumps in the road, you have less congestion to hold you back from recovery. So that I think is key and critical. And you saw it play out here in the third quarter following these storms.

I would tell you a year ago, some of the events that we saw in the quarter probably would have set us back three months, okay? But we were back within a week and now we're actually at record network speeds and low dwell. So it's really remarkable. And I do actually just want to refute the notion that resiliency is about retaining costs. In fact, we've achieved resiliency this quarter while lowering costs. So it's a good news story. We seem to have a good model in place here.

Thanks for the question, Jordan. Next?

[Operator]

Your next question comes from Ravi Shanker, Morgan Stanley. Please go ahead.

[Ravi Shanker, Analyst at Morgan Stanley]

Thanks. Good morning, everyone. Thanks for the color on '25 on the productivity actions. But for that to drop through to the bottom line, how much pricing do you need to counter general inflation for next year?

[Claude E. Elkins, Executive Vice President & Chief Marketing Officer at Norfolk Southern]

We've -- thank you, Ravi, by the way. We've had a very successful year so far in terms of being able to price to the value of our service and that value is increasing as the year goes on, and we're very confident that we're going to finish up the year in a strong position. Going into '25, we continue to believe that we're going to outpace inflation in all of our major markets. Now commodity prices like seaborne coal, probably be a headwind. We'll see how that evolves in '25. But when you think about our core product and the value of the service that we're offering, it's increasing and our customers are saving money at the same time. So, it's a powerful combination.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

You have to think of it, Ravi, in the elements when you talk about pricing, you can't talk about it as one topic, right? Merchandise, as Ed, just said, we feel really good, really strong. The service helps as a good backdrop there as does inflation. So the model is intact. I think intermodal is going to be somewhat dependent on what happens with spot truck pricing. Clearly, we seem to have found the bottom and the question is when does it start coming off the floor here? And yes, we have other commodity groups that follow indices that we don't control, obviously, and seaborne met being a big one. But I think for those areas like and particularly merchandise in 2025, model is intact. We feel really good.

Thank you. Appreciate the question. Let's try to get another couple in.

[Operator]

Your next question comes from David Vernon, Bernstein. Please go ahead.

[David Vernon, Analyst at Sanford C. Bernstein]

Hey. Good morning, guys, and congrats to the new roles. So maybe just kind of building off that question around the seaborne met market in 2025. Ed, you've been around this business a long time. What do you think about the U.S.'s role in terms of the export markets if we see a lower price correction? Are you worried just -- could you kind of maybe shape the price headwind that might manifest on a slightly weaker market for Norfolk into next year? And then kind of help us understand whether you're worried about also sort of like overall aggregate volume demand on the export markets for 2025.

[Claude E. Elkins, Executive Vice President & Chief Marketing Officer at Norfolk Southern]

I'm a little bit reticent to get a lot into '25 because we're still building our view of that of that particular dimension. But I will tell you the U.S. has remained remarkably competitive over time. I think we're going to continue to do that, particularly when I think about export thermals, we're in a very good spot in terms of demand. I expect that to generally continue. And China is going to determine a lot about what happens with export met demand. There's a tremendous amount of geopolitical uncertainty that's driving a lot of commodity prices, driving a lot of energy prices. But we've got our weather eye on it and we are fully prepared and capable of delivering the tonnage that our customers around the globe are going to need.

[David Vernon, Analyst at Sanford C. Bernstein]

Thank you.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

Next question please, Elvis.

[Operator]

Your next question comes from Ben Nolan, Stifel.

[Benjamin J. Nolan, Analyst at Stifel Financial]

Hey, I appreciate you guys fitting me in. I was just going to ask, you talked a little bit on the intermodal side that it feels like maybe it's bottoming and specifically around -- and appreciating that the trucking market is still really challenged. Are you starting to see any green shoots on the premium intermodal at all? Or is that not yet the place where we are?

[John F. Orr, Executive Vice President & Chief Operating Officer at Norfolk Southern]

On the premium side, there's still a lot of headwinds out there emanating from the highway generally. We are seeing -- I mean, you got to look at it from a fairly substantial distance, but we are seeing truck utilization head up and I think we're close to the 10-year average now, and I think we're going to trend above it. You look at the total number of motor carriers that are out there, it's declining slowly. But both those things, along with feedback that we're getting from our key partners like J.B. Hunt and Hub Group are telling us that we're reaching a point where I fully expect that pricing is going to eventually inflect. I do think we're around the bottom now and I feel at least somewhat confident knocking on the table here that that's true.

Premium is a different story. We'll see how that evolves. What we are focused on is making sure that we're delivering exactly the product that particular segment needs.

[Benjamin J. Nolan, Analyst at Stifel Financial]

Okay. Thank you.

[Mark R. George, President & Chief Executive Officer at Norfolk Southern]

That brings us to the end. Look, I want to thank everyone for your questions, and we look forward to talking to you all throughout the quarter. Have a great day. Take care.

Participants

Corporate Executives

• Luke Nichols, Senior Director of Investor Relations
• Mark R. George, President & Chief Executive Officer
• John F. Orr, Executive Vice President & Chief Operating Officer
• Claude E. Elkins, Executive Vice President & Chief Marketing Officer
• Jason A. Zampi, Executive Vice President, Chief Financial Officer & Treasurer

Analysts

• Chris Wetherbee, Wells Fargo & Company
• Brian Ossenbeck, J.P. Morgan
• Ken Hoexter, Bank of America Co.
• Scott Group, Wolfe Research
• Tom Wadewitz, UBS Securities
• Brandon Oglenski, Barclays PLC
• Jonathan Chappell, Evercore ISI
• Jeffrey A. Kauffman, Vertical Research Partners
• Jordan Alliger, The Goldman Sachs Group, Inc.
• Ravi Shanker, Morgan Stanley
• David Vernon, Sanford C. Bernstein
• Benjamin J. Nolan, Stifel Financial