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Norfolk Southern team produces strong first-quarter results

April 2020

Composite Service Performance
Above is a slide shown during CEO Jim Squires’ opening remarks on NS’ April 29 earnings call, with assistant chief dispatcher Misty Braden pictured.

Norfolk Southern team produces strong first-quarter results

Norfolk Southern employees turned in a strong first-quarter performance that set records for service and operating efficiencies.

Leading off the April 29 earnings call, CEO Jim Squires gave credit to the NS team for dedication to service, as employees rallied to provide high-quality service and keep the economy moving as COVID-19 began spreading across our network.

“Norfolk Southern employees are proud to be delivering an essential service,” Squires said. He quoted assistant chief dispatcher Misty Braden, who said in a recent Pulling Together: Voices at NS video: “We supply America with the goods that they are short of right now, and I hope everybody that works for Norfolk Southern feels essential after this.”

“It is truly inspirational to watch our employees rise to the challenge,” Squires said.

Thanks to the hard work of employees, NS produced quarterly results that achieved significant progress in the railroad’s efforts to gain best-in-class performance in service, efficiency, cost control, and operational discipline.

Compared with the first quarter of 2019, NS operations increased train speed by 10% and decreased the time rail cars spend in terminals by 16%, setting records for train performance and dwell times. Keeping the network fluid and high-performing, NS achieved best-ever results in customer service at the carload level and for our time-sensitive intermodal markets.

Responding to COVID-19

From a financial perspective, NS’ business volumes and revenues were down as a result of a one-two punch from heavyweight forces beyond our control – a sharp decline in energy markets coupled with a drop in economic activity as COVID-19 evolved into a global pandemic.

Keeping our footing, the NS team kept focused on things we can control, such as finding ways to operate more efficiently and working collaboratively across departments and with customers on innovative service solutions. That’s all part and parcel of ongoing efforts to transform how we do business to keep pace with rapidly changing marketplaces.

“Our customers are making rapid adjustments to their operations due to the impacts of the coronavirus, and we are right there with them every day as a valued partner,” Squires told analysts. “They count on us for reliable service, close collaboration, and nimble operational adjustments, and we’re delivering.”

Positive operating momentum

On the earnings call, Mike Wheeler, chief operating officer, emphasized the railroad’s positive operating momentum. “We are making progress through long-term, structural changes in our asset base, service levels, and productivity drivers,” he said. “We will continue to build on our progress from 2019, following PSR principles while proactively adapting our operating plan to the economic environment.”

Said Alan Shaw, chief marketing officer: “In the face of this challenging environment, we are flexible and responsive to market changes and customer needs, adjusting our operating plan and resources where necessary, while we remain focused on our long-term strategy….”

“Our service is the best in Norfolk Southern history,” Shaw added, “a testament to the commitment of our employees to respond to rapidly evolving customer requirements and deliver an exceptional service product.”

Improved service and operating efficiencies are key

In the current economic conditions, NS’ focus on operational efficiencies and service performance is more important than ever, helping to offset first-quarter revenue and volume declines of 8% and 11%, respectively.

“Looking at the big picture, the underlying change to our cost structure continued to shine through in the first quarter, as we reduce and realign resources around our new operating model,” said Mark George, chief financial officer.

First-quarter gains in efficiencies and cost control led to railway operating expenses of $2.1 billion, including a $385 million non-cash charge related to the disposition of 703 locomotives no longer needed for operations. Excluding this charge, adjusted operating expenses declined $202 million, or 11% – nearly offsetting first-quarter revenue declines in actual dollars.

In addition, excluding the locomotive charge, NS posted a first-quarter operating ratio of 63.7% versus 66% over the same period last year. The first-quarter adjusted OR means that 63.7 cents of every dollar earned went into operating costs. NS has set a goal of reducing its operating ratio to 60% by end of 2021. 

Improved service contributed to an overall 4% growth in revenue-per-unit, or RPU, another boost. RPU is the amount of revenue the railroad earns per unit, on average, whether it’s a rail car, container, or trailer. NS now has achieved 13 consecutive quarters of year-over-year RPU growth, a key metric for our marketing teams and a driver of the company’s long-term financial success.

NS reported earnings per share – a measure of profitability – of $1.47. Excluding the locomotive rationalization charge, adjusted earnings per share were $2.58, a year-over-year increase of 3% and beating market expectations.

Squires said the first-quarter results demonstrate the company’s resiliency and resourcefulness in challenging times.

“There is much for us to be proud of in our report today, from our strong financial performance to the incredible job the men and women of Norfolk Southern are doing to keep the trains running,” Squires said. “These are remarkable achievements that demonstrate this team’s urgency to transform our company. We are confident that by continuing to adjust and successfully execute our strategic plan, we are building a stronger, more resilient, and more profitable Norfolk Southern.”

Reconciliation of Non-GAAP Financial Measures

Information in the preceding article includes non-GAAP financial measures, as defined by SEC Regulation G. Non-GAAP financial measures should be considered in addition to, not as a substitute for, the financial measures reported in accordance with U.S. generally accepted accounting principles, or GAAP.

GAAP financial results are adjusted to exclude the effects of a non-cash charge in the first quarter of 2020 related to the disposal of approximately 300 locomotives and the designation of an additional 400 locomotives as held for sale. The introduction of precision scheduled railroading in 2019 continues to provide significant benefits to the network operations and has resulted in excess capacity resulting in the sidelining of these locomotives.

The company uses these non-GAAP financial measures internally and believes this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the locomotive disposal charge. While the company believes that these non-GAAP financial measures are useful in evaluating the company’s business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.


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First quarter’s non-cash locomotive charge highlights efficiency gains 

Norfolk Southern’s first-quarter earnings report includes a $385 million accounting charge that, on paper, produces financial numbers that might look like a down day on Wall Street. In reality, this write-off, related to the elimination of more than 700 locomotives from the NS fleet, is an operational success story for our railroad, driven by efficiencies that are improving service while decreasing costs of doing business.

It’s a prime example of the progress employees have made over the past year in advancing NS’ strategic plan goals to serve customers, manage assets, and control costs – all essential to maintaining our railroad’s competitive standing in the industry.

This is how CEO Jim Squires put it during the earnings call with analysts: “Thanks to the excellent execution of our strategic plan, our fleet today is more efficient, and we are able to operate with significantly fewer locomotives.”

NS now is operating an active fleet that has almost 15% fewer locomotives compared to the first quarter of 2019. During the earnings call, NS senior leaders attributed the reduction to efficiencies gained from implementing our brand of precision scheduled railroading – in particular the phased rollout of our TOP21 operating plan.

A PSR capacity dividend

“Simply said, it’s a capacity dividend of our TOP21 PSR implementation, which has resulted in the decongestion of our yards and road network, allowing cars to turn quicker in the terminals, and trains to move faster on the network,” said Mark George, chief financial officer. “The blending of our discrete networks resulted in fewer, but longer, trains. Fewer trains, along with better balancing of our routes, require fewer locomotives.”

As a result of these efficiencies, NS entered 2020 with roughly 1,000 locomotives on the “sidelines,” out of an approximate fleet of 3,900, George said. The NS operations team determined that 703 of the stored locomotives were not needed and could be sold or scrapped. The remaining 400 or so will be held in a surge fleet and available for upgrade in NS’ DC-to-AC conversion program.

The quarter’s $385 million non-cash charge is tied to the disposition of the 703 excess locomotives. Nearly 300 of those locomotives were sold in the first quarter and the rest will be marketed for sale or scrapped in the next 12 months, George said.

“The $385 million,” George explained during the earnings call, “is essentially the remaining book value on those locomotives that otherwise would have been depreciated in NS’ profit and loss account in the years to come.”

Achieving a key strategic plan goal

By reducing the fleet, the company achieved a key goal of NS’ Reimagine ’21 strategic plan. When NS’ senior leaders presented the plan to financial analysts during Investor Day in February 2019, they outlined a goal to eliminate more than 500 locomotives by 2021. Thanks to the hard work of employees in executing the plan and efficiencies gained, NS accomplished the goal a year in advance and far surpassed 500.

In an added benefit, NS is increasing the reliability of the locomotive fleet while reducing ongoing maintenance costs. In addition to disposing of the fleet’s oldest locomotives, the company also eliminated models that were more prone to mechanical failures and expensive to maintain.

“The team targeted removal of the oldest, least reliable, and least efficient of the locomotives, and eliminated entire model lines, moving us to a more homogenous fleet of 10 models from 19,” George said.

Amid uncertainty and tough challenges ahead, NS senior leaders remain confident

While Norfolk Southern is entering uncharted territory with COVID-19, the railroad’s executive team is confident that the company is positioned to pull through the crisis and respond to market demands when the U.S. economy begins to get healthier.

“By executing our strategic plan, exercising capital discipline, and serving our customers well, Norfolk Southern is poised to emerge stronger and ready for growth as the economy recovers,” CEO Jim Squires told analysts on the earnings call.

Like many other companies, NS announced on the call that the company is withdrawing guidance for revenue and operating ratio for the rest of 2020 because of economic uncertainties caused by the coronavirus pandemic.

“While we can’t be certain of the severity and duration of the downturn in 2020, we do know that revenue will be much lower than we thought at the beginning of the year,” said Mark George, chief financial officer.

Solid financials

In our favor, NS has a strong balance sheet, manageable levels of debt, and robust access to credit markets, George said. NS reported record free cash flow of $589 million (see footnote below) in the first quarter, significant because the company could draw from that cash, if needed, to weather the economic downtown.

Recognizing the challenging business environment ahead, NS already has reduced our 2020 capital budget, which covers property additions such as terminals and facilities, equipment such as locomotives and rail cars, technology, and roadway maintenance. NS has limited capital expenditures to roughly $1.5 billion, which is about $500 million less, or 25% less, than the nearly $2 billion spent on CapEx items in 2019.

Ensuring safety and service

NS will pursue further cost control measures based on how much volume declines. In deciding what to reduce, NS will do nothing to jeopardize safety, service, or the company’s ability to recover after the crisis, George emphasized.

“We never want to cut in a way where we can’t handle volume when a recovery occurs, which would then adversely impact customer service,” George said, “and we absolutely won’t compromise on network safety.”

Alan Shaw, chief marketing officer, said NS is projecting year-over-year volume declines across all business groups, with large impacts in the second quarter. NS has seen volume declines of around 30% across all commodity segments in the second quarter to date. The severity of declines and timing of impacts, he said, will depend on the reopening of the economy and energy prices.

“The strength of our franchise, our commitment to collaboration, our deep customer relationships, and superior service product provide the framework for success to get us through this downturn and as economic conditions improve,” Shaw said.

Looking for opportunities to improve

Mike Wheeler, chief operating officer, said operations is using this time of lower traffic “as an opportunity to challenge ourselves and our capabilities” to improve NS’ TOP21 operating plan for the long-term. That includes reviewing and assessing all aspects of train operations.

“For example,” Wheeler said, “we are successfully handling carload traffic on premium intermodal trains, blending previously separate service networks in a way that allows us to maintain service frequency and train size while reducing costs.”

Footnote: Regarding first-quarter free cash flow, please see reconciliation of non-GAAP financial measures posted on our corporate website.