All right. We're going to get going with our next session with Norfolk Southern. I'm happy to have Jason Zampi, CFO at the conference this year. Michael, Neil and Luke from the team are also here with us in the first row.
Jason, I'm going to let you make some opening comments, and then we'll get right into it. So thanks so much for being here.
Yes. Thanks, Scott, and thanks for having us. I think it's pretty incredible when you think about what we've been able to accomplish over the last year. I think, John Orr was sitting here with you 12 months ago. And if you think about what he and the team have done from increasing network fluidity really providing a great service product for our customers and driving productivity really throughout the P&L. It's really an impressive story.
Sticking on ops for a second. I mean, we've got really -- some really good momentum. Operationally, you see that in our weekly service metrics. We've also demonstrated our ability to run a very resilient railroad. So first quarter continue to test that, we've had 18 winter storms across the railroad, and you saw a lot of the pictures during our first quarter earnings call. Up and running in a matter of hours and days versus weeks and probably events like that would have taken us months to recover from. So really strong progress on the resiliency front.
And then like I said, productivity, we're seeing that labor productivity, fuel efficiency, purchase service costs coming down. So really good progress on that front as well. All while operating safely, and you see our safety metrics continuing to improve. So really good momentum on the operations front.
I'd also say, we've got a really cohesive and energized team that is driving towards our strategic objectives. So really, really proud of the group that we've got there. And -- as we move forward, thinking about where we are going into 2025, we laid out some of our key goals, $150 million of productivity savings and cost reductions, made great progress on that in the first quarter that you saw. We talked about 3% revenue growth. And we still -- a lot of, obviously, uncertainty in the macro, but still feel good about that. Volumes are still kind of hanging in where we thought they'd be.
And then the math comes to 150 basis points of OR improvement. So feeling good on that side as well, and are ready to pivot if necessary. But we kind of know what's in front of us and feel good about our path.
All right. Fantastic. I'll start, but we have a nice full room. So if people have questions raise your hand, we'll get to you.
Let's just start near-term volumes tracking up about 6% quarter-to-date in 2Q. So good start. How are -- what's -- what commodity segments may be doing better than you would have thought? What if anything is worse than you would have thought and then we'll...
Yes.
We'll go from there.
Yes. So as you mentioned, volumes have accelerated. We're up about 1% in the first quarter and then through April and first part of May here, that low single digits. So I think you talked about mid-single digits. I'd say coal and auto are coming in a little stronger than we thought coal from a replenishment of stockpile perspective. And then auto, we had some production issues that were kind of plants coming back online for. And then I'd say intermodal is pretty much in line with where we thought. International still coming in pretty strong. We haven't seen really a drop-off in that yet, and our domestic intermodal business is staying pretty steady.
So let's turn to that intermodal side because -- we've all been talking about this like big import cliff into the U.S. It feels like we've seen it, but it doesn't seem like it's showing up in -- like the rail intermodal volumes yet. Is this just a timing lag and we're going to start to see it over the next few weeks? Or is there some reason that "Hey, there's enough inventory still at the ports and a backlog to clear." So the intermodal volumes are going to be a lot steadier than maybe what you would have thought given this import cliff.
Yes. And I think 2 things there, Scott. One is probably much more pronounced on the West Coast, right? And that's where we're kind of hearing that -- about the air pocket, if you will, and as you mentioned, kind of seeing that -- those volumes come down now. So we haven't really experienced that yet on the East Coast for us. I mentioned our international volumes are still holding strong. If there is an impact that expected to be much less magnitude than what they're thinking about on the West Coast.
So I think the key with all of this is -- with all this uncertainty is really sticking with our -- staying weather close to our customers, trying to understand where -- what they're seeing. But I think the other thing that's really good is for us, we've shown our ability to be agile in this market.
You can go back to last year with hurricanes, the port strike things like the Port of Baltimore closure, and then this year with winter weather, that's -- those kind of shocks and uncertainty in the system. This is a way that we've kind of proven that we can help our customers work through those. So we feel really good about that aspect.
So when you think about some volumes up mid-single digits, like there's nothing -- it doesn't sound like there's any reason to think that, that in the near term gets a whole lot worse this feels sustainable to you right now?
Yes. I mean, like I said, I think on the intermodal side, we're going to stay close to it. But everything else is feeling pretty good. I think on the coal side, like I said, we're seeing some replenishment of stockpiles there. Kind of 3 things if you think about coming out of the harsh winter; second, preparing for summer electricity demand; and then third, if you look at forward natural gas prices, those are elevated.
And so I think utilities are starting to rebuild those stockpiles. So all 3 of those things are kind of helping to drive that. Yes, I think we feel good about our volume outlook in the 3% that we've guided to.
So it's been a while since we've talked about coal in a positive way, like you just gave us the 3 factors. Like what's the -- how long does this period of replenishment last? Is this just a Q2 phenomenon and get to Q3, and we're back to flat to down coal? Or do you think that there's some duration to the strength in coal?
Yes. I think it's probably a little bit of a mixed bag there, maybe trailing into third quarter a little bit, but we don't see this being a reversal of what we've seen kind of over the last couple of years.
I think the other piece with coal that we got to keep in mind is I'm focused on the volume side, obviously here. But the price side, especially on the -- for export is really depressed. And so that is kind of mitigating these volume gains when you think about all-in revenue growth from a coal perspective.
Just we'll do that maybe very quickly, just because you mentioned it. Any -- how should we think about the coal RPU Q1 to Q2, just given what you just talked about?
Yes. So sequentially, we think about from first quarter to second quarter, a continued degradation in export coal yields, and then kind of flattening out from there going forward. So that will be a headwind to overall coal RPU for the rest of the year.
And should we be thinking like down in that low single-digit range? Or could it be worse than that? Or...
Yes. I think that's fair low single digits.
Down low single digits. Okay. Great. And then one more just on the volume side, and then there's a lot of other stuff to talk about. We've seen over the last 6 to 9 months, just like really, really strong growth in West Coast port volumes, right? Maybe just putting tariff aside, like obviously, there were East Coast labor uncertainty that caused that shift. Do you expect to start seeing you preparing for a shift back to East Coast ports? And is that a good thing, bad thing for you? I'm guessing, there's some puts and takes with that.
Yes. Yes, absolutely. So I think to your first point there that it's another example of how uncertainty in the market kind of disrupts the supply chain. Like you said, there's a port strike and then maybe a delay on when they are going to fully decide that, and customers continue to ship to the West Coast.
So we're starting to see that come back to the East Coast to kind of a more normal equilibrium there. And when we think about where the volume comes from, I'd say this, I think, again, I think we're well positioned to handle it wherever it comes from. But on the East Coast, we've got some really great port partners that have done a lot of great work from a growth and efficiency perspective to handle that volume coming in from the East Coast.
And then obviously, the other benefit the East Coast has is just the density 2/3 of the population, half of the manufacturer in the U.S. being right here on the East Coast. So I think those are all good things. West Coast, you'd say, all right, well, we've got longer length of haul, but trade off there as you maybe lose a little bit of that freight as it kind of moves across the country.
So all in, I think we're ready to handle that volume wherever it comes. We're not -- we obviously can't control that where it comes in, but we're ready to handle it.
And then a couple of times, you've mentioned the 3% revenue growth for the year. It felt like on the Q1 call, the message was we're keeping it, but there's a lot more sort of uncertainty -- since then, we've got at least a 90-day pause or you feel -- and that we know the volume trend has been pretty good so far in Q2. Are we feeling better about that 3% than we did just a month or so ago?
Yes, I'd say -- and just to kind of go back there, that 3% revenue growth was really all volume. The yields were kind of flat when you think about the mix of the commodities, and we'll talk about that in a second. But so that -- the volume side was really what's driving the 3% revenue growth.
And I think the volumes that we're moving right now are encouraging, but relatively in line with kind of where we were expecting it to be maybe a little bit accelerated. So I don't think we're feeling worse than where we were, but I also don't feel a lot better just again because there's -- while we have a delay here, there's not definitive guidance of how this is all going to shake out.
And I think that, ultimately, customers and shippers are looking for that certainty. So maybe some pull forward here in second quarter, but we'll have to see how it shakes out the rest of the year.
Okay. And then maybe a similar question on the 150 basis points of margin improvement. Do we need 3% revenue growth to get that 150? Or do you feel like we have line of sight to that even if we don't get all the way to the 3% revenue growth.
Yes. So -- we -- a big part of the 150 basis points of OR improvement is on the back of increased productivity. And we've really -- we delivered $290 million of productivity and cost takeout in 2024. We're continuing down that path this year with a guide of $150 million plus and made really strong progress towards that in the first quarter here. So that is -- that's a big component of that.
If that volume, that revenue growth doesn't come through, we're scenario planning right now, thinking of other things we can do. But we do need some revenue growth to hit those targets. If you think about when we laid out our longer-term targets last spring, it was 150 basis points of OR improvement each year and that was with 3% revenue growth in this overall $550 million of productivity savings.
And last year, we had flat revenue. So we didn't get that 3%, but yet, we still were able to accomplish that 150 basis points. So we've proven we can do it. I just think on a sustained basis, we do need some revenue growth to help hit those targets.
That makes sense. And then any way to help us think about sort of near-term operating ratio expectations and where we see some degree of sequential improvement Q1 to Q2. Typically, every year is a little different, but the range I see 200 to 400 basis points, pretty wide range, but I don't know where do you think we should end up in that spectrum?
Yes. We always joke around. We have to use air quotes when we talk about average seasonality, it's kind of all over the place. But we think about it probably more normal in the like 150 to 200 basis points of sequential improvement. You think about where we were in the first quarter at 67.9%, we feel very confident of beating that normal seasonality as we move from first quarter into second quarter.
A couple of things that were kind of onetime or nonrecurring. If you think about it, we had $35 million of weather costs, another $35-ish million of incentive comp adjustments. So those won't continue on, you pull those out and then you think about kind of maybe that normal seasonality gets you to where we're kind of thinking here that we need to be in the second quarter and going forward?
So take that -- take Q1, take out $70 million of cost give or take, and then layer in 150 to 200?
Yes, I think that gets you right around like, call it, a 64, which is based on the 67.9% that we printed in the first quarter, we really have to be at 64%, sub-64% for the rest remaining 3 quarters of the year to hit our 150 basis points of guidance. It's obviously not going to be even each quarter, second, third and fourth. There's still obviously some seasonality there. But I think that's a good way to think about it, Scott.
Okay. Perfect. And then I know going back a year ago when you guys were giving all sorts of long-term guidance. It was the -- the long-term guide was a sub-60% OR over the next few years. Is that still the right framework to be thinking about? And what do you think is the realistic time line to get there?
Yes. I think that's absolutely our framework. I think the only thing that's probably changed is maybe the timing of that when we laid out that framework, we were looking at kind of the 3-plus year range and again, really top line, thinking about 3% revenue growth each year. But we also called out really to take that next step from, call it, a 62% OR down to a 60% OR or sub-60% OR. We kind of needed this market recovery. So another 2% of revenue growth.
And we think that's still going to come. It's just again, the timing of when that may ultimately come to fruition. So 100% of our goal. That's still what we're driving towards. When we laid out those targets, we laid out $550 million in cost savings, and that's not the end goal. We're going to continue to press on that. And that will be a big component of how we hit those targets.
By the way, if there's questions, raise your hand, do -- wow, we have a question. I don't know if we have mics, but if I need to -- I'll repeat it if need be.
So question, if I heard it right is, it feels like you've had some opportunities to gain some share other Eastern rail having some service issues. As their service gets better, what's the -- how much volume you think can go back to the other rail?
Yes. I would say we're recapturing share from all modes of transportation. I think couple of years ago, we did not have a strong enough service product for our customers, and they needed to make other choices. So what we're seeing is some of those customers kind of bringing more share of wallet back to us. So things that should already be on rail in the first place and things that make sense to move on NS's network.
So we feel good about that. The progress we're making there, and it's really on the back of this great service product. We have to prove that we can consistently provide that service to our customers, so that they have that confidence and trust that they can -- they can bring it back to us to be a key part of their supply chain.
I want to talk a bit on the pricing and the yield side a little bit. So if I look at yields, excluding fuel in Q1, they were up a little bit, 0.5%, but that's the first increase, we had 6 quarters of declines. I guess, any -- how should we think about that yield trajectory going forward? It looks like when you just look at the mix of volume right now with coal strength and merchandise is really good, it feels like mix is in a much better place than maybe the last bunch of quarters. So -- it feels like we could see some strong yield growth this quarter? Are we thinking about that right?
Yes. So let me -- I'll hit the last part of your question first from a mix perspective.
So I think what you're seeing is, from a high-level commodity perspective, you've got strong growth in coal, strong growth in merchandise. And from a mix perspective, you'd assume that's positive. But I also think you really need to dig kind of within mix within the mix. So again, when I talked about export coal pricing, and then in the merchandise side, maybe some of the lower-rated commodities within merchandise are growing more outside. So -- we don't expect that to be a tailwind here in the first quarter -- excuse me, as we move into the second quarter.
But back to your original question on overall yields, I think you really need to break it down into 3 pieces. So you talked about ex fuel kind of slightly positive. If you look at the 3 commodities broken out within merchandise, we've had really good pricing progress there. We've got a great service product that's obviously making those conversations, those pricing conversations easier with our customers. And we've had really, like I said, strong price within the merchandise product for quite some time now.
But then you look at the other 2 pieces. Intermodal, obviously, heavily dependent on the truck market kind of bouncing along the bottom there from a pricing perspective. And in our current plan, we are not forecasting any uptick in that for the rest of the year, kind of assuming that's flat. Hopefully, we're wrong and it comes in higher, but that's what's in our base plan.
And then coal, again, just really and weighted down by those seaborne coal prices. So that's what kind of mixes together to get you kind of flat yields, but I think it is really important to look at the pieces because we are making really great progress on the -- on that merchandise.
Just a couple of follow-ups. So merchandise was up ex fuel, 4% in Q1. I don't know if there's mix within that, but -- so is that a good sort of assumption of what merchandise yield should be right now or...?
I think probably a little bit lower than that as we move forward, again, just to do that mix within the mix.
Okay. And then intermodal, you said you're not counting on any intermodal yield uplift. They were up 2% in Q1 ex fuel.
Right. And different components there when you think about rate, you've got your core pricing. Obviously, we're taking fuel out of here. You've got accessorials, things like that. But overall, we're kind of assuming flat from here on out.
Okay. So maybe let's just -- we talked about yield. Let's talk about more like price. Because I think for so long, right, the given in this industry was just inflation plus price. And it certainly feels like it's -- the last few years, it's been less of a given, right? Where are we in that sort of, hey, let's not -- instead of saying, "Oh, it's if you exclude this and this and this, we're inflation [indiscernible]." Where -- when can we say you know what, like -- no excuses were inflation plus price.
Well, I was going to say exactly that. Exclude this and this. And so I mean, it's -- in fairness, I mean, you really -- when you look at that merchandise business, we are and have been at inflation plus pricing, as you call it, for quite some time now. And that's really on the back right now of a great service product, something our customers can count on and bring more share to us.
I think to get to a -- from an overall book of business back to that place, you're going to need a recovery higher truck rates and then we're going to need some help on coal price. So -- which I think is going to be all in is going to take some time to do. But for right now, again, think about this controlling what we can control, we are getting that inflation plus pricing in our Merchandise segment.
Okay. Maybe now let's turn to the cost and productivity side. So -- been very strong labor productivity trends the last bunch of quarters, like the Q1 volumes up 1%, head count was down 6%. Now we just got the April head count data down a little bit more and volumes are up even more. So I think you're leading the industry right now in terms of labor productivity. How much more is there to go on that front? Is your service levels with really good labor productivity, you're also hanging in quite well.
Yes. Yes, that's right. I appreciate you noticing it because we're very proud of that labor productivity. We've got -- if you just think about it kind of sequentially from a head count perspective, we expect to kind of be flat from here on now, kind of which is right around where we ended fourth quarter, but yet we're bringing on more volume is our expectation. We're not seeing, as you pointed out, we're not seeing any degradation in the service metrics with that additional volume and with this level of labor productivity.
So I think those are key -- you can kind of manufacture, if you will, a higher labor productivity, but you might harm service or volume in the process, and we're doing it all together, which is the key to really drive value there. So I think that's an area that we are continuing to push on and for sure, that's a big component of the $150 million of productivity.
I mean it feels like for months, if not quarters, you've been saying it's going to be sort of head count is going to be flat sequentially from here, and it feels like every month it comes out a little bit more, like -- and at some point, does that get...
Yes. And I think there's -- you kind of saw that in first quarter here where we let attrition on the T&E side, take hold a little bit. We do have some CT, some of our conductor trainees starting up again here. So that will kind of start to replenish that pipeline and get us probably more flattish with fourth quarter.
Okay. Now while labor productivity was really good. The other side of that was comp per employee was up 7% in Q1. How does that trend from here?
Yes. So I think the best in my mind, at least the easiest way to think about comp per employee. So we talked about the incentive comp adjustment that we booked in first quarter. We also had some weather-related costs that hit comp and benefits. If you take both of those out, comp per employee was like $35,500 per quarter in the first quarter. That's about what it was in the fourth quarter, and that's a good run rate for the first half of this year.
Then if you think about moving into the second half of the year, you've got a 4% weight, contractual wage increase for our union employees going into effect. So I'd increase it off of that 35.5 going forward. But there will be some partial offset to that wage inflation due to increased productivity. So...
Okay. And then what about some of the other cost buckets, right? Just looking at our model, like purchase services is what still feels like the highest versus maybe history at Norfolk maybe versus some of the other rails. Like is there -- is that an opportunity on the cost side? And where if anywhere, do you see the most risk of inflation? Where is the biggest opportunities on savings?
Yes. So I think if you think about other areas of productivity, I've talked a lot about labor productivity, and we've focused really heavily on our T&E productivity. But as we move into 2025 and we're already starting to see it, it's kind of pushing that labor productivity into all of the other crafts as well. So whether that be mechanical or engineering workforce. We're continuing to press on labor productivity there. So that's kind of double not only the T&E side, but we're moving to other crafts as well. So we'll continue on that front.
Fuel efficiency. John, you've heard John talk a lot about what he and his team are doing from a fuel efficiency perspective. We just had our fourth quarter in a row of record quarterly fuel efficiency. And it's not just a fuel efficiency though, it's also thinking about like how and where we fuel locomotives to get the best price, how we're distributing fuel, all those kinds of things, that will also add to that fuel efficiency.
And then -- Scott you mentioned purchase services. We've actually made some pretty good progress there in the first quarter. Purchase services were down about $20 million year-over-year, about down $10 million, sequentially. So that is absolutely an area that we're focused on and an area where there is, for sure, some more -- some more work to do and some more improvement to come.
I think it's -- when I think about purchase services, I kind of think about it in 3 big buckets. About 1/3 of that, that bucket is really volume variable, and that's for our intermodal and automotive terminals. Those -- the operation of those terminals are outsourced. And so you've got lift cost, drayage, crane maintenance, things like that, that fall into that, that are volume variable.
And as you know, volume -- intermodal volumes have been going up over the last several years. So that is a piece of that driver. That's about 1/3. You got about 25% of that bucket is due to what I would call like operation support services. So things like taxis and lodging for our crews, rail grinding, those types of things. They're obviously necessary for our operation.
And then another big chunk of that is technology. All in, those 3 pieces are about 80% of that purchase services bucket. So just to give you a kind of flavor of what's in there, I think it's helpful to think about it that way. But you've heard us talk the last couple of quarters about what we're doing from a technology standpoint to really rationalize that spend, make sure we're getting strong returns on those projects, quick delivery and fast benefits. And that's really Anil, our new CIDO is really helping to drive that. So really good progress there. I think -- sorry, I talked for a long time. I think the last piece of your question was inflation.
Yes. Are there areas that have the biggest risk of cost inflation?
Yes. I think the -- where we see -- where you'll see inflation probably most pronounced in our P&L is within that comp and ben line. Like I said, we've got a 4% wage rate going into effect July 1 for 80-plus percent of our employees. So that will be a big driver. We're also see inflation obviously in our materials line item and other lines as well, but comp and ben is the one that sticks out the most.
Just 1 or 2 just like quick ones I want to just touch on just that your CFO hat. CapEx coming down this year.
Yes.
Any incremental opportunities there? And then how much -- what's the cash flow benefit if we get 100% bonus depreciation?
Yes. So as you mentioned, we're -- our CapEx in 2024 was $2.4 billion. We've guided now to $2.2 billion, reduced that about $200 million. We're really able to do that through the work that John and his team have really accomplished having a more fluid network. We're able to set down a lot of locomotives and freight cars, so we don't have to spend as much on those asset categories. But what it allows us to do is really spend on our steady state areas like infrastructure, rail ties, ballast, things like that and the safety of our network.
So that's going to continue on and we always will invest in those areas. It's just where we've had the opportunity to kind of take it down again from that network fluidity. I wouldn't think about that number, the $2.2 billion coming down going forward. But I would think about, I think on a kind of shorthand basis, a lot of people think about CapEx as a percentage of revenue. That percentage will get better from a standpoint of growing our top line, not reducing our CapEx. So we feel like this is kind of a good area to be at.
And then on the bonus depreciation, obviously, that would be a significant help to us. We're going through the process right now of calculating that from a cash tax perspective, but it's definitely a benefit.
Okay. And then just last thing, we've asked all the rails, no one has announced any plans to do mergers. We've asked all the rails just like there just seems to be more chatter for whatever reason. Your thoughts on does this make sense? Is the timing right or -- is this just sort of are we wasting our time and breath right now?
Yes. I mean I think, obviously, I read the trains article like I'm sure you did and heard kind of 2 different perspectives there. One, on a transcon merger or others on just partnerships across the industry with other rails. I think I see a lot of benefit in a transcon merger. I think there could be a lot of synergies there and cost takeout. But I also view the regulatory framework is pretty challenging right now.
That said, is this administration? Is this the time to try to progress that. I don't know, we'll see how it shakes out. But I think what we really are focused on at NS is kind of coming back to our core strategy, delivering a great service product for our customers that they can count on and they can trust, which helps us grow, brings more volume onto the network, brings volume that should be on rail, should be on NS back to us. Enhancing our productivity and cost profile and doing it all safely.
So those are the things that we're focused on right now. Again, I know there's a lot of talk about these mergers and other components, but for us, that's what we're kind of laser-focused on right now.
Awesome. Thank you, Jason. That was great.
All right. We're going to get our next, we're doing a truck brokerage panel in a couple of minutes with Landstar, RXO Echo Global and Arrive Logistics. So please stick around for that. That's great.
Appreciate it.
