Luke Nichols:

Thank you, and good afternoon, everyone. Please note that during today's call, we will make certain forward-looking statements within the meaning of the of the safe harbor provision Private Securities Litigation Reform Act of 1995. These statements relate to future events for 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 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 as referenced in our earnings release. Turning to Slide 3, it's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

John Orr:

Thank you, Alan. It's a pleasure to provide an update on our progress. Turning to Slide 5. At NS, safety enables performance and our commitment to safety is unwavering. During the quarter, we leveraged our NS leadership framework to strengthen our field safety. We continued our efforts to focus on mainline accident reductions and we commissioned three additional inspection portals and added field sensors. These have contributed to our best-in-class mainline accident rate. We also conducted two cross-functional leadership safety summits, strengthening our capabilities and reinforcing safety from the ballast to the boardroom. Turning to Slide 6. Our metrics improved across all of our core network performance indices. Our balanced approach proved safety, service and cost improvements work best together. Year-to-date, we have reduced our active online motor power fleet by 320 locomotives and have targeted an additional 100 reductions in the second half. As we store locomotives, we use reliability metrics to remove the worst performers, driving up overall fleet reliability and driving down maintenance, materials and fuel expense. Quarter-over-quarter, we increased our GTMs for available horsepower by 6% and our car velocity by 6%. Both improvements are the result of design processes that drive out time and cost, both in terminals and over the road. Our strategy includes structural improvements in fuel procurement, materials management, purchase service optimization, crew cost efficiency and productivity enhancements. So let's take a look at a few of the initiatives in the pipeline that are closing the gap as we track for the $250 million cost takeout commitment. Turning to Slide 7. We have delivered a 6% improvement in car velocity by reducing handlings, extending train schedules and improving connection performance. Car velocity is something I monitor closely. It captures improvements in our operating plan, terminal execution and over-the-road performance. For example, during the quarter, we eliminated over 700 unnecessary car handlings per day. Driving car velocity in response to overall train speed improvements includes working with our customers to rightsize the inventory in their pipelines as train speed and car velocity improve, fewer cars are required to service the current volume. In the quarter, we delivered a reduction of 3% of cars online. We are improving safety, train speed and service reliability by addressing unscheduled train stops and dispatching practices. For example, our mechanical war rooms root cause analysis of every unscheduled train stop has resulted in an 18% reduction of fees and scheduled stops in Q2. We have a new network operations watchdog team, bringing extreme discipline to planned adherence. They challenged the root cause for every extra train. This has instilled network-wide visibility and accountability to execution and planning. I'm really encouraged that this has increased connections and train yield and has driven out extra train starts from 200 in March to just 50 in June. These improvements to our operating plan and terminal discipline have resulted in a 4% reduction in crew starts. The combination of crew and overtime reductions has dropped our crew expense per kGTM by 8% compared to Q1. As operational effectiveness grows, we are recalibrating our standards and sweating the network resources even further. This is the path to at least 7% to 10% improvement in car velocity. Yard and local redesigns are underway. We driving out waste and rework in the first mile and last mile operations. We are unlocking the capacity to take on additional work within the same footprint. Efficiency in this space is really important to me since we allocate approximately 50% of crew starts here. Over the next 24 months, we will continue to improve fuel productivity. We will continue to push locomotives, leverage trip optimizer to assertively manage horsepower per ton, turn power more quickly, improve fuel distribution and vendor accountability and increased train size. We are targeting locomotive productivity improvements of an additional 8%. One of my personal objectives is to develop the next generation of skilled PSR railroaders and to build the bench strength to sustain the improvements that I'm leading. We are structuring the organization to drive the daily and strategic outcomes, and I am proud and encouraged by the engagement of people in every department and across the entire organization. The team is working collaboratively and with confidence. Our team is energized and motivated to build upon the strength of the quarter and deliver the next wave of initiatives that will yield savings in all P&L categories beyond just comp and bang, but in materials, rents and purchased services, success breeds success. I want to close out my remarks on Slide 8 and 9 with two flywheel examples of balancing service and cost. In automotive, our car velocity increased by 16%, creating the platform for growth as our carloads increased by 7%. Within intermodal, shipments and service performance simultaneously increased by 8%. This following the 15% lane rationalization we discussed earlier this quarter. And what's really important to me is that we are launching our NS intermodal reservation system in September. This smooth strain demand reduces rents and expenses and creates service certainty. Our customers are enjoying some of the best sustained service ever. At the same time, we have consolidated train starts, streamlined our service plan, reduced handling complexity and have driven out cost. We are unlocking tremendous value within our franchise, adding new capability, urgently eliminating waste and driving to a sub-60 OR. Now, I'll turn it over to Ed.

Mark George:

Thanks, Ed and good afternoon everyone. Let's start on Slide 15 with a quick reconciliation of GAAP results on the left and the adjusted results on the right. You'll see that the Eastern Ohio incident Eastern Ohio incident column is actually income in the quarter of $65 column as our $156 million of insurance recoveries exceeded the additional costs that were accrued. In the restructuring column, you will also see income as we booked a favorable true-up to our Q1 separation cost accruals, but also realized an associated favorable postretirement curtailment adjustment within our other income line item. We also highlight under the advisory cost column, expenses incurred in Q2 associated with a proxy context. Adjusted results, including a 65.1% OR was in line with our guidance range. EPS of $3.06 was aided by $0.05 below the line from a favorable state income tax adjustment. On the next chart, Slide 16, I'll go through the year-over-year and sequential variances compared to the adjusted results. Our second quarter performance was a function of dose of revenue lift combined with the team making excellent progress on network performance and providing strong service that enabled us to remove cost from our structure. Year-over-year revenue was up $64 million or 2%, with volumes up 5%, but RPU was down 3%. As Ed discussed, adverse mix remained a headwind to RPU in the quarter. Operating expenses were down $7 million year-over-year despite inflation headwinds, reflecting strong momentum on cost takeout, which drove 160 basis points of OR improvement. The cost reduction momentum is especially evident when looking at the sequential decline of $119 or 6% on $40 million more revenue combining to drive up a large 480 basis point sequential reduction in our operating ratio and will most certainly result in a sharp narrowing of the OR gap with the industry. Drilling into the revenue change on Slide 17, focusing here on the sequential increase in revenue from Q1 of $40 million. That was driven by merchandise volume growth. Yet despite what appears as a favorable mix shift at the high level, with a 2% rise in merchandise volume, RPU to Q1 was only flat, and that's because mix within each business line was adverse, as you'll see illustrated in the gray box where volume growth of below average RPU business lines exceed volume growth in the above average business lines. Shifting to a sequential look at operating expense on Slide 18. I'll start by saying it's nice to see all green on this chart. OpEx is down $119 million versus the first quarter. The dramatic acceleration in our network velocity has allowed us to drive out the remaining service mitigation costs in the quarter, which shows up in several categories, including comp and ben, most notably over time, but also in equipment rents, purchase services as well as other. The ops team did a terrific job speeding up the network and improving service to deliver on these cost savings, as well as fuel efficiency improvements. You'll also see savings in the comp and ben from lower employee levels, largely driven from the previously announced downsizing actions that we took in our management ranks, but also sequential attrition of nearly 2% of our T&E workforce. Property gains in the second quarter totaled $25 million compared to zero in Q1, so the first half is pretty much on a normal annual run rate. Real estate transactions are lumpy, and some of you may say that the $25 million in the quarter was 2x a theoretically smoothed amount, but either way you choose to evaluate our results, our OR performance in the quarter was in line with our commitment. So we are very encouraged at what is clearly an inflection point in our cost structure, allowing us to meet the commitment we made on OR despite a weaker volume environment than we had been planning for, demonstrating organizational agility. As we look to the second half, there are various headwinds and tailwinds to consider. Ed noted that the revenue will be softer than we previously expected, with some sequential volume improvement, but adverse mix. And the industry's next contractual wage increase that took effect on July 1 creates a $25 million step up in comp and ben here in the third quarter. However, John talked about our actions and momentum on productivity side within operations, and that will help neutralize the wage impact. All that said, the key message I want to leave you with today is that despite softer macro conditions, we are reaffirming our guidance for the second half operating ratio in the 64% to 65% range. Before I hand to Alan, I'll make a comment on capital. Many of you have seen that with PSR, there is often a liberation of excess capital assets. That boosts efficiency and creates incremental cash flow streams, adding to shareholder returns. We've had some of those in the past several years with some larger asset sales, and we continue to evaluate opportunities and have a robust list of properties for which we are pursuing sales that will simplify our network and generate cash over the next several quarters. Alan?

Operator:

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First call we have is Tom Wadewitz from UBS. Tom, go ahead.

Ed Elkins:

Thanks, man. Let me walk you through the -- really the price and mix story in intermodal. Mix and price make up around 6 and 7 points in weakness that you saw there. And that mix is really driven in the premium segment where lower part counts or are really pressuring our carriers to keep their unionized road fleets employed. The other mix piece is we're seeing a lot of empty shipments. On the Intermodal side, we're seeing them and have seen them really all year long in the Intermodal segment -- or excuse me, in the International segment where carriers are really trying to push empties back offshore. We're also starting to see a lot more domestic empty repositioning moves back to the West Coast. We think that's in anticipation of possible ILA action on the East Coast ports there. And then the second part of your question is when does it really -- when does the highway rates get better and when we start to see some of the capacity drop out from the highway carriers that are putting a lot of pressure on rates. I think we're around the bottom. I really do, from what I've seen, from what read and from what I hear from our customers, we're kind of bouncing right along the bottom. And I think we're getting closer and closer to an inflection point. Talking to one of our biggest customers today, they noted that they're expecting a real peak season this year for the first time in a few years. And I think that bodes well both for our international customers as well as for our domestic customers.

Ed Elkins:

Yes. I think RPU on the domestic side is moving sideways.

Tom Wadewitz:

Thank you.

Scott Group:

Hey. Thanks. Good afternoon. So Mark, maybe just some help on the cost side, $25 million we get from the wage increase in Q3, but obviously, there were some good sequential cost progress. So any way to just help us think about the overall ex fuel trend and OR in Q3? And then maybe just separately, the mix chart the last couple of quarters is really helpful. Do you think this is a -- is this a cyclical phenomenon of negative mix? Or is there something that's maybe more structural about where the growth is coming from?

Ed Elkins:

Sure. I can do that. I've already talked about some of the mix challenges that we're seeing in intermodal. And I will tell you, we see the same story that's been playing out in the second quarter going forward into the really third and fourth. We're seeing significant volume growth in some of our lower-rated merchandise commodities like aggregates and finished vehicles, and both of those move at kind of the lower end of that RPU spectrum. We are focused a lot on earning back merchandise share and the additional volume that we are seeing is really attributable to the better velocity and car supply that we're seeing out there. I mean think about what happened in the automotive market where we actually use less equipment to handle a record amount of revenue. It's a real sea change from where we've been in...

Scott Group:

And it gets right down to the basics, right? We sweat the asset efficiencies, moving the most miles per day that we can, driving the efficiencies of our locomotives and creating resiliency at a really low cost by eliminating waste, creating more capacity so we can onboard more customers and lengthen our trains and really drive out the service reliability through our war rooms and our drill down.

Alan Shaw:

Yes. Look, we're really confident in our guidance for an OR in the second half of the year is 64% to 65%, despite revenue headwinds. And it's because of this flywheel effect that we're seeing and productivity, where a faster network is generating a lot of opportunities for John and his team to unlock savings.

Operator:

The next question will be coming from Ken Hoexter from Bank of America. Ken, go ahead.

Mark George:

Well, look, Ken, again, you're right that sequentially, Q2 to Q3, when we look historically, you have some years where you have improvement in the OR. You have other years where you have some level of degradation. I think on average, it's probably slight degradation in this year, which is somewhat of a unique period of time. And this is if you exclude 2020. But in this year, if you look at this period of time, we're expecting sequential volume improvement. So that's really going to help us. And the gravy on top of that is continued momentum in what John is doing, in face of all the headwinds that I laid out. So that's where the confidence is coming from. I don't know John do you want to add?

Mark George:

So just getting also to the essence of your question on why not better, I'm just going to repeat what I said to Scott, there is some headwind here in the third quarter from the second quarter related to the wage increase of 80 basis points. And also the way we see the fuel curve playing out, there's probably another 60 basis points of headwind. So we're talking about overcoming that. And those are big hurdles. Maybe fuel is not -- doesn't end up being as bad. That could be some upside. But honestly, we got to see where volume shakes out too.

Ed Elkins:

Agree. And we're targeting more revenue. I mean we know the macro environment is challenged but look, let me give you 2 examples of recent wins that are only possible because of higher velocity and better car supply. We converted a coil line from the highway with our largest middle customer between Indiana and Ohio and that's in a challenged metals market. So we grew inorganically off the highway. We also converted the large highway lane to rail in the state of Georgia with our largest aggregate shipper, all because we're able to handle more tonnage with less equipment.

Jeff Kauffman:

Thank you very much and congratulations in a tough environment. I just kind of want to get your big-picture view on some of the changes with the STB and the hearings that they're having and how that may or may not impact the rail.

John Orr:

And just to add, Alan, when we were in Washington a few weeks ago meeting with the STB commissioners, they were really reinforcing our business plan and resiliency as being an enabler of service and driving the US economy, and they were right in lockstep with our vision. So I think it will -- it's always going to challenge the sector when the commercial regulator wants to talk to the sector. But when we're leading front of all of that, I think it serves us well to continue what we're doing.

Chris Wetherbee:

Thanks. Good afternoon guys. I guess as we're thinking about the progress that you're making John, in particular, as we move through in the back half of the year. I guess, how do we think about headcount? What resources are sort of required given the progress that you're making here? I guess, in other words, should we be able to see further reductions in heads as we move sequentially through the rest of the year?

Mark George:

And Chris, I would tell you, we are on track to be down 2%, like we had guided previously by the time we get to the end of the year versus the end of last year. And that's on carrying a little bit more volume, right?

Operator:

The next question will come from Brian Ossenbeck from JPMorgan. Brian, go ahead.

Mark George:

Yes. I think that actually, the profile in the back half, you have a typical challenge in the fourth quarter being a lighter one where you see the OR float up. I actually think because of the momentum we're making there'll be continuous productivity that we get throughout the year. So, while we might get a little bit more volume in the third quarter and a little bit less as you typically would expect in the fourth quarter, the productivity is going to help us sail through. And I would I would imagine that both third and fourth quarter are going to look somewhat similar here.

John Chappell:

Thank you. Good afternoon. Ed, past and future. First, in the past, is there any way to quantify, if there was any, any potential volume impact from the distraction, if you will, of the last several months, any customers who maybe had some negative muscle memory from cutting to bone and putting in contingency plans ahead of final certainty. And then the second part of it would be for the future. You mentioned some of the wins that you've had from these new service metrics that you're putting up. Do you feel that you have a long list customers who have been resistant to moving to the rail given past service who are now a little bit more open to switching back to the rail network given some of these vast improvements you've made?

Alan Shaw:

I -- any volume.

Alan Shaw:

Look, our service product sales in this market, right? The two most service-sensitive markets, Automotive and Intermodal grew 7% and 8% on respectively, because of the great product that John Orr and his team are putting together. And because of the alignment between marketing and operations, they're looking for every opportunity to secure additional revenue and additional margin we were able pick up spot opportunities in weak coal markets and weak agriculture markets because of the great product we're delivering and the capacity dividend that John has created.

Alan Shaw:

Great point.

Brandon Oglenski:

Hey, good afternoon. And thanks for taking my question. And maybe just on a very quick point of clarification. Are you still expecting coal yields to decline in the back half, especially on export because I think that was the prior expectation. And then, Mark, I think in your recorded remarks, you ended your statement talking about, hey, look, we had prior big land sale transactions. We think we've identified a few more. I think that's what I heard. So should we be contemplating that in the forward OR outlook? I think that's maybe where you were going. And you also made a comment that I think you should expect about $12.5 million a quarter. So should we be thinking annualized $50 million gains? Or are you saying there's potentially bigger sales coming. Thank you.

Ed Elkins:

Okay. And then you'd asked about coal price as well. There were a few global supply chain disruptions during the quarter caused the slight lift prices, but those gains have mostly eroded away. And the expectation is that rates are going to continue to drift slightly lower the experts that we talk to, and there are several of them are really expecting those seaborne prices to stay north of $200. But we'll see. We'll see what happens.

Ravi Shanker:

Thank you. Good evening, everyone. I think you said earlier that there was something around the East Coast port actions and some customer behavior there. Can you unpack that a little bit more and give us a little more detail there? What are you seeing already, what's some of the time line for this? And kind of where can it go before that settles down?

Operator:

The next question will be coming from Elliot Alper for TD Cowen. Elliot, go ahead.

Mark George:

Hey, thanks for the question, Elliot. Yes, I mean it's -- obviously, it's a big spend amount that's gone up a lot from technology in the past handful of years, largely subscription-based, cloud-based services. So you see a lot more software costs showing up now and purchase services as opposed to in capital. But at the same time, about -- probably about one-third is related to the volume variable costs associated with intermodal activity. So, Intermodal grew 8% year-over-year, but we actually limited the purchase services increase to around 3%. And actually, sequentially, it was down slightly. So this is an area that we've spent a lot of time, John and I in the past couple of months talking about and we're going to be focused pretty aggressively on trying to find opportunities to bring this down. And certainly, a lot of the other areas of purchased services outside of the volume variable pieces. John, do you want to jump in?

Mark George:

Yes. And one other point on purchase services because you did ask about how it will look at the balance of the year. I would tell you, it is going to be no worse than what you see in the first half. I would expect it to be down year-over-year in the back half.

Elliot Alper:

What do you think about one of the biggest crew costs, recrews?

Elliot Alper:

So we're not increase recrews out, reducing our exposure to -- over time reducing our exposure to taxi cabs, hotels, all the associated costs with that. And that is just a winning proposition because as you reduce recrews, creating service stability, that flies in the real house of Ed and being able to sell, that's the power of the resiliency that we're creating at the lowest cost possible and the flywheel of mobility.

Daniel Imbro:

Yes. Thanks. Good evening, guys. I wanted to circle back to winning some of that merchandise business back from the disruption earlier this year. It sounds like service is in a good place. The flywheel is turning and you have the ability to absorb that volume. So I guess, what do you think it takes to catalyze and start winning back some more of that more profitable merchandise volume? And then on the guide, does it include some pace of market share win back or volume win back that's embedded in that volume outlook for the back half? Thanks.

Ed Elkins:

Exactly. And look, let's be clear, the erosion in our merchandise volume didn't happen in the first half of this year. It's happened over a fairly extended period of time, right, as we've worked really hard to get to where we are right now. So, there are varying levers we're going to pull with various customers. But the first one that we're going to pull with every customer is giving them exactly what they want, which is a conveyor belt that runs at the same speed all the time, that's fundamentally what our customers need, first of all, and we're out there right now, demonstrating it and improving it to them.

Operator:

The next question will come from Jordan Alliger from Goldman Sachs. Jordan, go ahead.

Ed Elkins:

Well, there is no secret. I mean, it's hard work, and it's running an efficient, effective railroad every single day. And that stability lends itself to opportunity, whether it's in asset utilization, crew utilization, fuel efficiency, all of those things. I've made a solid commitment on the path to taking out -- overall our $450 million in the -- to make this happen. And I -- that's a series of small wins, bigger wins. But there -- we've got line of sight to a big pipeline of opportunities that we're just growing through and they'll come at different points. Today is what we would consider an inflection point. And as we move through that, create stability and drive forward, it will always be there. So I would say it's a blend of those things and we're going to drive hard.

Operator:

The next question will come from Walter Spracklin from RBC Capital Markets. Walter, go ahead.

Ed Elkins:

Well, look, here's what I would say. We know that near assuring or onshoring how everyone described that is occurring. There's two kinds of manufacturing that I think is going to come back to North America. Advanced manufacturing, which is high value add and probably is very automated. I think that's going to come back to the U.S. But basic manufacturing is probably going to a place in North America, that is Mexico. So we're talking really every week with Grupo Mexico as well as the CPKC on opportunities. One of those opportunities is connecting Mexico to the Southeast via the Meridian Speedway. That's for sure. There are other opportunities that will emerge in the near future that I think will be very exciting opportunities and products various segments of U.S. manufacturing.

Ed Elkins:

Yes, I would say standby for future developments.

Stephanie Moore:

Hi. Good afternoon. Thank you. I wanted to touch on with just the increased productivity that you're seeing this year, does this kind of load the spring so to speak, going forward for even spring so to speak, going forward for even better OR improvements in the years ahead, 8-K kind of maintaining the guide this year, even the lower revenues. So, if we roll that forward to 2025 and 2026, hopefully, more constructive OR improvements in the, years ahead 8-K kind of maintaining the guide this year even the lower revenues. So if we roll that forward to 2025 and 2026, hopefully, more constructive freight background or a backdrop, does that mean kind of the freight background or a backdrop, does that mean kind of the accelerating OR expansion in the accelerating OR expansion in the years ahead? I'd years ahead? I'd love to get your thoughts. Thanks.

Mark George:

And I think if you see outsized top line opportunities that on the horizon, I think you know in this industry, it usually generates outsized if you see outsized top line opportunities that -- on the horizon, I think you know in this industry, it usually generates outsized through opportunities and through opportunities and maybe end up getting there faster. So thank you very much everyone.

Alan Shaw:

Thanks for your interest in Norfolk Southern. And we look forward to continuing conversations over next couple of months.

Luke Nichols:

Thank you, and 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 discussion of those risks and uncertainties we view as most important.

Alan Shaw:

Good morning, everyone, and thank you for joining Norfolk Southern's First Quarter 2024 Earnings Call. Here with me today are Mark George, our Chief Financial Officer; Ed Elkins, our Chief Marketing Officer; and our new Chief Operating Officer, John Orr. I am excited to have John on the Norfolk Southern team. John is a 40-year railroad industry veteran and a proven PSR expert who has worked with Hunter Harrison, Claude Mongeau and Keith Creel to implement PSR railroads across 3 countries.

John Orr:

Thank you, Ed. I arrived at NS in late March and immediately got to work immersing myself in the operations and connecting with our people. I've had boots on the ground assessing terminals and engaging craft colleagues and frontline supervisors. I've also met with our stakeholders from labor, regulatory and community leadership. What I've seen confirms that NS is a robust franchise with a talented team and the resources to deliver impressive results when properly executed. Our safety performance as shown on Slide 15, has trended favorably. I have observed a strong safety commitment, and we are building on that. My first action as COO was a system safety blitz to provide clarity around the value of safety.

Alan Shaw:

Our strategy is designed to mirror the great success stories of the Canadian railroads who have recognized that PSR is about more than tearing a railroad down to its studs at slashing costs regardless of the fallout. As our Board member, Claude Mongeau, demonstrated when he was CEO of Canadian National, a PSR operating model, when part of a customer-focused balanced strategy, can deliver top-tier revenue growth and a sub-60 operating ratio. John Orr was an integral part of Claude's leadership team at CN and thus, a perfect fit from Norfolk Southern as we turbocharge productivity in pursuit of industry competitive margins and top-tier earnings growth.

Alan Shaw:

Thanks for the question, Brian. Let me be really clear. The agreement related to the Meridian Speedway is by no means a consequential concession, and it does not impact Mexico. We said it impacts the Dallas business, which is largely defined by abundant truck capacity. John, do you want to handle the second part of his one question.

Scott Group:

So Mark, you're guiding 400 to 500 basis points of sequential improvement into Q2. Just help us think about the drivers there? How much volume? How should we think about cost ex fuel? And there's a lot going on with the proxy. So I do want to ask also, Alan. A, what's -- any expectation in terms of timing for ISS and then there is a lot of focus on this Meridian Speedway thing. It looks like there was another a second amendment that you guys filed yesterday. Any color on what that second amendment is?

Operator:

Our next question is from the line of Tom Wadewitz with UBS.

Alan Shaw:

Tom, thanks for the question. Let me be really clear. We we're still focused on that same strategy that we laid out a couple of years ago. And that's that balance between service productivity and growth with safety at its core. And we made a lot of improvements last year in service. We made a safer road even safer, but we weren't delivering the productivity. We weren't running fast enough, and we weren't running efficiently enough.

John Orr:

Yes. And as I've said in my prepared remarks, they're not mutually exclusive. In fact, they're complementary to each other. And my approach is, as I evaluate the network, and restructuring our yard and local plans, what are basically on-ramps to our corridor that touch our service, touch our customers and creating efficiencies, new standards and accelerating through our current dwell times, making improvements year-over-year, but also making improvements on the individual cars and the handoffs on those cars, it drives performance.

Jonathan Chappell:

John, I want to follow up on a couple of things that have been touched on already as it relates to the things that you've done in the last 30 days. The volumes so far this quarter have been relatively strong for Norfolk Southern, on a year-over-year basis, [indiscernible] easy comps. But as you go through the next 6 months and you deal with things like laying off 300 more locomotives or reducing merchandise families by 10%, is there a situation where you don't maybe chase volume recovery as quickly as you would otherwise? Or it's more about getting the network where it needs to be and worrying about volume and I guess, the top line beyond that next 6-month period?

John Orr:

Yes. I think that the most imperative thing we can do is to close the gap on performance, reliability and drive the value of the network. As far as the capacity, we're unlocking capacity in the existing terminals by being more efficient, more effective and driving those on-ramps to the network more effectively. What are in that pipeline? We have ample capacity to grow more trains or grow longer trains to get yield out of that even a single line capacity.

Ed Elkins:

Sure. And you're absolutely right, John. We've seen volume so far this month and we're encouraged by that. Our customers are encouraged by the level of service that we're delivering. And to be clear, in Intermodal, the level of service we're delivering is the best in a generation and it's sustainable and it's going to continue to be that way, and we're earning trust from our customers to do that. We're seeing very good response on the bid front for new volume converting from the highway, which we're very encouraged by in Intermodal.

Operator:

Our next question is from the line of Justin Long with Stephens.

Ed Elkins:

I'll talk about the Intermodal piece first. I think that was your first question. Look, we took a very, very disciplined view of our Intermodal network and did a couple of things. Looked at lanes that were very low density, looked at lanes that were not strategic in terms of their capability for our customers, and then thirdly, looked at lanes where we did not believe that there was going to be long-term growth potential that we have line of sight on.

Ed Elkins:

Absolutely. And the -- as I said, the sales pipeline approach that we're taking has a very disciplined view toward conversion from the high labels in the Merchandise as well as the Intermodal space.

Operator:

Our next question is from the line of Jason Seidl with Cowen.

John Orr:

Yes. Obviously, the sick leave is a national issue. I think no different than any other regulated or introduced crew limitation, we all have to deal with it. What I'm really focused on is crew productivity and yard productivity and increasing the capabilities of each assignment to do more within the time frame they've got to work. And so delivering more, getting accountability to connections, getting yield on our trains, that's the most important piece, and we're balancing that.

Jeffrey Kauffman:

John, just kind of a question on your impression coming in. As you were an outsider, you had a certain view of what Norfolk might not have been able to do. Now you're an insider, you've had a chance to see an operation. I guess my question is twofold. Number one, what's different about when you actually came on board and got a chance to get out there and see what's going on. And then my second aspect of that is, what do you think somebody on the outside might not appreciate about the Norfolk network and what can and can't be done?

Stephanie Benjamin Moore:

I appreciate the color, especially from you, John, on just the detailed plans in place around productivity initiatives and creating a PSR mindset across the organization. With this focus as a clear priority, what has been the customer response just given the changes underway. How does this translate into incremental volumes? Is there a natural lag from customers? Does they kind of get convinced of the changes happening? Any color there would be helpful.

Ed Elkins:

Sure. And thank you, Stephanie, for the question. As I said earlier, our customers are encouraged by a couple of things. Number one, the velocity of change that they see happening in terms of service improvement. And you think about our first quarter, we absorbed double-digit growth in our international book as well as low single-digit growth in our domestic book, held serve on our merchandise freight and improved service throughout that time and into April. So they're encouraged.

John Orr:

And we've had to make hard decisions. Ed and I have had to try to take very decisive decisions on car flows, even on how customers are interacting with some of our service facilities. It is -- but having the work on the front end, engaging with people, helping them understand what we're doing, helping them understand where they fit into that, whether it's union leaders, it's regulatory leaders or our customers, that really, Stephanie, helps them understand what we're doing, why we're doing it and how we're going to work together to create these standards.

Operator:

Our next question is from the line of Jordan Alliger with Goldman Sachs.

John Orr:

Well, I'll tell you this, that all across Canada, the U.S. and Mexico, I've been a change agent and an architect of PSR. I haven't had the luxury of looking in the rearview mirror very often. And so I don't spend a lot of time looking at what could have been or what was rather than what the current situation is and how fast can we get to the desired state. Desired state is having -- closing the gap for sure, having an operation that is focused on asset management with speed and accuracy to reduce the cycle times, reduce the dwell times and drive out waste.

Operator:

Our next question is from the line of Walter Spracklin with RBC Capital.

Alan Shaw:

Walter, that's our strategy. That's what we're committed to doing. We're going to implement and we have been implementing PSR in a responsible and sustainable manner. We saw what happened in our peer in 2017. And we're not tearing this thing down to the studs. John knows how to do it without tearing it down to the studs as the activist COO has said he would have to do.

John Orr:

And I think Walter, by the way, it's nice to hear from you. I would say, it's what we said at the very onset, that we're taking a balanced approach. I've laid out really challenging and urgent near-term and midterm targets and I'm taking an aggressive disciplined approach to manage it. And I view as the George Foreman Grill example, you don't set and forget operations. You sweat it out and you can't drive this alone.

Mark George:

And just to close a loop, Walter, on say the locomotive specifically. Remember last year, we actually had to add locomotives back into service. We spent a fair amount of money in materials, trying to get locomotives that have been stored, back up and running so we could dig out of the top hole we were in following the East Palestine derailment.

Alan Shaw:

And to summarize, the service level improvements, the dramatic service level improvements and what the customers are reacting to, and that is across our markets and across our customer base.

David Vernon:

So John, you've been at the property a little over a month. I'd love to kind of get your perspective on kind of what the root cause is here that you see as far as kind of what drove the problems? Is it a question of kind of what Norfolk was trying to do or how they were doing it? And kind of any thoughts you have on that would be helpful.

Mark George:

Actually, I'll handle the headcount question before John talks to you a little bit about his assessment of the challenges. You may recall, we guided last time where we said overall headcount would likely be flat over the course of the year. We were taking 300 non-agreement people out, but we would likely have to add some agreement folks that would offset it. We actually see now with John in the room here, a pathway for total headcount to be down around 2% by the time we end the year. So that's the path on headcount. John?

Luke Nichols:

Thanks, Rob. Appreciate everyone's time and joining our call this morning. I recognize there's a few folks that didn't get a chance to ask your questions. I want to let you know Investor Relations is here through the rest of the day. Please feel free to reach out to us. We look forward to seeing everybody through the quarter.

Luke Nichols:

Thank you, and 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 the most important. Our presentation slides are available at norfolksouthern.com in the Investors section, along with the reconciliation of any non-GAAP measures used today to comparable GAAP measures. Turning to Slide 3, it's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

Mark George:

Thank you, Alan, and good morning, everyone. I'll start on Slide 7 with an update on our costs related to the Eastern Ohio derailment. During the fourth quarter, we reached a significant milestone with the bulk of the soil remediation being completed. It's an encouraging achievement, however, as you'll note, we incurred $137 million charge in the quarter, which related to an extension the timeline for ongoing testing as well as additional work that will be completed in nearby streams. There was another $89 million incurred in legal costs and other fees. But of note, we received $76 million of insurance recoveries, bringing the total recoveries in 2023 to just over $100 million. From a cash perspective, the net outflow in 2023 was $652 million after the insurance recoveries. While we're pleased with our remediation accomplishments, we currently expect ongoing monitoring efforts and cleanup efforts will continue through 2024. There will be additional costs in the future related to legal settlements and fees, although the amounts and timing cannot currently be estimated. Moving to Slide 8, where we illustrate the impact of these fourth quarter results on our results. Our GAAP results are in the first row, while on row two we isolate the accounting to our Q4 financials related to the incident. At the bottom of the chart, you'll note the comparisons of the adjusted results to prior year. I'll be talking about our adjusted results for the remainder of the discussion. Revenues were down nearly 5%, while adjusted operating expense was 3% higher. The adjusted operating ratio for Q4 2023 was 68.8%, which represented a year-over-year deterioration, but notably was a 30 basis point sequential improvement from our third quarter performance. The sequential improvement is encouraging, but we fell short of our expectations as service-related costs did not come down as we anticipated. While our recovery efforts related to the IT outages in late Q3 restored service quickly for our customers and allowed us to handle more business, it costs more money in the form of crew-related expenses that persisted well into the fourth quarter. On an adjusted basis, operating income was down 19% year-over-year. Net income and EPS were down 19% and 17%, respectively. Turning now to Slide 9, adjusted operating expense for the quarter was up $59 million. The increase excluding fuel decline was up $123 million. The largest drivers of the increase were employment growth as well as inflation across all categories. In comp and ben, looking to '24, we plan to keep overall headcount levels flat versus the year end 2023 exit rate with some additional mechanical craft hiring to be offset by upcoming reductions in the non-agreement category that Alan discussed. Purchased services was up due to higher costs associated with technology spend, as well as increased mechanical services, including repairs around our auto fleet as we prepare for growth opportunities in 2024. The increase in rents was driven by short-term locomotive resources and increased car supply for our auto fleet. We expect quarterly rents in 2024 to remain slightly above these fourth quarter levels due to more adverse TTX equity costs and volumetric-related increases, partially offset by benefits coming from improved velocity. The increase in materials relates to locomotive and freight car repairs. Claims were lower year-over-year. Recall that in Q4 2022, we had a large adverse adjustment. The other component is unfavorable, driven mainly by fewer real estate gains. Moving now to Slide 10. Last quarter, we introduced this slide to help investors think about our service costs and resiliency investments, which are two components of our current cost structure. On the left side, we see costs that should not be part of our cost structure and have grown out of service that has not met planned levels, mainly related to recrews and overtime. These costs did not step down as expected in Q4 due to the crew-related costs we incurred to accelerate service recovery for our customers after the IT outages. So, while service has been at strong levels exiting the year, Q1 costs will remain somewhat elevated in part from the cold weather we are seeing here in January. Overall service costs should meaningfully unwind in Q2. On the right hand, we show costs tied to our investments in resiliency, mainly related to additional T&E crews that we have added in locations where we were understaffed, as we position Norfolk Southern to realize outsized growth in revenue and margin in a growing volume environment. Our total T&E headcount is now on an appropriate level that will allow us to absorb volume growth in '24 and beyond. There will be some additional hiring in mechanical crafts that will be offset by reductions in non-agreement positions. The additional craft hires mean that resiliency costs will settle in roughly in the $55 million per quarter range in 2024. Adding those resources will drive benefits over time of being an even safer and higher velocity operation. Moving to Slide 11 and results below operating income, other income of $38 million was up $4 million in the quarter, driven by higher interest income on the extra cash we are carrying ahead of the CSR closing. The adjusted effective tax rate was 19.2% due to a rate adjustment on our deferred state income taxes and tax-free gains on favorable company-owned life insurance. For 2024, we expect our tax rate to be in the usual 23% to 24% range. Turning to Slide 12 and recapping our full-year results. We started the year planning for modest top-line growth that would afford a level of expense growth to help drive our strategic track toward resiliency. The disruptive events of the year and an adverse macro environment upended this. Revenue declined 5%, which was meaningfully affected by about 6 points of pressure from lower fuel surcharge revenue and a sharp year-over-year decline in storage fees. At the same time, OpEx rose 5%, fueled by inflation and investments in our business. As a result, operating income fell 18%, with the operating ratio rising to 67.4%. Favorable below-the-line items and benefits from share repurchases held the EPS decline to 15%. In 2023, free cash flow was $1.4 billion lower than the prior year, representing the impact of the $650 million derailment-related outlays, as well as the lower operating income, coupled with higher CapEx. Shareholder distributions in '23 were $1.8 billion, with two-thirds being driven by our rock solid dividend and the remainder from share repurchase activity. I'll mention that we did issue debt in November and built up our cash balance to $1.6 billion at year-end, as we prepare to fund the strategic CSR purchase that is scheduled to close on March 15. As a result, we will see higher interest expense in 2024 and we will temporarily suspend share repurchases while we absorb the asset and bring our credit metrics back into our target range. It's important to remember that CSR is a highly strategic critical artery in our network, for which we had a rare window to secure and guarantee control of the asset forever. This also enables us to control longer-term costs that could have begun to escalate sharply with the upcoming lease renewal. I'll now hand over to Paul, who can provide an update on our operations.

Ed Elkins:

Thanks, Paul, and good morning to everybody on the call. Beginning on Slide 21, let's cover our commercial results for the fourth quarter. Overall volume improved 3%, led by growth in intermodal and our automotive markets. Now, despite volume growth, total revenue and revenue per unit declined for the quarter due to lower revenue from fuel surcharge and intermodal storage and fees, along with negative shipment mix within the portfolio continuing from last quarter, as well as headwinds from a weak truck price environment due to the persistent overabundance of capacity. Looking at merchandise, volume was flat compared to the prior period and revenue was challenged by lower revenue from fuel surcharge compared to that prior period. RPU less fuel increased 1% as price gains more than offset the impacts from negative mix. This increase set a new quarterly record for Norfolk Southern and marks the 34 of the last 35 consecutive quarters of year-over-year growth in merchandise RPU less fuel. We're committed to driving value through price, and this commitment is demonstrated through quarterly records set in our automotive market for revenue, revenue less fuel, revenue per unit and revenue per unit less fuel. Let's move to intermodal. Volume in the quarter increased 5% year-over-year with gains in both our domestic and international lines of business. Revenue for intermodal was down 13% year-over-year, primarily driven by significantly lower revenue from storage and fees in the prior period. Also lower fuel prices and an excess supply of available trucks as well as negative mix within our international business impacted revenue per unit negatively. Excluding the impacts of fuel and elevated storage and fees, which are related to supply chain congestion, intermodal RPU declined 1% in the quarter. We're confident our domestic franchise is a coiled spring, positioned to yield strong incremental value as the truck market recovers. Turning to coal. Overall volume increased slightly with strong demand for export more than offsetting declines in our utility coal franchise. The market for utility confronted persistently high stockpiles and low natural gas prices. Coal revenue was down 4% year-over-year with lower commodity prices and lower revenue from fuel surcharge negatively impacting RPU. Now, let's turn to Slide 22 and review results for the full year. Total volume came in at 6.7 million units, a 1% decrease from 2022. Volume declines were most significant in intermodal and our energy-related chemical commodities. On the positive side, lower ocean freight rates, advanced demand for international intermodal and rising vehicle production activity drove growth in our automotive franchise, both of which contributed meaningfully to offsetting larger declines. Revenue for the year was $12.2 billion, down 5%, or $590 million from 2022, driven by lower revenue from fuel surcharge and storage fees, as well as lower volume. I do think it's important to point out, however, that if we exclude the $650 million revenue hit from fuel and storage fees, which is essentially a post-pandemic normalization of those items, underlying revenue was actually positive, even with volume down 1%, which speaks to our commitment to core pricing smart growth. RPU, excluding fuel, intermodal storage and fees, increased 2% as we realized above budget price results in merchandise and in coal. In fact, we set annual records for merchandise revenue, revenue less fuel and RPU less fuel. Objectively, the freight environment in 2023 was soft, with weak demand for goods, lower levels of manufacturing activity, and generally less freight coming in from overseas. These conditions amplified the excess capacity in transportation, pressuring margins and growth opportunities. Our focus throughout the year was creating value with a resilient network to drive growth. In the fourth quarter, we saw that growth materialize with improved volume, and that volume will bolster our revenue performance in the coming year as we execute our pricing strategy to grow core revenue per unit. Let's look ahead to 2024 on Slide 23. Our market outlook is for modest volume growth. In merchandise markets, overall volume growth is expected to be driven by gains in steel shipments. Automotive will grow on continued strength in vehicle production, including new EV business. Improved fluidity and increased network velocity will lift our effective capacity in both of these markets. Shifting to intermodal, we are optimistic that increasing levels of international trade will boost demand for both our domestic and international services. There's still uncertainty around how quickly capacity in the truck market right-sizes. Additionally, the strength of the consumer could pressure growth if the economy softens. Lastly, our coal outlook is for relatively flat volume levels compared to last year. Demand for export coal is forecasted to be high, but some of this demand will be met via a shift of historically domestic coal to export markets. Utility demand will be driven by stockpile levels, which are forecast to remain elevated in 2024, aside from extreme weather events. Looking at price, we expect strong pricing conditions in our merchandise markets, aided by our improved service product. However, as mentioned, a persistently weak truck market will mute the opportunity for intermodal price, with contract truck rates expected to trend roughly sideways from their current levels throughout 2024. We also faced some headwinds on coal pricing this year related to difficult comparisons for seaborne coal prices, with additional pressure from high stockpiles and weak natural gas prices. All said, we still expect to generate pricing above rail inflation in 2024. When we take all this together, we are reasonably confident that overall market fundamentals will create opportunities for us to bring on new freight and further the volume trend we achieved in the fourth quarter of 2023, while delivering incremental top-line revenue growth through core pricing gains, as we price into the value of our enhanced service product. Finally, let's turn to Slide 24. I'd like to give you some examples of how our customer-centric approach is yielding smart and sustainable growth. Last February, our team met with FedEx Ground with the intent to enhance Norfolk Southern service for their transportation network. We listened to their business forecast and made strategic adjustments that we knew would set us up to better serve this valued customer. We charted a better way forward for both of our organizations. As a result, we were able to significantly increase our volume for FedEx Ground during peak season, and we look forward to continuing that growth into the future. We also landed a new plastic recycling plant in Ohio with our new customer Pure Cycle, which is expected to launch this quarter. This is a great example of the circular loop that is possible within the plastic supply chain and how Norfolk Southern can deliver that resin in a carbon-friendly manner. Finally, 2023 was another successful year for the Norfolk Southern Industrial Development team. We partnered with 62 customers to facilitate the completion of strategic industrial development projects in 2023. Collectively, these projects represent $3.1 billion in customer investment and the creation of more than 4,150 new jobs along Norfolk Southern lines. As we look into 2024, we're encouraged by the continued robust pipeline of customers that are looking to locate facilities along our lines. These successes in 2023 are indicative of the success that we expect in '24 and demonstrates our strategy to deliver a better way forward for our customers, our communities and for our shareholders. With that, I'll turn it back over to Alan.

Operator:

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Alan Shaw:

Chris, we've committed to industry-competitive margins. And in '23, we overcame a lot. We made a lot of progress on our strategic plan. We enhanced safety, we improved service, we attracted new business, we overcame challenges. As we look into '24, it's really a focus on productivity, and we feel like we're going to be on that pathway of 100 basis points to 150 basis points a year, particularly as we get into the second half of the year and lap some of these revenue comps. But we gave a three-year outlook, but that's not an endpoint. We have talked about continuous productivity improvement as one of the three components of our balanced strategy of safe service, continuous productivity improvement, and smart growth.

Operator:

Thank you. Our next question comes from the line of Ken Hoexter with Bank of America. Please proceed with your question.

Alan Shaw:

Hey, Ken, with us entering the third year of a freight recession and with the investments that we've made in safety and service that are delivering meaningful results, it's clear that our cost structure is too high for our revenue base entering 2024. And so, we addressed service, we addressed safety, we addressed growth in '23. We did it in a responsible manner to protect our franchise and our shareholders. Now, as we enter 2024, we've got a much more fluid network, much safer network and network that is attracting growth, and it's a focus on productivity. And so, yeah, we're looking at every cost out there. And we're looking at discretionary costs, we're looking at management costs, and we're focused on productivity, because it is a balanced plan. I'll let Ed talk about price.

Ken Hoexter:

Thanks. I appreciate it. And I know one question, but I'm just trying to understand, are you saying then we get better margins in '24? Is that pricing outpacing that cost? Sorry, just trying to understand the answer there.

Ken Hoexter:

Thanks, Mark. Thanks, guys.

Operator:

Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

Alan Shaw:

Yeah, Scott, we had to overcome a lot in '23, And we made investments in a prudent manner to enhance safety, enhance service and attract growth, particularly in our most service-sensitive markets. And so, we're putting -- with respect we're putting proof points up on the Board. As we move through into the fourth quarter, we were still wrestling with a service product that was off plan, which adds complexity, adds variability and adds cost. We're operating in a really tough freight environment and we were dealing with pretty healthy year-over-year inflation, and we're still lapping some difficult comps with respect to the fuel surcharge revenue and with respect to storage revenue, right?

Alan Shaw:

And mix. And so, as we move into '24, those things are going to start to unwind themselves, right? We've got a much more fluid network. We're operating on plan. That will drive out our service recovery costs. And then, after that, we're going to continue to iterate to our plan. That's going to help drive productivity, and we're going to attract new business. And as you noted, our strategy is all about outperforming during an upmarket. I don't see that in the next six months. When the economy does recover, it always does, when the freight market does recover and it always does, we're going to be called for growth.

Mark George:

So, I think as you go into Q1, you're going to have some of the normal seasonality that has an impact on your OR. So, I think you need to expect that the first half, Q1 in particular, is probably going to step back, but then we feel much better as we lap a lot of the headwinds that we've been talking about from this first half, the intermodal storage charges, some of the fuel price and some of the other RPU challenges we're having on coal price, I think as we get to that back half is where you're going to really start to see much stronger incrementals and drop through.

Operator:

Thank you. Our next question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.

Alan Shaw:

What was the first part of your question, Amit?

Alan Shaw:

Well, that's our commitment. Our commitment is industry-competitive margins and top-tier revenue and earnings growth. And we said we were going to do that through an economic cycle. We said we would have difficulty within industry-competitive margins during a trough and the freight market. And candidly, we didn't expect some of the incidents that occurred in 2023, the network disruptions, the Eastern Ohio incident, and a continuation of a very difficult truck market. We invested throughout 2023 for the long term, and in the long-term best interests of Norfolk Southern and our shareholders. And we improved service. We improved safety. Volumes grew in the fourth quarter. Now, we can really narrow our focus, right? We can narrow our focus into productivity, and that's exactly what we're doing. And we're going to drive that by operating to the plan, a high degree of compliance to the plan, that will shed resources, that's going to shed a lot of the service recovery resources that you just referenced. As we get on plan, we'll continue to iterate the plan and look for additional ways to drive out complexity, drive out costs and improve balance.

Alan Shaw:

That's where two-thirds of our operating costs are.

Jon Chappell:

Thank you. I hate to keep on the guidance a bit, but I'm going to move up to the revenue line here. I'm just trying to understand the roughly 3%. I get that there's macro headwinds. I understand the first half may be difficult. But by the same token, you have incredibly easy volume comps, given all the disruption from February until August. And Ed talked about the continuation of the pricing above inflation. So, one would probably expect the volumes to be a little bit better than 3%, just given the comparisons. So, are we saying that all in yield may be down this year? Or is there just like a healthy element of conservatism that you're putting into the macroeconomy in the first half of the year that may be tamping that number down?

Jon Chappell:

Okay. Thank you, Ed.

Tom Wadewitz:

Yeah, good morning. I want to ask you one granular one and then kind of a higher level one. So, I guess on the granular question, for Paul, should we think about with a fairly muted volume backdrop that train starts would come down in '24? Or are you thinking kind of, hey, the schedule is set and we'll keep that where it is? And then, the higher-level question, I think when investors look at Norfolk, they say, okay, there is a potential idiosyncratic opportunity to run the system better. Maybe that runs on its own regardless of freight market. But I don't know that that's clear. So, should we look at it as more of a kind of idio improvement story or is this really a freight market, freight cycle leverage story, right, that it is really -- when the freight market improves, if that second half, if that's '25, then you're just really well positioned for that. So, I think just trying to figure out what's really the right way to look at the Norfolk story. Thank you.

Paul Duncan:

Yeah, absolutely, Tom, thanks for the question. So, we think about it not just as train starts, but overall T&E productivity, it's all about getting the most from our crews. And we're going to see that improve through not only what we've seen here over the past several weeks for improvements in network velocity, but running more discipline to plan and layering down initiatives. We know running more discipline to plan is already starting to show itself in reductions in T&E expense. You've seen it in the productivity measures from the slides. We're going to make further iterations to the plan as we get more disciplined, particularly in our merchandise network. And that's only going to drive improvements in GTMs per horsepower, but also on the T&E side. We've got a number of initiatives beyond just running the plan more disciplined and seeing that cost come out again that we're layering on. We've got pool transitions taking place. So, as we have gotten more fluid and more consistent, we have transitioned more short pool runs to long pool runs, again because we've got greater consistency and velocity in the network that has productivity benefits. We have put more towards assigned service from a T&E standpoint. That means we've got assigned crew pools and turns that reduces hotels, van expenses, has a quality-of-life benefit. We are going to roll out predictable work scheduling this year on our conductors -- or with our conductor, excuse me. More than 80% of our schedule -- our network is scheduled, meaning as we layer in predictable work scheduling, we will see a benefit in reductions in displacement time. We've got a number of board consolidation initiatives that are taking place, and we're driving accountabilities to run lean and two plan inside of our merchandise yard. So that all translates into we're going to see train length on the merchandise side. We've got line of sight on some improvements we can make there. Not only through further iterations of the plan, we've also got some investments planned this year in some of our major merch channels that are going to drive productivity and train length. Intermodal train length went up in Q4 as a direct result of us not only delivering great service, but customers rewarding us with business. And again, we're going to continue to work on that. And from a bulk standpoint, you've heard us talk about the various longer-term initiatives we have with our customers to invest in facilities, particularly in our [indiscernible] network. Several elevators are investing, and we expect to really see the benefits as those investments come to play.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Alan Shaw:

Brian, each franchise has unique strengths. We have committed to top-tier revenue and top-tier earnings growth, coupled with industry-competitive margins. We're going to deliver that. We've got a franchise that faces the fastest growing segments of the U.S. economy and a franchise that's poised for growth. We're entering the third year of a freight recession. That will unwind. And when it does, the enhancements that we've made to safety, the enhancements that we've made to service, the ability to attract business in the fourth quarter, and automotive and intermodal, which are our most service-sensitive markets, right, give us a pathway to success going forward and allow us to unlock our full potential. And Paul and his team and entire executive team are intently focused on driving out cost inefficiencies and driving productivity.

Paul Duncan:

Yeah. The specific around how much is initiatives versus volume adjust, many of those initiatives that I spoke to are going to continue regardless of the volume environment. The iterations to the plan are always going to continue, but that is going to be the lever that is most sensitive to volume. But we're going to continue to drive train life. We're going to continue to drive crew productivity regardless of the volume environment.

Operator:

Thank you. Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Paul Duncan:

Well, let me start off, and I'd love to have Ed jump in here as well. From an intermodal perspective, as we look at where we finished fourth quarter, we delivered the best intermodal service we have put across this railroad in several years, and customers rewarded us with volume as a result. We expect to maintain that level of service based on what we've heard from our customers is their expectation. From a merchandise standpoint, we continue to see improvements in merchandise trip plan compliance throughout the year. To your point around the train makeup rules, we said that we were going to recover after we had moved forward with those, meant to again drive greater safety and resiliency across our network. We feel very confident that we've seen -- merchandise trip line compliance continue to come up throughout the year, and we feel that we're very confident as we look at 2024 based on the further discipline that we are going to build and drive inside of our merchandise network.

Brandon Oglenski:

Thank you.

Justin Long:

Thanks, and good morning. So, for 2024, there are a lot of moving pieces that you've talked about. But when you put it all together, do you think you'll be within that targeted longer-term range of 100 basis points to 150 basis points of annual improvement in the OR? And, Mark, I think you and Alan both mentioned the interest expense headwind you'll have this year. I was wondering if you could help quantify that year-over-year headwind.

Justin Long:

Okay. Thanks.

Operator:

Thank you. Our next question comes from the line of Jason Seidl with TD Cowen. Please proceed with your question.

Alan Shaw:

Ed, what do you hear from customers?

Jason Seidl:

Ed, is there a preference on East Coast versus West Coast in the network?

Alan Shaw:

Frankly, that's one of the benefits of our franchise, right?

Alan Shaw:

We've got the most powerful intermodal franchise in the East, which serves 60% of the consumers. So, no matter whether it comes in the East Coast or West Coast, we're going to handle it.

Jason Seidl:

Appreciate the time, as always, gentlemen.

Ed Elkins:

Thank you, Jason.

Allison Poliniak:

Hi, good morning. So, with the focus on long-term growth, could you maybe talk to the growth investment embedded in CapEx? Is it higher? Is it lower? And then, with that longer-term margin roadmap, is there an offset embedded in that given just sort of the ongoing investment in service that NS is making? Just any thoughts there. Thanks.

Mark George:

Yeah. I mean, the capital guidance actually for '23, I think I mentioned in my prepared remarks, that was going to be largely flat with 2022. And I would say that the mix within that between reinvesting in the business and safety and resilience, it's about the same as what it was in 2022, call it about 60%, 65%, and the growth element to that is the balance, call it, 35%, and that's pretty consistent between the two years, Allison. Second part of your question again, I don't recall.

Alan Shaw:

Well, I know that a faster network is a less expensive network. So, as we invest in service and we invest in resiliency, it translates to fewer recruits, fewer network disruptions, fewer -- less overtime, less equipment rents, improved fuel consumption and fuel efficiency. So yeah, that's the part of our franchise -- or pardon me, of our strategy, right, it's that balance between service, productivity and growth, and they build on each other. Thank you.

Alan Shaw:

Thank you, Allison.

Operator:

Thank you. Our next question comes from the line of Jordan Alliger with Goldman Sachs. Please proceed with your question.

Mark George:

Yeah, Jordan, on the cash side, yeah, we've got the big CSR purchase here in March. We've gone outside of our preferred debt to EBITDA range at the very end of the year, in part because we've had to also fund these Palestine costs. So that will continue to consume some cash as well in 2024, and then we've got the CSR purchase in addition to that. There are no debt redemptions planned this year. So, it's really an issue of operating cash minus CapEx, gets you to free cash flow. And then, in that free cash flow, we've got our CapEx budget, which is flat with last year, as well as the CSR purchase. From there, we don't expect to have remaining cash to do share repurchase. So, as we go into 2025, we should be in a better track with EBITDA growth to start to have a more normal capital allocation cycle like we've experienced in the past.

Mark George:

Yeah. Why don't you repeat the first part?

Mark George:

Yeah. So, Jordan, I think as you look at it, one thing that's going to happen on the cost side is these service costs that I laid out in my chart will come out. They may not come out as great in the first quarter, largely because of what we're doing to mitigate the cold weather, but they're going to come out and they're going to start coming out in the first quarter. And the plan is that most of those will start to release here in the second quarter, if not, it will be completely gone. So that provides us some traction for sure. A lot of the other fluidity and improvements that Paul mentioned will start to really take hold and provide traction, where we actually think our T&E counts may end the year a little bit lower than where they started the year, which means you're taking on more volume and you're actually having perhaps fewer crews, that's embedded productivity right there. And then, of course, we're doing actions on the non-agreement side that will also yield some benefits. So, we feel really good about our back half and our margin profile. I think a little bit stronger revenue, we can absolutely outperform that 150 basis points in the back half -- the 100 basis points to 150 basis points in the back half, and possibly be there for the full year because of it.

Mark George:

Thank you.

Ravi Shanker:

Thanks. Good morning, everyone. Maybe just a high-level question here, maybe going back to some of the previous questions asked and just tying it up. I mean, look, there's obviously a margin gap to your peers and it's kind of easy to point the cost to the reason why. But you guys have been cutting costs for many years and you've taken a lot of resources down and you've done a lot to improve the service product. I think you have the lowest cost per carload of any of your peers. At what point is this not really a cost problem and is more of a revenue problem and that needs the bulk of the resources addressing that rather than trying to take out more cost?

Mark George:

Yeah. Make no mistake, Ravi, this franchise, this network is built to handle a lot more volume, but we have a lot of cost runway ahead of us. And that's what we're focused on right now and we're certainly going to welcome the revenue when it comes. And I think again that's going to drive the high incrementals at that point. Thank you.

David Vernon:

Hi, thanks guys, and thanks for taking the question. So, Mark, on the topic of cost, I think there were some headlines last night about some headcount actions, non-union workforce. Is there a specific cost program in place with a quantifiable number that we can be thinking about in terms of pursuit of sort of the non-operational costs as we kind of await the flywheel starting to spin?

David Vernon:

That's helpful. And maybe just to squeeze one in here on the CSR purchase. Obviously, you're going to be adding depreciation on the rent side. Is there any sort of like net benefit of owning that property versus just renting, or is this just more about avoiding future lease payments?

Operator:

Thank you. Our next question comes from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your question.

Alan Shaw:

[Bascome] (ph), we've given you a roadmap for the next three years on how we're going to narrow the gap with our peers with respect to margin. Our commitment is industry-competitive margins. We've given you an outline of where we're headed based where we see markets. If there's more lift in the freight market, then I fully expect we're going to outperform, because our investments in safety and service and our ability to attract growth in the fastest-growing markets and the most service-sensitive markets are going to yield outsized benefits to Norfolk Southern and our shareholders during an upcycle But we're not calling that yet.

Bascome Majors:

Hey, Mark, you've been candid about the lumpy legal outflows and the insurance inflows on the cash flow front you're going to see from the Eastern Ohio incident and how that's going to be with you for some time here. But as we think about the cost structure, can you talk a little more about the ongoing operating cost increases that came from that and how fully burdened what we saw in the fourth quarter was for that and what may still be ahead? And I'm thinking things like insurance premiums or depreciation or say maintenance or testing contracts, but really anything you can share on the ongoing cost increase and how far along we are in that process would be really helpful. Thank you.

Paul Duncan:

Yeah, I'll just add to -- thanks, Mark. The proof is in the pudding that we saw a 42% reduction in our mainline accident rate this year. So, as Alan described, part of our strategy has been to safely deliver reliable and resilient service, and 2023 was a challenging year for us, but those are the types of things that are going to move the needle in driving towards "We have a safer, more resilient product on the railroad." So yes, there are going to be some of those costs as Mark just outlined very well that remain embedded, with the offset being, we're going to see and deliver a safer product for our customers and through the communities we serve.

Alan Shaw:

Thank you for joining us today.

Luke Nichols:

Thank you. 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 discussion of those risks and uncertainties we view as most important. Our presentation slides are available at nscorp.com in the Investors section, along with a reconciliation of any non-GAAP measures used today to the comparable GAAP measures. Turning to Slide 3; it's now my distinct honour to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

Mark George:

Thank you, Alan, and good morning, everyone. I'll start on Slide 5 with an update on our accruals related to the Eastern Ohio derailment. We are pleased to report that we will be completing soil removal from the derailment site shortly, but expect that there will be ongoing testing efforts to ensure continued safety of the air, soil and water through April of 2024. And as such, we accrued $118 million in Q3 to account for this timeline extension. Additionally, we recorded another $70 million for legal and other costs incurred in the quarter. Of note, we did file our initial claim for reimbursement with our insurers during the third quarter and will continue to file claims as costs accumulate. We did receive notification of our first reimbursement under our policy of $25 million and accordingly recognize this as an offset to the costs incurred in the third quarter. The cash was actually received last week. While we were encouraged by the speed of this initial reimbursement, there are dozens of parties sharing exposure at 10 layers in the insurance tower. So we expect this cost recovery process to be protracted. Also, of the $966 million recorded as expense thus far, just more than half has been paid through September 30. Of the remaining $450 million, I'd expect roughly half to be spent in the fourth quarter and the rest to be spent in 2024. I will remind you that this situation remains fluid and we will continue working through these issues for many quarters to come. We expect that there will be additional costs that have not yet been incurred related to future settlements, fines and penalties, as well as legal fees, and we cannot predict the amounts at this time. Moving to Slide 6, where we illustrate the impact of these third quarter costs on our results; our GAAP results are in the first row, while on row 2, we isolate the accounting to our Q3 financials related to the incident and our response. At the bottom of the chart, you'll note the comparisons of the adjusted financial results to the prior year. I'll be talking about our adjusted results for the remainder of the discussion. Revenues were down 11%, adjusted operating expense was down modestly, the adjusted operating ratio for Q3 was 69.1%, which notably includes 270 basis points of headwind from net fuel price impacts. On an adjusted basis, operating income was down 28%, net income and EPS were down 37% and 35% respectively, but recall last year, we enjoyed a benefit from a state income tax change of $136 million, distorting the year-over-year comparison. Let's turn to Slide 7 for an overview of our operating revenues; and it's a quick look at the drivers of the revenue change from last year in advance of Ed getting into the market details. The biggest driver in the year-over-year revenue decline is the meaningful reduction in fuel surcharge revenue. Volumes were down 2%, which equates to a $74 million revenue decline and we are highlighting here the reduction in intramodal storage revenue of $71 million, as we are now back to more normal levels and will continue to have tough compares through Q1 of 2024. Ed will talk later about the traction we have on pricing as well as mix dynamics in the quarter that collectively inform the positive $27 million of rate mix and other. On Slide 8, let's drill into the operating expenses. Adjusted operating expenses for the quarter were down $19 million, or 1%, on a year-over-year basis. Fuel expense was down $94 million, or 25%, driven mainly by lower fuel prices. Comp and ben was down $20 million, or 3% year-over-year, as higher pay rates and employee levels were offset by a favorable comparison with Q3 last year from the $85 million charge we took related to the retroactive wage accruals. Depreciation expense was up in line with our earlier guidance. Purchase services was up due to higher costs associated with engineering activities on our network, as well as technology spend. The increase in materials and other was up $42 million and driven primarily by an adverse comp on a favorable legal settlement last year, as well as higher consumption of materials for locomotive repairs. Property sales were also lower this quarter. Moving to Slide 9, while we expect costs related to the past service issues to begin unwinding in the third quarter, additional service challenges in the quarter resulted in a delay with only moderate easing. We expect the unwind to accelerate here in the fourth quarter. Now, offsetting these fourth-quarter savings will be an increase in incremental costs related to building resiliency in a couple key areas that will pay dividends in the years ahead. Firstly, there are investments in the continuation of our hiring and locomotives in order to support both future growth and faster recoveries. Second are the investments in our craft workforce, including the quality of life enhancements like paid sick leave. These investments overall should allow for the accommodation of higher volumes that will help cover these costs along with more productivity. And on Slide 10, let's talk to a couple P&L items below operating income. Other income was up $42 million in the quarter, driven by favorable returns from our company-owned life insurance. The adjusted effective tax rate was 22.7% in line with what we normally guide. And turning to free cash flow and shareholder distribution on Slide 11, through the first nine months, free cash flow was $1.1 billion lower than prior year, with half due to derailment-related expenditures and the remainder from a combination of lower core operating results and higher CapEx. Shareholder distributions over the same nine months were $1.4 billion, thanks to our solid dividend and continued share repurchase activity. I will remind that the citizen vote in Cincinnati to approve the proposed $1.6 billion purchase of the CSR asset will take place in November. So we are reserving capital capacity for that potential transaction, which would close in mid-March of 2024. I'll now hand off to Paul to provide an update on our operations.

Ed Elkins:

Thanks Paul and good morning to everybody on the call. Now before we get into the numbers, I want to call out the collaboration between our teams and marketing and operations as we improve service and innovate solutions to deliver value for our shareholders and for our customers. I'll talk about it more as we move along here, but I think it's important to recognize the steady progress that we're seeing deep in these organizations that's starting to pay off. Let's start on Slide 18 and review our results for the third quarter. Norfolk Southern volumes and revenue was down 2% and 11% respectively year-over-year in the third quarter. Revenue declines, outpaced volume due to lower fuel surcharge and intermediate storage revenue compared to the prior period. Within merchandise, weakness in several energy markets was the leading driver of a 3% decline in total volume. Crude oil shipments were challenged by unfavorable fuel price differentials that discouraged crude by rail to East Coast refineries that we serve. Also, low natural gas prices negatively impacted shipments of sand and NGLs. Helping to offset those declines in energy markets was strength in automotive where volume increased 7% year-over-year in the third quarter. Growth was driven by continued strength and demand for finished vehicles as well as high shippable ground counts. Merchandise revenue was down 7% due to lower revenue from fuel surcharge and lower volume. However, revenue per unit excluding fuel set a new record as it improved 3% showing sustained price and mix improvement. This quarter marks 33 quarters out of the last 34 consecutive quarters where we've been able to achieve year-over-year growth in merchandise revenue per unit excluding fuel. Moving on to intermodal, volume was down slightly compared with last year as growth in international intermodal largely offset declines in domestic. On the domestic side, persistently abundant truck capacity and weak freight demand challenged volume. While on the international side, volume improved as customers continued to return freight to IPI service. Intermodal revenue was down 22% as revenue per unit excluding fuel declined 15%. Lower intermodal storage fees represented more than two-thirds of this decline, followed by adverse mix effects from strong international volumes and the impact of persistent competitive pressure in a loose trucking environment. We're also seeing negative mix effects within the international business. First, shippers are returning to lower yielding short haul lanes that shifted to the highway during the pandemic and second, growth in lower yielding empty shipments is also outpacing loaded shipments. Intermodal storage has returned to a normal level and we expect a lap this headwind in the second quarter of next year. Lastly, within coal, volume dropped 9% year-over-year with weak conditions in our utility markets, which more than offset strength in our export markets. Utility coal volume was down roughly 26% from prior year levels driven by high stock piles and low natural gas prices and prolonged customer and producer outages. Export volume increased year-over-year driven by strong Asian demand. Coal revenue declined 8% primarily due to lower volume. Revenue per unit excluding fuel set a new record and revenue per unit also increased as positive mix and stronger than expected seawarm coal pricing and modest liquidated damages more than offset a decline in fuel surcharge revenue. Turning to slide 19, for the fourth quarter, we expect to see slow volume recovery amid uncertain economic conditions. September presented us with some encouraging data that the contraction in manufacturing is slowing and onshoring to the US is on the rise. However, we remain cautious in our optimism as uncertainty surrounding future Fed actions, strike outcomes and geopolitical tension is very pronounced. Although the macro environment is unclear, we are steadfast in our business development initiatives and I'll talk about those in a few minutes. Our merchandised markets have upside potential in the automotive and metals markets. We expect growth in automotive as we continue to work through the backlog of shippable vehicles, improve our cycle times and grow our fleet size. We also still see unmet demand in our metals market, which we should realize as improving service should drive year-over-year growth. Offsetting anticipated growth in the fourth quarter will be sustained, soft conditions in energy markets as the headwinds that pressured crude, NGL and sand volumes in the third quarter are expected to continue through the remainder of the year. Automotive production is a key driver for many of our merchandised markets beyond automotive, so the duration and scope of the ongoing UAW strike is a downside risk to our overall merchandise volumes. Our marketing and operations teams are collaborating to deliver incremental business wins across the portfolio of carload markets that we serve by identifying and solving business challenges for our customers at an accelerating pace. This innovation and collaboration will be a driver of future growth for NS. Intermodal volume is expected to improve year-over-year in the fourth quarter from sustained service recovery and improving market conditions. We're encouraged by the momentum that we're seeing in our domestic market. Our customers are seeing improvements in bid compliance and demand, which has us trending positively in October, but we continue to see a relatively muted peak season which will temper overall volumes. International markets will benefit from strong East Coast import demand and favorable ocean rates driving demand for IPI. We expect the negative mix effects from the shift back to short haul lanes to persist in the fourth quarter, and we continue to experiment and develop new services for our intermodal customers, and I'll talk about that in just a minute. Coal volumes should be stable in the fourth quarter with upside potential in export markets as new production comes online. In addition, recent trends in seaborne coal prices suggest higher prices throughout the remainder of the year due to supply constraints out of Australia as well as continued strong demand out of China and India. Domestic coal shipments should improve sequentially in the fourth quarter on improved service and fewer outages, but headwinds from low natural gas prices will continue to be a limiting factor and while uncertainty in the economy continues to persist, we're confident in our ability to collaborate with our customers to drive incremental volume and to continue providing value in a manner that drives growth in the future. Now before I turn it back to Alan, I would like to expand briefly on how we're providing value in ways that drive growth in an unfavorable market. Slide 20 features key examples of new service offerings we developed this quarter aimed at making Norfolk Southern the preferred option for freight transportation and driving modal conversion. It's important to recognize that collaboration and teamwork invested by both marketing and operations to bring these projects to life. In October, we partnered with CN to expand intermodal service and connect customers in Atlanta and Kansas City with markets on the CN in Canada. We also partnered with Florida East Coast Railway to expand both domestic and international intermodal services in Florida. These new services are designed to give our customers flexibility, expand the reach of the NS intermodal network into key growth markets, and give more ways for our customers to reduce their supply chain greenhouse gas emissions. Early in September, we also announced an investment in DrayNow, a company focused on modernizing technology solutions for intermodal. DrayNow is revolutionizing intermodals' first and final mile journey through an app that provides customers with real-time shipment tracking and document capture of drayage shipments. Norfolk Southern is the operator of the most extensive intermodal network in the Eastern US and together with DrayNow and our best-in-class customers, we will drive more transparency into a fragmented supply chain and increase the ability to best serve our intermodal customers. And lastly, our persistent industrial development efforts paid off as both new and expanded industries turned on additional volume in the third quarter, including a new cement transload, an ethanol terminal, and a container board warehouse, as well as expanded rail operations and an established grain elevator. We'd like to thank our customers for locating on our network and allowing NS to serve their market needs. Together, these diverse projects will generate over 7,800 new car loads annually at full production. We're aggressively pursuing project-oriented growth to enhance the NS network in a fragile freight environment. We're not sitting back and waiting for car loads to come to us, but rather we are proactively making enhancements to our service portfolio to become a preferred service provider for our customers and drive sustainable and smart growth in the future. And concluding on Slide 21, let's look at our 2023 outlook. Based on lower Q3 revenue, which included significantly lower fuel surcharge, we're now expecting 2023 revenue to be down closer to 4% year over year. With that, I'll turn it back over to Alan to bring us home.

Operator:

Thank you. We'll now be conducting a question and answer session. [Operator instructions] And our first question comes from Chris Wetherbee with Citigroup.

Mark George:

Okay, thanks, Chris. Yeah, so if you start first on the service costs, we saw a slight reduction here in the third quarter. We were hoping for a little bit more, but obviously we had some disruptions to the network that delayed that. We do expect the reduction to continue here in the fourth quarter, and eventually this should unwind over the next couple quarters. As fluidity on the network improves, as we qualify more of our T&Es in the right critical locations as well, and we start to build some solid processes around delivering service as opposed to putting the band-aids on, like we are today with overtime, etcetera. So those will start to unwind here in the next couple quarters. The right-hand part of that slide, those are -- I think you need to think about those as structural cost increases. And those are really around developing and building resiliency. That's the whole point. A lot of this is related to the T&E ramp-up that we've seen as well as the investments in our locomotives. There are also costs related to the quality of life improvements that we've announced with our craft workforce and I'd say that of these costs, 75% of those will probably reside in the comp and band line, and then after that you'll see costs sitting in purchase services and also in some materials. But in terms of cadence as we go into Q4, like I said, service costs will start to come down, but that will be offset by another increase there in the structural resiliency costs.by another increase there in the structural resiliency cost. And then I think at that point, we should probably be moderating going forward into '24, but we'll give you more '24 guidance when we reconvene in January.

Mark George:

Yeah. Ultimately, these are going to get paid for by the elimination of those temporary service costs, but also by accommodating more volume than we typically would be able to, as well as, pricing and productivity. So it's exaggerated here because we're in a down cycle.

Mark George:

Yeah, I think we're at a trough. I think we're at a trough right here.

Amit Mehrotra:

Thanks, operator. Hi, guys. Maybe first question, can you just give us the liquidated damages in coal and where we think coal yields can trend from the high 3Q levels? And, Alan, just a bigger picture question, every rail right now has a cyclical challenge. Everybody has a fuel headwind. You guys are still reporting margins that are 600 basis points, 700 basis points worse than your direct competitor and just generally industry. I look at that as an opportunity because obviously with top SPG you've fixed the network, you're improving the service, the volumes are coming. So there's obviously progress made there, but is there an opportunity to look deeper inside the cost structure of the organization to say, listen, we're dealing with all these headwinds just like all our competitors are, but we're still our cost structure is still seemingly very, very high and what's the opportunity there if you're looking at it and how you're going about addressing those differences? Thank you.

Ed Elkins:

Sure. Yeah. I think you asked about LDs in the quarter and I think I said in the prepared remarks, these are episodic. We don't expect them to continue. Its high single digits in terms of millions of dollars and when we look out into the fourth quarter, and again, restating what I said in the prepared remarks, we're forecasting prices to be sideways through the end of the quarter and the year and that's really predicated off the continuation of strong demand out of India and China for next quarter.

Operator:

Our next question is from the line of Ken Hoexter with Bank of America. Please proceed with your question.

Alan Shaw:

Yeah. Well, thank you, Ken. Look, I've been CEO for a year and a half. We've been kinetic here. We've refreshed our operations leadership. We've implemented a new operating plan. We've launched a brand new strategy, something that's never been done in this industry. We've revamped the marketing organization. We brought in a number of outsiders and leadership roles; outsiders to the rail industry, outsiders to Norfolk Southern. I believe we've got the right team going forward. We will continue to look for opportunities to improve our strategic talent base. With respect to the resiliency costs, some of that has to do with predictable work schedules. Some of that has to do with the historic wage increase that the rail industry and labor came to agreement on last year. Some of it has to do with hiring or investing in additional resources and as a result of that, what you're seeing is third quarter service is better year over year and better sequentially. Our safety figures improved in the third quarter and our volume growth right now, our volumes the last four weeks are at levels that we haven't seen in the last, say, second quarter of last year. So we are making progress. We're doing exactly what we said we're going to do. This is the better way forward for Norfolk Southern to drive long-term shareholder value.

Operator:

Our next question is in the line of Scott Group with Wolfe Research.

Alan Shaw:

Mark, you want to address the first one?

Alan Shaw:

And Scott, with respect to industry competitive margins, we are committed to it. We're committed to it over the long term. Now, what we'll see is that as service continues to improve, we'll have greater opportunity to eliminate the service recovery cost. We'll have greater opportunity to drive productivity throughout our organization as we standardize our operating practices. We'll have greater opportunity to generate more volume. We'll have greater opportunity to generate more price, reflecting the value of the product that we sell and all of those things will contribute to improvements in our margins and industry competitive margins and I think we're going to see improvement in that next year.

Operator:

Our next question is from the line of Tom Wadewitz with UBS. Please proceed with your question.

Alan Shaw:

Yeah, Tom, to be clear, this is a balanced approach. It's not just about revenue growth. We will continue to drive productivity into our organization. I'm committed to that. Our improved service product is going to help us with productivity. Our improved service product is going to help us attract more volume. Our improved service product is going to help us price to the value of our product. So there's a lot of value in there as we continue to invest in network resiliency long term. Ed, why don't you talk about what you're seeing in the market itself?

Operator:

Our next question is in the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Alan Shaw:

Well, let me try to answer both of those. First one, I think you were asking about some of the known headwinds that we had coming in the second half and if they're intact. And I would say yes. We've seen the storage revenue really normalized to pre-pandemic levels and that's persisted and it's been very consistent throughout most of the year. We all know what fuel's doing. On that storage piece, we expect to lap that probably second quarter of next year and so that's going to be a headwind until then. Coal pricing is a surprise to the upside and we'll see where it goes from here. So that's sort of the known pieces of this. On the core pricing side, I think it's probably worth reviewing, what our strategy is and that's, number one, we're always compelled to deliver a competitive price in the marketplace that our customers can recognize value in, but we define that by long-term contract pricing, not by what's going on in the spot markets. That recipe over time has generated above-rail inflation pricing for many, many quarters now. We're confident that it will in the future. Okay, it's a very unusual truck market right now. We know that. But on our merchandise business in particular, we recognize our mid-single-digit pricing in this quarter and again, we're positive for price here today.

Justin Long:

Thanks and good morning. Last quarter, you talked about $175 million to $200 million of lost revenue from the operational disruptions associated with East Palestine. Any updated thoughts on the timing of when this revenue can be recovered? I'm curious if that's something that could be driving some of the improvement in volumes and then on the two tech outages, any way you can quantify the impact you've seen from those thus far?

Ed Elkins:

Sure. As service improves, and it is improving both sequentially and year-over-year. Our customers are very encouraged by that, and they're telling us that. That improvement in service is going to bring freight back to Norfolk Southern. We know our customers are very sophisticated supply chain managers and purchasers and when we're not on plan, they have to make other plans to keep their factories running. Some of our customers are going to see that value faster and as we cycle equipment faster, they're immediately going to be able to load more revenue onto Norfolk Southern. I think of markets like metals, like automotive, even though there is a strike right now, I think of that in the construction market and the aggregates market and some of the more flexible freight markets, we have to demonstrate persistent value in the form of reliable, sustainable service over a longer period of time, but we're making sure that our customers are well aware of our progress.

Operator:

Our next question is from the line of Jonathan Chappell with Evercore ISI. Please proceed with your question.

Alan Shaw:

I'm going to try to be very tight with this answer. Number one, we're really glad to see a peak season happen this year, and we're encouraged by that. Our services allow us to deliver that. This network is built for a lot more freight than we're handling right now and as our customers recognize and are able to deliver that value to their customers, we're going to be able to handle a lot more freight. I'm confident in that. The fact is, and this is the last thing I'll say on it, economic uncertainty and geopolitical uncertainty are very high right now and I think we see that in the headlines every single day and it's just something that we have to keep in mind. That's probably why some of those lights are colored the way they are right now.

Allison Poliniak:

Hi, good morning. I just want to go back to Intermodal and I would say the share recapture there. I know you talked about service and you talked about sort of that time to sort of regain that confidence. Is that something you're starting to see now or hear now from your customers where we could see that start to accelerate in the next few months despite what's going on in the overall macro Intermodal market? Just any thoughts there on your opportunities set for that?

Operator:

Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Alan Shaw:

Yeah, that's been an ongoing effort by Paul and his team to standardize the operating practices within our terminals, which allows us to drive further productivity and further capacity improvements and further service improvements. And that's just part of, you know, the PSR principles.

Jordan Alliger:

Yeah, hi. Just a follow-up, with Velocity and Dwell recovering so well of late, is there a way to assess, how much of that comes from the better operations, the changes you've made there versus adding the headcount to get it closer to where you need to be? And do we think about headcount sort of flatlining from here on out, roughly? Thanks.

Mark George:

Yeah, the headcount certainly helps. We've augmented in a lot of our critical locations, the staffing in order to improve our fluidity there. So that's a big driver. We've invested money in locomotives, so we have more locomotives available as well. And frankly, Paul, why don't you talk a little bit about the process changes that we're making in the terminals, which really are sticky and fundamental drivers for running a scheduled railroad?

Alan Shaw:

Jordan, you asked about where headcount's going. Let me just put a fine point on that. I do think that our conductor training pipeline really starts to taper down here in the fourth quarter, and I'd expect that we'd probably end the year just under 600. We have enough qualified T&E here probably in the fourth quarter to start capturing meaningful growth that might be on the horizon. And it's really about balancing where those T&E are amongst our hiring locations and we want to make sure that we're not just adequately staffed, but we're at resilient levels in those critical locations. But probably, I would say the other area of headcount, we're going to need some more supervisors now as you add a lot more T&E. So that's probably the remaining pickup you'll see in some of the resilience investments that we're making in the fourth quarter is really around the area of field supervision. But in terms of overall T&E, I think we're cresting here. And now we'll be able to handle more volume and start driving productivity to also take another step up in volume absorption. So that's kind of the roadmap on T&E.

Jason Seidl:

Thank you, operator. Alan and team, good morning. Wanted to follow up a little bit on the automotive side. You guys mentioned that there's a backlog of finished vehicles that you could move. Can you give us a sense of how many weeks you think that backlog is for you guys just in case the UAW strike drags on longer than most people would want? And then you made a comment about near shoring and how that is looking really good for you potentially down the road. Do you have any numbers from your industrial development projects? If you can compare in the prior years, that'd be great. Thank you.

Jason Seidl:

Well, I certainly hope so. You mentioned 600 projects. How does that compare to, say, pre-pandemic?

Operator:

Our next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Alan Shaw:

Thanks for the question. On the international side, we saw those lanes suffer the most during the pandemic, where steamship lines were basically moving port to port and then allowing customers to pick it up there. That naturally is the part that has reverted back the most and I would say it's naturally reverted back the most strongly because of the capability that we have in some of those markets, like from Savannah into the Southeast, like from Charleston into the Southeast, like from Norfolk into the Midwest, and even from the Port of New York into the hinterland markets. We have a really good portfolio of intermodal services and I'll remind you that over 100 million Americans wake up every morning within 50 miles of one of our intermodal terminals. That is a compelling strength that we think is going to allow us to succeed both on the international end and the domestic side.

Operator:

Next question is from the line of Bascome Majors with Susquehanna. Please proceed with your question.

Alan Shaw:

Okay, Bascome. Thank you very much for that, for the question. We're certainly pleased that we're winding down the site remediation work, which obviously has been costly, as you've seen from my chart and the impact there, but I do think we've got issues that we're going to be working through for several quarters to come and it's really impossible right now, Bascome, to predict the amounts or the timing and, there could be a lot more developments that lead to additional costs, and in particular with regard to litigation matters, fines, penalties, legal fees and these could end up being material, but at the same time, we do have insurance recoveries that have started. We actually got our first cash recovery, that $25 million I cited, that we recorded in the quarter. We actually got the cash last week for that, so that's good. But I don't think that you should expect to see significant, meaningful cash recoveries from insurance in the near term. I think these things are really going to become protracted, but so it's hard to even match the timeline of those inflows with what potential future outflows might be. I think with regard to insurance in general, I think, just bear in mind, it would be reasonable to expect significant premium increases going forward as a result of an incident of this size. So hopefully that's helpful, Bascome. Thank you.

Ben Nolan:

Yeah, hi. I appreciate it. I wanted to go back to some of the development that you're seeing from some of your customers, and specifically, it's sort of a little bit of a mixed signal. It sounds like there's a lot of people moving forward, but then the lights are not all green. I guess I was curious, have you seen any, as a function of higher interest rates or ambiguity in the market or whatever, any of those projects that make up that $600 on your book here, have any of those shifted to the right, or is there any reason to think that maybe those aren't all full steam ahead?

Operator:

Our final question is from the line of David Vernon with Bernstein. Please proceed with your question.

Alan Shaw:

Yeah, look, I think we've had a challenging mixed environment here the past couple quarters that have been consuming a lot of the positive pricing, core pricing that Ed and his team have been capturing. At some point, that mixed headwind will reverse, it usually does. But as we think sequentially going into Q4, we're going to have some of the structural headwinds for sure, but that should be offset by the temporary costs related to the service. So I think we're kind of neutral there. And then we're not going to have the same type of fuel headwinds that we had in the third quarter. In fact, I don't think, I think it could be probably flat neutral, maybe slightly, slightly positive. So really, we're talking about volume dropping through. We have seen a nice uptick sequentially in volume, and that should drop through with those normal incrementals of call it 60% or plus. So that's the way I think about Q4 and then longer term, things should play out that way. In any given quarter, obviously, mix is playing a role and hopefully, it's not adverse going into 2024, the way it's been here these past couple few quarters.

Alan Shaw:

We certainly appreciate your participation and your questions this morning. Thanks for joining.

Luke Nichols:

Thank you, and 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 discussion of those risks and uncertainties we view as most important. Our presentation slides are available at nscorp.com in the Investors section, along with a reconciliation of any non-GAAP measures used today to the comparable GAAP measures. Turning to Slide 3. It's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

Mark George:

Thank you, Alan, and good morning to everyone. Before we get into the operating results for the quarter, Slide 6 illustrates the financial impact from the Eastern Ohio derailment. There was another $416 million of costs recorded in Q2, primarily driven by environmental cleanup activities. Our estimates reflect the significant progress we've made remediating the site and the continued efforts we expect to undertake related to further restoration efforts. While our estimates reflect our expectation that activity at the site will meaningfully moderate in the fourth quarter, any changes in the nature, extent and duration of the remaining cleanup activities and government oversight activities may impact our current estimate. Additionally, developments with respect to the healthcare fund, which we are creating for affected residents as well as the potential fines, penalties or settlements and ongoing legal expenses will all likely impact our costs in future quarters. Of the $803 million recorded so far this year, only $287 million of the cash has been paid through June 30. We currently expect about half of our accrued balance to be paid over the remainder of the year with the rest in 2024 or later. Our 2023 results do not reflect potential recoveries from third parties or under our insurance coverage. Importantly, you will see in the quarter that we have started the process of pursuing recovery from third parties, a process we will continue to explore where appropriate in connection with our other lawsuits. As for our insurance coverage, we expect to begin filing insurance claims here in the third quarter. This will be the first of many claims that will be made over the coming quarters. To remind everyone, we can only make claims upon payments being made not based on accruals. As you can imagine, insurance reimbursements and third-party recoveries will take time to materialize. Turning to Slide 7. Here, we illustrate the accounting impacts of the incident and response on our key metrics for Q2. At the bottom, you see the adjusted results excluding those impacts. Revenues were down 8% to last year, while adjusted operating expense was flattish. It's important to understand that the incident meaningfully harmed revenues in the quarter because of the resulting service disruption, but that impact is not adjusted from our GAAP figures and mitigating those service impacts cost us money to fix and those costs are also not accounted for in the $416 million operating expense adjustment. Consequently, the adjusted operating ratio was 66.7%. Had we been able to move a couple of hundred million more of revenue with our Q2 cost structure, our margins would have been much stronger. On an adjusted basis, operating income was down 22%, net Income was down 18%, and EPS was down 14%. Moving to Slide 8. Adjusted operating expenses for the quarter were up slightly on a year-over-year basis. Compensation and benefits were up $79 million or 13% in the quarter due to wage inflation and ongoing hiring to primarily shore up the remaining challenged locations on our network and in support of our strategic plan to build long-term network resiliency. Materials and other expenses in the quarter were up $33 million or 19% driven primarily by a continuation of the locomotive related work we discussed during the first quarter call, bringing part of the stored fleet back into service to successfully accelerate the network, which you will hear more about from Paul. Additionally, in other, the quarter was impacted by lower gains on the sale of property. Purchased services and rents were up $25 million or 5% this quarter as the challenge network created more headwinds to the category in addition to our continued investments in technology. Depreciation was up $17 million in the quarter, in line with our guidance. Mitigating these increases were fuel expenses which were down $145 million or 36% in the quarter. Turning to Slide 9. Let's look at the adjusted P&L results below the line. Partially mitigating the $279 million reduction in adjusted operating income was a $71 million increase in other income, driven by favorable investment returns and compares from company-owned life insurance. Net income and EPS were down 18% and 14%, respectively, in the quarter. Moving to free cash flow and shareholder returns on Slide 10. Through the first six months, free cash flow was lower by $276 million due to combined pressure from the derailment-related expenditures as well as investments in roadway and equipment. Shareholder distributions during the first half were $918 million, thanks to our solid dividend and share repurchase activity. I'll now turn it over to Paul for a discussion on our operations.

Ed Elkins:

Thanks, Paul, and good morning to everybody on the call. Beginning on Slide 19, I'll review our commercial results for the quarter. Now as we expected, the second quarter came with challenges related to ongoing soft freight demand, lower commodity prices and still recovering service levels. In total, we generated just under $3 billion in revenue for the quarter, down 8% from the second quarter of last year and that's driven by a 6% drop in volume and lower revenue from fuel and accessorials. ARPU was also down year-over-year. However, revenue per unit less fuel improved 1% reflecting gains in price and favorable mix, and that's driven by tempered demand for intermodal and utility coal. I'd like to note here that underneath this favorable overall mix narrative, there was significant negative mix within markets that tempered overall revenue per unit performance, which I'll note below. Now merchandise results were varied as favorable conditions in the markets for automotive and agriculture products were offset by headwinds in chemicals markets. And that's a good example of the challenging RPU mix within markets that I just mentioned. Automotive volumes were driven by robust finished vehicle production and agriculture shipments were strong due to new lane offerings and a weak local crop in the Southeast. Offsetting this growth was weakness in several of our chemical commodities as well as challenges to meet customer demand in key markets such as metals, aggregates and finished vehicles. Taken together, total merchandise volume and revenue for the second quarter came in 1% below prior year levels. Revenue per unit was flat year-over-year, but RPU less fuel grew 2%, which makes 32 out of the last 33 quarters that we've achieved growth in this metric. And I think that is a clear signal that our diverse portfolio and strong pricing discipline are delivering results. Turning to Intermodal. Continued market headwinds were felt the strongest in our domestic lines of business where volumes declined 14% year-over-year as weak freight demand, high inventories and excess truck capacity weighed on performance. Conversely, in a continuation of the first quarter trend, international volumes increased 1% year-over-year and 5.8% sequentially over last quarter. As we guided to before, our customers have continued to shift highway freight back into IPI services and storage charges have declined as supply chain fluidity and container dwell have returned to pre-pandemic normalcy. As you would expect with this performance, Intermodal is another segment where ARPU mix with end markets was challenging for us. Both RPU and RPU less fuel were down significantly due to lower revenue from fuel surcharge and storage charges. Lastly, coal volume was flat year-over-year, but coal revenue fell 4% as RPU declined. Utility volumes were down 17% year-over-year due to historically low natural gas prices and elevated stockpiles. These declines were offset by gains in export shipments as a result of increased production and robust overseas demand. Although export volumes increased, the mix between export steam and export metallurgical coal shifted unfavorably and comparatively lower seaborne coal prices yielded lower revenue per unit. Again, a key segment where ARPU mix within markets was a headwind. With that, let's turn to Slide 20 and review our outlook for the remainder of 2023. Overall, we're confident that our service product positions us to realize growth when market conditions improve. And as the year progresses, we are focused on pursuing the opportunities in markets that have the highest potential for growth for Norfolk Southern. We expect to increase our share in these markets as an improving service product and a sharply focused organization allows us to realize more of the ongoing demand for our services. Beginning with merchandise markets, conditions vary by individual market, and we see strong levels of nonresidential construction as reshoring and infrastructure projects increase which will drive strength in metals and construction volume. Pent-up demand for U.S. light vehicles will continue to support metals and automotive volumes. However, we expect continued weakness in our chemicals markets in the second half. Turning to Intermodal. We expect international volumes to continue its growth trend with an expected rebound in import volumes and the continued share growth of IPI. Storage charges will continue to be a revenue and RPU headwind compared to last year. On the domestic side, overall growth will be dependent on the U.S. consumer, retail inventory levels and the truck market. We worked really hard with our best-in-class channel partners to sustain our service levels throughout the quarter during the crucial climax of bid season, and we're hearing from our key partners that our strategy is helping them increase their share of bid wins. We look forward to leveraging our capacity to realize this growth as market conditions improve. And finally, within our coal markets, we expect overall volume growth as continued strength in export markets more than offset weakness in utility coal. Coal production levels at NS-served mines will drive growth in export shipments, although we do expect lower seaborne coal prices to negatively impact RPU. The utility outlook is largely dependent on the weather, on existing stockpiles and natural gas prices. The net result is we expect total coal RPU to sequentially decline by a low double-digit percentage. Despite uncertainty across the economy, our focus on service, productivity and growth remains at the core of our strategy, and we're confident in our ability to grow our franchise and deliver value for our customers. On that note, I'd like to draw your attention to Slide 21, which highlights the strength of Norfolk Southern's network and our ability to drive growth both now and in the future. The ecosystem for electric vehicles has been steadily developing in recent years as demonstrated by last quarter's announcement of the new Scout Motors plant on Norfolk Southern. We are focused on all facets of this emerging EV supply chain, including the EV battery and battery components. Over the last 18 months, more than $70 billion in new investment has been announced for building out EV battery manufacturing plants across North America. Our commercial team has worked to help locate nearly 1/3 of that investment on our network, including most recently in the second quarter, a new $3 billion General Motors and Samsung battery manufacturing plant in Indiana, on a Norfolk Southern main line. Norfolk Southern's network is well positioned for future industrial development. We reached 60% of the U.S. population and cover 50% of our manufacturing base. We look forward to amplifying that strength through continued industrial development wins. Year-to-date, our industrial development team has reported $2.6 billion in industry investment that's been completed along Norfolk Southern lines, bringing 3,200 new jobs to the local communities that we serve. We continue to invest in site readiness for our highest potential industrial sites, and we're confident our diverse portfolio of shovel-ready sites combined with the strength of our network, we'll continue to land new opportunities across our network. With that, I'll turn it back over to Alan to bring us home.

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Alan Shaw:

Brendon, we remade our train makeup and starting in March. And we guided to the fact that we would expect service to improve as we moved out of the second quarter and into the third quarter coupled with the fact that we're going to get the second track back in East Palestine that's absolutely what we delivered. Our service is on the trajectory that we had guided to. And what we're seeing as a result over the last couple of weeks is real strength in our volume sequentially and also relative to the rest of the industry. With respect to our updated operating plan and train makeup rules, it gives us an opportunity to create more capacity as we've increased the utilization of distributed power which helps our cost structure, helps our service product and helps our capacity for growth.

Ken Hoexter:

Just before I get to the question, two clarifications, Mark. You said 1% ARPU gain ex-fuel on mix and price. So if mix was positive, are you saying pricing is less than 1%? Or are you saying intra-category mix hides the pricing gain. And then second, you mentioned the real estate gain. Did you mention what it was in the quarter? And then my question is on carload growth. Alan, you mentioned accelerating growth in the second half of the year. Peers are talking about RTMs or industrial production being down slightly. I just want to understand how you're targeting that acceleration in the second half, maybe detail that a little more.

Alan Shaw:

Yes. Ken. And with respect to volumes moving forward, clearly, our volumes were pressured in the second quarter and in the last two months of the first quarter because of the service degradation. That's why it was really important for us to hit the service targets and the service recovery trajectory that we had committed to publicly and with our customers. We've done that. And as a result, our equipment is turning faster and customers are talking to us about incorporating Norfolk Southern into their long-term supply chain solutions. Ed, do you want to give a little bit more color on that?

Operator:

Thank you. Our next question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.

Alan Shaw:

Ed, you want to take the first question?

Alan Shaw:

You've also seen us take share from truck in the international market.

Mark George:

Amit, let me go through a little bit of the first half, second half dynamic because there are some changes here for sure. We do expect some modestly higher volumes from the better service product we have here in the back half. So that's definitely going into the tailwind category. We will start to see a partial wind down of the service costs here in the second half as well. And fuel expense is going to be less of a headwind than it was in the first half. But we got some sizable headwinds here in the back half, principally on the ARPU side. The fuel surcharge really starts to diminish here and the lag benefit disappears on us. So this fuel will be a real negative in the back half, certainly to margins. And as Ed mentioned, intermodal storage is basically back at pre-pandemic levels now, which means we're going to continue to have quarter-over-quarter headwinds until we lap this probably in the second quarter of next year. And then, of course, if the futures hold, we're going to have international seaborne coal pricing headwind as well in the RPU side. So that's pretty much the headwind and tailwind equation. So if the volumes come in, like we think a little bit of back half tailwind, we should get some OR improvement from here and the more the better because we got a lot of capacity on the railroad right now.

Scott Group:

So Mark, you're saying hopefully, some OR, just you're saying, hopefully, some OR improvement from Q2 into the back half of the year?

Alan Shaw:

Look, we were really clear in May that OR would be really pressured in the second quarter because we're going to have three months of service disruption as we've delivered on our commitment to improve service throughout the quarter and moving into third quarter. That creates more opportunity for volume and it creates a better cost structure for us. We will still have those headwinds that Mark called out, particularly with respect to fuel surcharge and comps on...

Alan Shaw:

On coal pricing but the underlying product and our ability to onboard volume at strong incrementals is improving.

Ed Elkins:

This is Ed. When we look at the second half of the year, on the RPU front, reduced storage and fuel surcharge revenues are going to persist. We've talked about that. I talked about that in our prepared remarks. Collectively, those current projections for us fuel storage and coal pricing is roughly $650 million.

Ed Elkins:

That's right.

Scott Group:

650 in what period?

Scott Group:

Okay. That's revenue.

Chris Wetherbee:

So maybe a little bit on hedge here. I guess I'm curious, how do we think about -- you talked about the pipeline of string new rolling kind of moderating in the back half of the year? So how do we think about actual employee levels in the back half of the year, maybe 3Q, 4Q? And then, Mark, in the past, you talked a little bit about OpEx and maybe putting the profit aside, I know obviously, there's RPU headwinds on the revenue piece. Is OpEx kind of flattish from where you were in the second quarter? Or is there an ability to actually improve on that given the network kind of reopening and getting some of that productivity back into the model?

Paul Duncan:

Yes. Thanks, Alan. So as you saw on the -- hunting chart on the stats, we continue to make progress on staffing. And really, at this point, we plan to reduce the CT pipeline to around 600 or less as we continue to focus on attrition and filling in some of those remaining locations. But at this point, with what we've been able to do from a hiring standpoint, we have further leveraged and gained velocity across the network and facilitate having those folks that are at healthy locations send to some of those hotspots. And again, that is a contributor to the velocity improvements and the service improvements that we've seen here over the past several weeks that we expect to continue through the latter half of the year.

Paul Duncan:

Correct. Correct.

Chris Wetherbee:

Okay. And average heads are up a little bit in the back half of the year, I think is what I heard.

Chris Wetherbee:

Average head count is going to be up a little bit sequentially in the back half of the year.

Operator:

Thank you. Ladies and gentlemen, please limit yourself to one question so we allow as many as possible to join us. Thank you. Our next question comes from the line of Jon Chappell with Evercore ISI. Please proceed with your question.

Mark George:

Yes. So, the way we look at it, and we've done some analysis here with Ed and his team, we think we left about $175 million to $200 million of revenue behind because of the service disruptions and the shutdown of the line there in East Palestine. So, that's kind of on the revenue side. And on the cost side, we were dealing with growing a lot of costs and trying to accelerate the network, and we've done that successfully. So, now we're going to probably use the next six months to really work those costs off and get back to more productive levels of service. So, I think you'll see that those costs will wind down here in the third quarter. And I think by the fourth quarter, most of those costs will be removed from our system. So, we talk about probably $40 million to $45 million here in the second quarter of kind of poor service related costs, and that will start to unwind here.

Brian Ossenbeck:

Maybe just go back to the average comp per employee. And Mark, you were talking about the 4% increase for the craft employees. Can you just give us a sense of what that looks like on an all-in basis because you've got over time, you've got mix, you got trainees in there. What does it look like in the back half of this year and how does that carry forward into next year? And then beyond that point, can you just talk more broadly about the cost for paid sick leave, what role changes and how we should think about those, including any potential offsets and when you might see them?

Brian Ossenbeck:

The work rule changes...

Operator:

Thank you. Our next question comes from the line of Jordan Alliger with Goldman Sachs. Please proceed with your question.

Mark George:

Well, I'll jump in and just say that you go back to our financial framework, our goal, the one we launched back in December, kind of -- we're aiming for mid-single-digit revenue growth on average in most years. And that would imply a few points at least of volume and a couple of points of pricing. So we think that, that is the right equation for us where we can then leverage it and drive productivity so that we have op income growth that's greater than the revenue growth. So, that's pretty much the model. And I would expect in '24 that to play out.

Ravi Shanker:

Now that you've had a little more time to digest the aftermath of the accident, do you have a better sense of when we might know the final kind of financial impact here? Kind of is that 3Q event, is a 2024 event? Is it going to take several years? How does that play out?

Mark George:

Sure. I mean, this is going to take a little bit more time. The way to look at this, Ravi, is as we've entered Q2, we've got a lot more visibility now than we did in Q1. And our current estimates assume that the cleanup activity continues into October and then kind of moderates meaningfully during the fourth quarter. Future periods are going to be impacted by ongoing legal costs and may be impacted by other items as well such as fines and penalties, which are currently unknown. And frankly, we can't estimate. So what I would encourage is that maybe you look at the 10-Q disclosures later today related to the matter, we kind of go into a fair amount of detail of the types of things that could continue to impact us in the future. And we'll continue to monitor this and keep you all apprised as things change. But right now, the largest part of what we're accruing for has really been the environmental cleanup costs. And the visibility now is we think as we get into October, things really start to wind down, and that's the basis of these estimates. Now I'll take a moment and just say, we've started the process, like I said in my prepared remarks of seeking recovery from third parties, and we are going to start here in the third quarter, making claims against our insurance -- making claims against our insurance policies. So that's going to take some time to play out. And we're probably talking quarters, not months.

Justin Long:

We had another Class 1 rail yesterday come out and announced that they're pausing buyback activity for the second half. So I wanted to get your thoughts around buybacks as we move into the next couple of quarters? And any update on the timing of the Cincinnati Southern acquisition closing and how that deal will be funded?

Operator:

Thank you. Our next question comes from the line of Jeff Kauffman with Vertical Research Partners. Please proceed with your question.

Alan Shaw:

Ed, why don't you address that?

Alan Shaw:

And it's all part of our long-term strategy to drive service, productivity and growth.

Alan Shaw:

Yes. And we're willing to take a lead role in the industry on that.

Operator:

Thank you. Our next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.

Mark George:

The single biggest lever we've got right now is to absorb volume growth into our current cost structure. So, that is really going to provide a bit of peel out from where we are today. And then I think at the same time, Paul and his team, in particular, are working hard on productivity initiatives because we've dug service out of the hole we were in, maybe not in the most productive way. We've been growing a lot of costs and resources to accelerate the network. So now there's a lot of opportunity to take the costs out and start driving productivity again. And that's what Paul and his team are heavily focused on. We're not going to give an OR projection here or the pace at which we're going to improve. There are a lot of levers. And you touched on most of them. RPU being a big piece. We'll see what happens here with coal pricing in the future. That's been a driver. The same thing with fuel. That's going to be -- it's been very supportive fuel to our OR in the first half, and it's going to be equally negative now here in the back half. So that dynamic could change going forward. So we're not in a position to project where the OR goes in the next 12 or 18 months. But I will tell you, we are coiled up with the investments we've made to start driving improvements by taking on volume. We are reading employees to take on volume.

Mark George:

Yes. I mean we laid them out. There are some revenue RPU type of headwinds, but we do think that there is volume out there for the taking. And as long as we don't go into an economic downturn, which is we're feeling a little bit better about lately, we think there's some share recapture opportunity that's out there and other areas where we can take the volume on. But yes, we're going to have short-term headwinds.

Operator:

Thank you. Our next question comes from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

Ed Elkins:

I appreciate the question. I'm not sure, I think, in terms of algorithms for that stuff. The value of the product that we're delivering varies by the size of the project. And it could be months to manifest volume. It could be years depending on the size of the project. We're encouraged by the EV battery facilities that have located along our lines. But let me be also clear, we're encouraged by EV battery production or facilities that are not on our lines because being the largest producer we serve more auto plants than any other railroad. We're going to benefit from that off-line production as well. So I don't -- I think when we think through it, it is a multi-year manifestation of volume over time.

Operator:

Thank you. Our next question comes from the line of Jason Seidl with TD Cowen. Please proceed with your question.

Mark George:

Jason, other income, remember, a big driver of other income is the Company owned -- the returns on company-owned life insurance investments. And here in the first half, we had some pretty good compares because last year, in Q1, Q2, we had losses on those company-owned life insurance policies. So now, we've swung to returns again, which is historically long term, been the more normal. And so the $64 million or so in Q2, which is year-over-year compare on company-owned life insurance will probably not be as big in the back half. So, I'd get back to more back half numbers like you've seen historically in that $20 million to $30 million a quarter range.

Operator:

Thank you. Our next question comes from the line of Bascome Majors with Susquehanna International Group. Please proceed with your question.

Mark George:

Yes, Bascom, it's really because of the timing with EP and the uncertainties around. I had mentioned that the accrued balance that sits there today, $287 million of cash has gone out. We've got over $800 million that we had accrued for. So the remaining $500-or-so million, half of that is going to come out in the back half of this year, the other half probably next year, some may slip into 2025 even. Beyond that, we have no visibility to the timing on recoveries. It's unlikely that we'll see any recoveries actually here in 2023. It's a matter of when in 2024, they start to come in. And we'll get back to, again, the insurance process where you can't really ask for insurance coverage on costs you've incurred until you actually incur the expense, meaning the cash goes out. So we're only just now starting to make those claims. So it is going to take several quarters probably before you go through the process and get the free cash flow benefit on the proceeds.

Mark George:

I don't want to get into that level of guidance right here.

Ben Nolan:

Yes. We've heard a little bit about the possibility of seeing some intermodal shifting back to the West Coast from the East Coast given the hopefully, normalization of labor over there. Curious if you guys have seen any initial signs of that at all or if you see that as a potential risk or not?

Operator:

Thank you. Our final question today comes from the line of David Vernon with Bernstein. Please proceed with your question.

Ed Elkins:

This is Ed. I'll start. There's no doubt, we went through a tough stretch there with service that for some of our customers to find alternatives to keep their supply chains running. Those alternatives probably included additional inventory, truck substitution as well as other railroads. And I think Mark actually mentioned $175 million to $200 million in the quarter that we -- we wish we had back. I think that's a fair number. We work pretty closely on that. But we also know that our customers recognize the long-term benefit that we deliver. And I told you earlier that I'm already encouraged about the recent trajectory of our volumes. We're able to save our customers money, and they are looking forward for us doing that. We focused on two things during the quarter as we got service back. Number one, get it back as quickly as possible. And number two, make sure we stayed really close to our customers, so they knew that they could unwind those alternatives and come back to us. We think we're seeing that.

Operator:

Thank you. That concludes our question-and-answer session. I'll turn the floor back to Mr. Shaw for any final comments.

Operator:

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Luke Nichols:

Thank you, and 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 nscorp.com in the Investors section, along with a reconciliation of any non-GAAP measures used today to the comparable GAAP measures. Turning to Slide 3. It's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

Mark George:

Thank you, and good morning, everyone. On Page 6, you will see our key financial results for the quarter. The top row represents the GAAP measures. On the second row are the current cost estimates and impacts related to the Eastern Ohio incident and response. On the third row, you see the adjusted results. The $387 million of expense that we recorded for the incident includes costs associated with the cleanup of the site, community support and restoration payments, legal and advisory expenses, and a preliminary estimate of claims and settlements. It is important to note that no insurance or other recoveries are assumed in these estimates and that credits associated with these recoveries will be determined and recorded in future periods. Similarly, as we learn more, one can expect future estimates of cost will result in revisions to the accruals in subsequent quarters. The two rows at the bottom reflect the variances versus Q1 of 2022. GAAP earnings were down year-over-year due to the Eastern Ohio cost that were recorded. The adjusted variances at the bottom reflects 7% revenue growth that Ed will detail shortly, along with adjusted net income growth of 8% and adjusted EPS growth of 13%. Adjusted operating expense were up 11% in the quarter, and Slide 7 details the drivers, which I will walk through now. Adjusted operating expenses were up $204 million or 11%, with the majority of the increase being driven by inflation and incremental service-related costs. Inflationary pressures are visible in pretty much all P&L categories, most notably in comp and bend from last year's wage settlements. In comp and bend, we also saw an increase in headcount as we continue to build our T&E resources to help us become more reliable and resilient in support of our long-term strategy for growth. Purchase service growth is also impacted by inflation, but is also driven in part by technology investments, including projects aimed at improving productivity, operational executability, and enhanced safety. The service disruptions triggered by the Eastern Ohio derailment, the associated shutdown of our main line in a critical corridor as well as the acceleration of our enhanced train makeup rules is having an incremental impact on costs, resulting in slower network speeds that inflates equipment rents, while also driving a meaningful increase in material costs, in part because we strategically work to bring locomotives into service from our stored fleet to help accelerate our network. Moving to depreciation, please recall that we gave guidance on depreciation headwind this year from a recently completed roadway depreciation study, and that contributed $8 million of headwind in the quarter, and that will continue as a headwind in subsequent quarters. We also drove fuel efficiency by another 1% improvement in the quarter versus last year. Moving to the P&L results below operating income on Slide 8, and I'll talk to the adjusted variances here in the right-hand columns. Operating income grew 1%. Other income was $56 million, aided by favorable returns on company-owned life insurance and that helped adjusted pretax income grow 7%. Net income grew 8% and EPS grew 13% in the quarter. Turning to free cash flow and shareholder distributions on Slide 9. Cash from operations was $179 million higher, in part from changes in working capital, while free cash flow was $140 million higher than last year, and we remain committed to returning capital to shareholders with a strong dividend, supplemented by share repurchases. Let me turn now to Paul for his review on operations.

Claude Elkins:

Thanks, Paul, and good morning to everyone on the call. I'm starting on Slide 17, where our results for the quarter speak to the benefits of our diverse portfolio in that we were able to leverage strong market conditions in our Merchandise and Coal markets to offset weaker conditions in our Intermodal markets. This enabled year-over-year growth in revenue and revenue per unit in the first quarter. As you can see, overall volume was flat, but total revenue increased 7% to $3.1 billion due to higher fuel surcharges and positive mix, which more than offset lower volume in storage revenue in Intermodal. Volume and revenue were strongest in January when our service product was the best it has been in two years, and the truck market was showing signs of rebalancing. Volume and revenue decelerated throughout the quarter as service disruptions impacted our ability to meet customer demand in key markets and the truck market continued to deteriorate. Our performance in January demonstrates that a customer-centric operations-driven approach can yield significant value for our customers and our shareholders. Within Merchandise, volume growth of 5% was led by strength in sand, automotive, grain and aggregates markets. These gains were partially offset by weakness in demand for plastics and for pulp board. Volume improvement was the largest driver of double-digit revenue growth in Merchandise this quarter, followed by higher fuel prices and price gains. Intermodal markets were notably weaker this quarter, particularly within our domestic lines of business where a weak freight environment and a weakening truck sector combined to drive a 4% volume decline year-over-year. International Intermodal was a bright spot this quarter with volumes improving 9% year-over-year on higher demand for IPI services, even as overall imports fell, which helped to mitigate some of the domestic declines. Intermodal revenue benefited from higher fuel surcharges and price this quarter. However, not enough to overcome the negative impacts of lower storage revenue and lower domestic volume, which drove a 5% decline in revenue versus the prior period. Now I'd note that the combination of improving international IPI volumes and declining Intermodal storage revenue is a strong indication that supply chain congestion is rapidly unwinding in the U.S. Coal shipments in the first quarter were up 5% year-over-year, led by export, which is currently experiencing continued high levels of demand as well as greater Coal supply in our service territory to meet that demand. Volume growth was muted somewhat by year-over-year declines in utility Coal due to depressed natural gas prices and mild winter weather. Coal revenue was up 13% in the first quarter, driven by higher volumes, fuel surcharge, and price gains. Now moving to Slide 18. As we look ahead to the remainder of 2023, we expect near-term headwinds to pressure volume and revenue throughout the second quarter. However, we are optimistic that our service product will be much improved in the back half of the year, positioning us to return to growth when market conditions permit. Additionally, we are walking on to the field today with the best marketing team in the business. And this team is working hard to identify new avenues to growth in the form of new markets to serve and new products to deliver. Even in a decelerating economy, we know that we can offer exceptional value to customers seeking to reduce their overall spend on transportation and reduce their carbon footprint. As we look at the rest of the year, Merchandise growth will be led by automotive shipments, supported by the forecasted 5% growth in U.S. light vehicle production for the remaining quarters of 2023. Also contributing to growth in automotive shipments is a backlog of shippable ground counts that we will work through as our service improves. We also expect strong volume improvement in our metals market where improved equipment cycle times will enable us to serve unmet demand. Partially offsetting expected growth will be weakness in our chemicals markets where certain segments, like plastics, are experiencing weaker demand. Facility downtime and increased pipeline capacity will also drive year-over-year declines in shipments of crude oil and natural gas liquids. Within our Intermodal markets, volume in 2023 will be largely dependent on economic conditions, particularly the health of the American consumer. Currently, we see headwinds from excess truck capacity, replenished inventories, and a challenging consumer economy, and these headwinds are likely to persist throughout the second quarter, negatively impacting volume, particularly in our domestic lines of business. Looking at the back half of '23, clearly, the economic conditions remain uncertain. We see continued weakness in the housing market, which negatively impacts demand for furniture, home appliances, electronics, all those things that want to move in a container. That market has not rebalanced as we anticipated earlier this year with spot and contract truck rates continuing to fall throughout the first quarter. So the timing of the rebalancing will have a large impact on our volume outlook. Additionally, our domestic partners outlook for the second half of '23 has dimmed somewhat. International Intermodal shipments will be driven by demand for IPI, which is a function of import volumes, which is declining and supply chain fluidity, which is improving. Fluidity has returned to supply chains faster than we expected, which will be a tailwind to volumes, but will negatively impact Intermodal storage revenue for the remainder of this year. Taken together, we are optimistic for our Intermodal business to overcome these near-term challenges and to finish the year with momentum to realize the long-term potential of this market. We have the best Intermodal partners in the industry. and our team is working hard to ensure that we are positioned for success with them as the market turns. Lastly, volume in our Coal business for the remainder of '23 will be up versus '22 with growth in export Coal shipments more than offsetting expected declines in utility Coal. Strength in export Coal markets will be driven by new Coal production coming online at NS-served mines and sustained international demand for U.S. sourced Coal. However, the expected increase in volume will be more than offset by anticipated lower revenue per unit due to lower seaborne Coal prices and reduced fuel surcharge revenue. The utility outlook is highly dependent upon weather and natural gas pricing, which is currently expected to average less than $3 per million BTU in '23, a more than 50% decrease from last year. In addition, stockpiles are currently at increased levels, which further pressures demand for utility Coal shipments. Overall, we have a cautious outlook for the remainder of '23. Improving service levels will be a tailwind, but persistent market headwinds and a stubbornly loose truck market will temper our ability to grow in the near-term. Overall, growth in 2023 will be dependent on the macro environment. We continue to put our efforts on things that we can control to deliver on our customer-centric operations-driven strategy. We are making the investments required to deliver compelling logistics value for the long-term through a simple, reliable, and efficient customer experience. Lastly, on Slide 19, I'd like to highlight a recent industrial development success that demonstrates the long-term value of locating along Norfolk Southern lines. Scout Motors, an independent U.S. company backed by Volkswagen Group is locating a new manufacturing plant in Blythewood, South Carolina and a site served by Norfolk Southern. In Phase 1, this new plant will produce more than 200,000 new electric vehicles and create over 4,000 permanent jobs. The $2 billion investment by Scout will revive an iconic brand that last produced vehicles in 1980, and we couldn't be happier that Scout selected a site served by Norfolk Southern. We look forward to serving their business by the end of 2026. Before I close, I'd like to say thank you to our customers who have supported us through the challenges of this first quarter. We appreciate every opportunity that they give us to participate in their supply chains, and we look forward to successfully growing these partnerships. We are confident in our ability to realize long-term growth and we look forward to delivering results for our customers and for our shareholders. And with that, I'll turn it back over to Alan to bring us home.

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Ken Hoexter with Bank of America. Please proceed.

Alan Shaw:

Hey, Ken, thanks for the question. Yes, we're in the process of recovering service. And I want to make it really clear. We had a great service product to the close last year and in January. And you saw the attendant impact on our volumes, right? It proves that our unique vision, our unique focus and our unique strategy works in this industry. And we remain committed to executing on that. In the aftermath of East Palestine, we had some tough decisions to make. And we made those decisions knowing full well that it would have a near-term impact on our service and our productivity and our growth, but they were the right decisions to make, because they align with our core values, and they are long aligned with our long-term focus as a customer-centric operations-driven service organization. The same operating team and the same marketing team that delivered that exceptional service product late last year and beginning of this year is in place now. And we're in much better shape with our resources. And so I don't think the climb out will be nearly as long. Certainly, we want to get the track back in place in East Palestine. And that, as Paul noted, will probably happen in the beginning of June. And so I think as we move into and through the third quarter, you're going to see us in a position to deliver that exceptional service product that customers have become accustomed to receiving from Norfolk Southern. Ed, do you want to talk about what you're hearing from customers on that?

Operator:

Our next question is from Amit Mehrotra with Deutsche Bank. Please proceed. Amit, please check and see if your line is muted. Okay. We will come back to him. Our next question will be from Chris Wetherbee with Citigroup. Please proceed.

Alan Shaw:

Yes. Chris, as I've talked about cost structure and service going forward. It was in the context of our new train marshaling rules, which did initially have an impact because we could frankly, we got really conservative on our trained marshaling rules based on the environment and recent events. As we are dialing that in and analyzing each train symbol on each line segment, we're adding capacity back into the network. And as Paul noted, we're using this as an opportunity to significantly increase our use of distributed power, which will frankly ultimately enhance our productivity and our train length. So I feel very confident that we did the right thing at that time, and it's going to generate long-term benefit for NS and our customers and our shareholders, and that's kind of what our strategic vision is all about. Mark?

Alan Shaw:

Yes. And I'll add nor does our estimate include any potential recovery from other parties as well.

Operator:

Our next question is from Scott Group with Wolfe Research. Please proceed.

Mark George:

Yes. So on materials, Scott, the impact from what we had early in the year had a pretty profound sudden impact on the network. We needed to get locomotives to help dig us out, so we basically took locomotives out of stored status. Some of them required a lot of work to get them rejuvenated so they could help take us out. I think there will be some incremental material costs that will linger here in the second quarter and should ease in the back half of the year as we see our network fluidity improve. Ed?

Operator:

Our next question is from Brandon Oglenski with Barclays. Please proceed.

Alan Shaw:

Hey Brandon, I'm going to cover that because that's something that Paul and I discussed at length. As I noted, we had some tough decisions to make in the first quarter. And the train makeup rules was -- decision was based on the ongoing environment of recent events. Paul and I had a discussion in early March, and we decided we were going to get really conservative on our train makeup rules until we had an opportunity to deeply and thoroughly analyze each train symbol over each line segment. That created some congestion on our network because it had an initial impact on reducing capacity on our network. Paul and his team are going through each train symbol, each line segment, doing the analysis, looking at the physics, figuring out the right configuration of the train and the right configuration for the locomotives. And as we do that, we're adding capacity back in. As Paul noted, that includes expanded use of distributed power, which is going to support our productivity initiatives going forward. And ultimately, we are convinced that it's not going to have an impact on service. It's not going to have an impact on capacity and in many cases, it's probably going to improve productivity.

Operator:

Our next question is from Amit Mehrotra with Deutsche Bank. Please proceed.

Alan Shaw:

Yes, Amit, I'll handle the first part of your three-part one question. Yes, when we -- when this happened, we said we're going to stay true to our core values, and we're going to do what's right. And that means we're going to do what's right for the long-term best interest of Norfolk Southern and East Palestine. And frankly, our response in East Palestine has reinforced my conviction that taking a long-term view, the best interest of your shareholders, your customers, your employees and the communities you serve, as a customer-centric operations-driven service organization is the right vision and the right strategy for Norfolk Southern. And so I met with the Head of the EPA, and I made my personal commitment that we were going to do more than less. And that's what you're seeing. We've got 300 people on the ground whether they are employees or contractors, seven days a week, and I sincerely appreciate their sacrifices and their willingness to do this, and frankly, the sacrifices of their families as well. And they're intently focused on the environmental remediation. They're intently focused on community assistance and they're intently focused on helping the community thrive. And we've reached a major milestone about week and half ago, where we finished the remediation under one track and have started on another track. And that was something that we did, didn't necessarily need to be done because we had an environmentally acceptable solution in place, but that was something that we did based on feedback that I received from the citizens of the community and from the EPA. Ed, do you want to talk about what you're seeing in the markets and the volume impact of the slower network but also the macro trends?

Alan Shaw:

And you and Paul are also resizing the Intermodal network based on current demand.

Mark George:

Look, it's not a question of when the volume and the demand from the U.S. consumers are going to recover. It's when it happens, right? And so that's part of our strategy is to invest through the downturn so that we're there for the upside.

Alan Shaw:

Mark, I think there was a.

Operator:

Our next question is from Jordan Alliger with Goldman Sachs. Please proceed.

Claude Elkins:

Speaking to our -- to the customer side of the business, there's -- we really have not had a more supportive group of constituents out there than our customers. They want us to get the network back up and running. They know that we're doing the right thing, not only for East Palestine but for them. And frankly, we are looking forward to delivering that additional capacity to them very quickly.

Paul Duncan:

Oh, absolutely. We're seeing improvements over the last few weeks. And I want to go back to the point that was made around TOP|SPG. TOP|SPG was implemented as a simpler, more executable plan that will provide us a quicker path to improving service, especially when we have major service interruptions. We've seen strong improvements in our Intermodal franchise as of late, building on the momentum out of the TOP|SPG implementation last year that I referenced. Again, right now, this is all about pent-up demand and inventory across the network in our Merchandise space, we're going to continue to work after it.

Brian Ossenbeck:

Hey, good morning. Thanks for taking the question. Maybe to follow-up with Ed first. You mentioned you had some stronger-than-expected results both in Coal and Intermodal ARPU. Wondering if you could give some thoughts on that as both of those because we have some pretty distinct factors and tailwinds that have been affected them more recently in terms of the export market and the storage fees. And then, Alan, maybe you can just give us a sense of the timing for some of these other public hearings or maybe mile markers that we should be keeping in mind for the NTSB and their investigation, the public hearing of East Palestine, takes your view, things that are pretty much unprecedented. But I think it will still be helpful to hear if there's any sort of time line we should keep on our calendars in terms of when the next updates for these investigations are expected or at least what we should consider the next sort of update when it comes to those things, not just the numbers that you're recording, but the more public-facing side of it? Thank you.

Alan Shaw:

And Brian, with respect to hearings, the NTSB has announced it may conduct a field here in the summer, as you noted. That date has not yet been finalized. We don't really have anything else scheduled at this point, but that doesn't mean others won't pop up. I met with the Chair of the NTSB just last week and committed our full cooperation with their investigation. And you saw as soon as the NTSB released its preliminary results, we initiated a six-point safety plan. And I'll also note that I've been in D.C. multiple occasions with our elected officials and with our regulators, offering my full-throated support for many of the provisions in the rail safety bills that are out there. We are going to take and we have taken an industry-leading role in advancing these safety initiatives, and we embrace that role.

Jeffrey Kauffman:

Thank you very much. And congratulations in a challenging quarter. I've only got one question. Everyone is trying to figure out, is this a recession? Is this not a recession? Are we heading into a recession? There's a lot of anomalies in your data because of the single track that you're running in a key part of your line and the effect that's having on traffic. But I'd love to hear your view in terms of what's the macro? Where do you believe we're headed? And then kind of how do we back out the effect of your remediation efforts on your own traffic volumes here?

Claude Elkins:

Sure. I think the one word that describes it best is murkiness, and quite frankly, it doesn't matter whether you're on the consumer side of the coin or on the industrial side, there is a clear line of sight, I think on the industrial markets for a quarter or two of demand. We see that clearly. We also see clearly that there is further deterioration in the truckload markets right now. The real question is the second half of the year. And you have heard from other calls and other entities that probably their outlook has changed somewhat, particularly on the consumer side. But we know that there's still pent-up demand in many of these industrial markets. So I am with you in terms of there's a lot of cross currents out there and a tremendous amount of, again murkiness, but I think the one thing I want to reassure you of is we are positioning ourselves to be ready when these markets do turn and they will turn.

Thomas Wadewitz:

Yes, good morning. Sorry about that. Mark, I wanted to ask you if you could help us think about operating ratio. You've got a lot of moving parts right now. It seems pretty clear when you look at second half maybe or beyond June, you could see some help from the network being more fluid. But how do we think about maybe seasonal pattern in OR relative to what's normal if you think about 2Q versus 1Q? Or if you assume stability in volume or some pickup in volume, how do you think about it in the second half, given that you've got storage charges revenue per car maybe in export? Just a lot of moving parts, but any thoughts on OR would be helpful. Thank you.

Operator:

Our next question is from Ravi Shanker with Morgan Stanley. Please proceed.

Alan Shaw:

Ravi, I think Mark was pretty clear that there are some moving parts in our estimate. There are some things that we know that are going to hit that have not been estimated. That includes additional charges. It also includes the potential for insurance claims and also recoveries from other third parties. What we've given you now is what we're able to accrue. With respect to our mix freight, our new train marshaling rules, which have really enhanced the use of DP are going to allow us to leverage that and drive productivity into that network.

Jason Seidl:

Thank you, operator. Good morning gentlemen. How should we think about headcount sequentially sort of as we move throughout the year? And you mentioned your below minimum staffing levels in a good part of your network. And then I think before you mentioned this time around, even in the downturn, you're going to think about furloughs a lot differently than you have in the past. I would just like to get a little bit of color on that.

Mark George:

Well, yes, I think you see that we've got some trajectory in Paul's slide on our T&E count. We still have over 900 of conductor trainees. And as Paul mentioned, we've got a fair amount of our key locations that are still below our targeted levels. And we want to get to resilient levels in our locations here because we're feeling the pain of not being resilient. We made a promise to be resilient in our new strategy, and we're committed to get there. Unfortunately, we're not there yet, and that's part of why you're seeing us deal with the service challenge here again here in the second quarter. So there's more hiring to do. I think you'll start to see once we get to the levels we determine are appropriate at all of our locations will bring our train e-counts down probably by more than half of where they are today, and that will help us just handle normal attrition. But remember, the targeted numbers for headcount really is a dynamic number. And it does depend on the volume outlook and the demand outlook by area, by commodity type, by lane. So there's really a lot more sophisticated modeling than ever we put into trying to determine what our appropriate levels are. So I think you will continue to see it go up throughout the course of the year.

Justin Long:

Thanks. I wanted to circle back to Intermodal. If I look at your domestic Intermodal volumes, they've declined sequentially for three consecutive quarters. And obviously, there's weakness in demand that you've talked about, and that's well known. But what's your confidence that first quarter is the bottom in terms of domestic Intermodal volumes? Or is there a potential we see sequential pressure continue into 2Q?

Alan Shaw:

Yes, we're aligned with the best channel partners in the industry. And they're investing for growth right now through the soft patch. So we're going to grow with them. And Ed, you were able to take share from truck and the international market.

Operator:

Our next question is from Walter Spracklin with RBC Capital Markets. Please proceed.

ClaudeElkins:

Sure. Absolutely. We have over 600 active projects in our pipeline. And while we can't talk about really any of those, many of them under NDA, what I can tell you is that we are really well positioned to serve the EV and battery ecosystems including support for additional battery manufacturing and as they search for plant sites for manufacturing. The recent Scout Motors assembly plant and proposed reopening of a lithium mine nearby, present some more unique opportunities for us. There's three opportunities really for us to participate in the EV space. One is moving raw materials, one is moving components and one is moving the finished vehicles. We're actively working on all three of those segments.

David Vernon:

Hey guys, thanks for fitting me in here. So Mark, can you talk a little bit about the trajectory for cost per employees to kind of go throughout the year, the $140 million level, is that a good number to be modeling off of and then, Ed, if you wouldn't mind, maybe -- I want to take a run at asking you to mention how much the accessorial and surcharge revenue headwind could be inside of the Intermodal ARPU. I just want to make sure we're not confusing the minus 1 in ARPU ex-fuel with core price as opposed to accessorial. And if you could help us to mention that, that would be helpful. Thank you.

Claude Elkins:

Yes. And on the road side, we made a I think we expect year-over-year declines in accessorial revenue. It really be a significant headwind to revenue or ARPU less fuel for the remainder of '23 and that's going to be offset by some positive impacts from price and volume, our plan. And then beginning in '24, the revenue from accessorial charges is likely to be much more in line with what we've experienced pre-pandemic. First quarter, we took a significant step towards normalization, as I noted.

Jonathan Chappell:

Thank you. Good morning. Mark, on your Slide 7, when you lay out the OpEx components, I understand there's a lot of inflation associated with that. But is there any way to talk about some of the costs associated with just running the one line at a reduced speed from the beginning of March. What we should think about that cost component to be in the second quarter as you go through June? And do you think that those will really be ring-fenced then into the second quarter with kind of normalization starting in early 3Q?

Operator:

Our next question is from Ari Rosa with Credit Suisse. Please proceed.

Alan Shaw:

Yes. Obviously, as CEO, I think about that every day. What could we have done better? What could we have done differently? And I asked my team in the immediate aftermath to come up with some solutions. As soon as we got the preliminary results of the NTSB report, you saw the six-point safety plan, which included adding 200 hot box detectors across our network. And I'll note that the spacing of our hot box detectors was already amongst the lowest in the industry. But you know what, we can do better. We're augmenting that. And so we're adding about 25% more hot box detectors. We're partnering with the Georgia Tech Research Institute on next-generation machine visioning, inspection portals. And the first one is going to go up outside of East Palestine. So there are a couple of things that we're doing there. They're all to enhance safety because we're going to continue to focus on doing better. That's our goal.

Ariel Rosa:

Got it. Okay, thank you for the thoughts.

Alan Shaw:

Yes. Thank you for your interest in Norfolk Southern and your time this morning. Have a good morning.

Luke Nichols:

Thank you, and 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, 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 nscorp.com in the Investors section along with our reconciliation of any non-GAAP measures used today to the comparable GAAP measures. Turning to Slide 3. It's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

Paul Duncan :

Thank you, Alan, and good morning. I am excited to be leading the operating team as we implement the vision set forth this last quarter. My focus since assuming the role of Chief Operating Officer has been in 2 areas

Mark George :

Thank you, and good morning, everyone. I'm on Slide 15. As you heard from Ed, we had another quarter of strong revenue performance, up 13%. Operating expenses in the quarter were up $333 million or 19% year-on-year, driven primarily by elevated fuel prices and some significant adverse accrual adjustments that I will describe shortly which had an outsized impact on the operating ratio. Operating income at $1.18 billion set a fourth quarter record. EPS was $3.42, up double digits year-over-year. Moving to Slide 16. Let's reconcile the drivers of the changes in operating income, operating ratio and earnings per share. Talking specifically to operating income, the $52 million improvement was aided by the first row in the bottom section, a favorable wage accrual true-up related to our commitment to getting retroactive wages distributed to our employees before the end of the year. It was not only the right thing to do, but the acceleration created the added benefit of saving payroll taxes for employees as well as for the company. That adjustment provided a $16 million expense savings, which equates to 50 basis point tailwind to the OR and a nickel boost to EPS. But in the second row of the reconciliation at the bottom you will see that there was a $57 million expense headwind from numerous unexpected adverse items in the claims category that I'll put in 3 buckets. Accrual adjustments related to personal injury reserves based on actuarial studies, adjustments to environmental reserves based on activity and costs associated with derailments that occurred during the quarter. Combined, these adverse items versus a smaller positive adjustment last Q4 results in $57 million of year-over-year headwind in the fourth quarter, which equates to 180 basis points OR drag and $0.19 of EPS. Absent those 2 reconciling items I just detailed, core operating income growth was actually $93 million, and that translates to EPS growth of $0.44. The OR contraction at 180 basis points reflects lower incrementals driven by the net inflation impact as well as service-related costs. So let's drill into the operating expenses for the quarter now on Slide 17. Fuel was again a primary expense driver this quarter, up $141 million or 62% due to elevated fuel prices. Materials & Other was up $78 million, which included the $71 million increase in claims that was heavily impacted by the items we just discussed. Compensation and benefits were up $55 million or 9%, driven by elevated wages from the new labor contracts as well as higher employment levels. Purchased services were up $48 million or 10% in the quarter, driven primarily from continued inflationary pressures, costs related to our service environment as well as technology-related costs as we progress our digital transformation. Some of the inflation impacts are associated with intermodal operations that more than offset savings from lower intermodal volumes. Depreciation was up $11 million year-over-year, consistent with prior quarters. But let me point out that we are nearing completion of our periodic roadway depreciation study and the findings will result in a quarterly step-up in our 2023 depreciation expense. You can expect in 2023 that the quarterly year-over-year growth will be around double what you see here, meaning that the full year impact will be a step-up in the $40 million to $50 million range. Shifting to Slide 18. Let's look at the results below the line. After spending much of the year as a net expense, other income flipped back to a more normal profile and amounted to $34 million, an increase of $13 million over last year. Net income in the quarter was up $30 million or 4%. EPS growth at 10% exceeded the net income growth due to strong share repurchase activity. Turning now to Slide 19 and looking at the full year results. EPS was $13.88, an increase of $1.77 or 15% relative to 2021 and driven by record revenues of $12.7 billion, which was up 14% compared to 2021. As you look at the full year OpEx and operating ratio headwinds versus prior year, Recall the adverse impact of the wage settlement. Moving to Slide 20. Property additions at $1.9 billion ended the year exactly as we had been guiding. We had another strong year for shareholder distributions with over $4 billion returned again in 2022, with over 12.6 million shares repurchased. Dividend distributions were up 14%, and you will have read about our Board just approving a 9% or $0.11 increase to our quarterly dividend here in the first quarter. All this demonstrates our commitment to return capital to shareholders. And with that, I'll now turn it back over to Alan.

Operator:

[Operator Instructions] Our first question comes from the line of Tom Wadewitz with UBS.

Alan Shaw :

Tom, I'm going to turn it over to Ed and let him address your questions on our yield and RPU.

Tom Wadewitz:

Can you ballpark the LD impact in 4Q? Just frame it a little bit for us.

Tom Wadewitz:

Downward. Sequentially, okay. Great.

Jordan Alliger:

I think you mentioned on the call at the end that the macro backdrop, it might be tough from a full year perspective to grow EBIT dollars. I'm just sort of curious, as you think about your big picture outlook. Is there a differential first half, second half? Do you expect EBIT growth to be possible at some point as we move through the year?

Mark George :

Yes, really, it's going to depend a lot on the way the top line evolves. And if, in fact, there is a recession that we have to deal with, with some demand destruction. But as we think about -- we've got a lot of tailwinds in the year, including really strong core pricing that we anticipate as well as fuel efficiency. We had 3% fuel efficiency this year. We expect another good year next year. And I do expect that we'll have a wind down of some of the service-related costs now that our service product has improved. However, that would probably start to manifest more in the back half. And then, of course, we'll have the absence of some of the wage adjustment that we booked in the third quarter related to prior years. And this quarter, I would expect that big claims impact that we had in the fourth quarter was truly anomalous, and I wouldn't expect it to be of repeating nature at all. So those are some of the tailwinds as we look into the year. But we are swimming against some pretty heavy headwinds. As we talked about on the call, we do have meaningful inflation to absorb, including the wage increases. And we've got some level of diminishing coal RPU and accessorial revenues as we go through the year, again, mainly in the back half. And then the depreciation step-up that I mentioned, which will be more evenly spaced throughout the year. So -- but again, a lot of good tailwinds. We've got good core pricing and -- but the headwinds are kind of what I laid out. The biggest variable is really going to be volumes. So how much we get win.

Chris Wetherbee:

Maybe I can pick up on that last comment. So in terms of the volume, I know you expect to be able to get some share recapture here. Do you think that ultimately yield a positive volume outcome for the year? And I guess, Mark have been helpful in terms of laying out the OR expectations, particularly a little bit more close in. So certainly, I would love to understand sort of your view on the potential for OR improvement or maybe holding the line in 2023. But if not, sort of first quarter, first half sort of how do we think about how things are trending out, just given some of the puts and takes you just outlined.

Mark George :

Yes. And Chris, we don't really want to get into quarterly guidance because there are a lot of variables. But I can just point you back to the tailwinds we talk of. Right now here in the first quarter, we're going to have probably a pretty good compare given where volumes were last year. So I think that's -- that will be -- that will probably represent one of our better year-over-year quarters, but we're really looking at a very uncertain outlook here in the second and third quarter. And we don't want to get into projecting right now at that level of granularity.

Amit Mehrotra:

Mark, just a couple -- just quick follow-ups for me. So one, the flat operating income translates to EPS growth this year. I suppose you can still eke out some earnings growth under that scenario given maybe some share repurchase and then the other income kind of coming back. If you could just talk about that? And then totally get the uncertainty and it's one of the most uncertain that I've ever seen. But I wanted to ask you about what you can control, which is the OpEx base ex the fuel. So you mentioned the depreciation step up, you have some visibility on labor per the PEB or the agreement. I also think you said in the past, there's like $40 million a quarter of inefficiencies that you endured last year. So I assume that some of that can unwind. So So I'm just trying to understand how do you think the OpEx base ex fuel moves relative to that $6.4 billion that you did in 2022. So EPS growth relative to EBIT growth and then OpEx base ex-fuel expectations for '23?

Operator:

Our next question comes from the line of Allison Poliniak with Wells Fargo.

Alan Shaw :

Yes. Allison, we had talked about in the fourth quarter a number that was about 1/4 of our crew base is below minimum staffing levels. It's roughly in that neighbourhood right now. And frankly, as we move forward, it's going to be highly dependent upon where we see markets headed in overall demand. So we are continuing to hire into our environment or into that environment. Pardon me, our conductor training pipeline remains very robust. And certainly, you've seen the improvements in our service product as we've addressed both resources leadership and plan, and our service is now the best it's been in over 2 years. Paul, why don't you talk a little bit more specificity on what we're doing with respect to our craft colleagues.

Operator:

Our next question comes from the line of Justin Long with Stephens Inc.

Ed Elkins:

This is Ed. Thanks for the question. We look at this very carefully along with our customers and stakeholders. When we look globally, we see that the congestion at the ports that both coasts has really alleviated itself. And that's also true at most of our intermodal ramps on the inland side. But you look at good spending in the U.S., which has plateaued for the consumer, but it's plateaued at a level that essentially is where we should be in like 2025 or 2026. So there's still a tremendous number of goods being brought into the country, trying to fit through a pipeline that was designed for arguably 2023. And so that congestion still exists in some places, really around the warehousing on the Hinterland and Inland locations. We think it's going to unwind. In terms of the timing of that unwinding we're watching very carefully. We think it will happen in '23 at some point.

Justin Long:

That's helpful. And any color on the net impact from a dollar perspective.

Alan Shaw :

I mean we'll lose asset [soil] revenue will gain in freight revenue because our customer supply chains will be more fluid, and we'll be able to move more business.

Operator:

Our next question comes from the line of Scott Group with Wolfe Research.

Alan Shaw :

Scott, this is Alan. Thanks for the question. Yes. Flattish is in the ballpark for revenue. I think Mark talked a little bit about some of the cross currents that we have, both on the top line and on the expense category. Can you repeat your second question? We had a break up quite a little bit in the middle. Yes, associated with headcount.

Alan Shaw :

Paul, why don't you talk about that?

Operator:

Our next question comes from the line of Brandon Oglenski with Barclays.

Alan Shaw :

Yes. This is exactly what the environment we were contemplating. Here we are, we're continuing to hire. We're hiring aggressively. We need to because in some locations, as we talked about, were short of cruise. Resiliency is also about investing consistently in our assets, which includes our technology, it includes locomotives, track, intermodal terminals. It includes freight cars designed to help us compete with truck. And it includes -- yes, it includes our people as well. It also includes processes and a continuous improvement plan as we lift our service is the best it's been in over 2 years. But we're not stopping there. We're going to continue to evolve our product and we're going to continue to improve. And we're looking a couple of years out, how do we position ourselves so that our customers can compete and grow and we can compete and grow with them.

Ravi Shankar:

Two-parter, if I may, please. You said that you expect share gains to offset some of the natural macro volume deterioration. Can you help us understand how much of that is "in the bag" with kind of new contract wins or kind of contracts have signed versus prospective as your service improves? And second question is, there has been some chatter on regulatory scrutiny on train length obviously, is a big part of top SPG and also for some of your peers. Can you talk about kind of how real that risk might be over time?

Alan Shaw :

Yes. Ravi, let me talk about the regulatory environment, if you will, for just a second. What we -- we're fully engaged with the STB. We've met with 4 of the 5 members just since our Investor Day on December 6. And they're really encouraged. What we told them as we spoke with them last year is we were fully committed to restoring service. They've seen that. They see it in the metrics and they hear it from our customers as well. And now, they're seeing us start to grow a little bit. And so we're aligned with them, and we're delivering on our promises for service and our promises to help our customers compete and grow.

Walter Spracklin:

Just coming back on the trucking market, your long-term approach to gaining share against truck through higher service and just curious whether with the capacity, the slippery cap capacity and pricing environment that you're seeing right now and should that persist? Does that provide you with a significant challenge with regards to gaining market share given that price dynamic. And I know at least 2 of your competitors have started acquiring trucking companies, OR CN but H&R and TransX, and then Coaster Home, your TSX by quality. Is that something that you would envision doing as a way to offset some of that challenge by buying a trucking company and then converting it to rail? Is that something you'd consider? Just curious as to all that -- how that pertains to your [indiscernible] strategy?

Ed Elkins:

Sure. Well, first of all, we have a fantastic partnership with our key customers. And that includes our key customers in that trucking space. I say all the time, we are not competing against trucks. We're competing against the highway. Truckers are our customers. and that's a great place to be. Sure, the current environment is challenging, but we've been there before. We've seen these cycles play out time and time again. The market is rebalancing right now. And I think when you look out past '23, it's clear that rail intermodal, specifically on Norfolk Southern is going to be a very compelling place to be for customers. We talk all the time internally about the -- all the innovation that's going into reducing the carbon footprint for transportation But if you want to reduce your carbon footprint by about 70% to 90%, just put it on a train on Norfolk Southern. It's the easiest way to do it. So we think the value prop long term is compelling. And even in the short term, we think we are very well positioned to compete with our customers.

Jon Chappell:

Thank circling back to yield a little bit. I mean the identifiable headwinds of fuel and accessory unwinds are very clear. It sounds like you think the core can still offset a lot of that, which has been really Norfolk's bread and butter for the last several years. But in this loosening truckload market, weaker economic backdrop, are you finding that there's any areas where your pricing power it's coming under pressure a little bit due to customers' unwillingness especially in the loosening truckload market as we think to intermodal.

Jon Chappell:

So does that mean core is a little bit stickier than in intermodal since there's more little conversion potential there as opposed to maybe economically sensitive merchandise?

Jon Chappell:

Yes, so does that mean that core is maybe a bit stickier in intermodal, given the potential for share gain as opposed to more economically sensitive merchandise?

Operator:

Our next question comes from the line of Brian Ossenbeck with JPMorgan.

Mark George :

I'll start with the comp and ben per employee. Brian, we ended pretty much where we had signaled we'd be on a per employee basis, excluding the adjustment there that deflated it a little bit. I would expect in '23, you'll see that number step up in Q1, like we talked about due to the payroll tax resets, and it will probably be in that 35 and change range. And while it would normally step up again in Q3 due to the wage accrual or the wage increases that take effect there in the third quarter. That will probably get offset to a large degree by the unwinding of some of these service-related costs. So I would expect kind of flat in that 35,000 and change territory throughout the year.

Brian Ossenbeck:

And do you think you could see a pilot program for one of those initiatives starting this year? Or is that a little too soon to expect?

Operator:

Our next question comes from the line of Cherilyn Radbourne with TD Securities.

Mark George :

Sure. There's clearly a bow wave of unmet demand out there for automobiles in North America. And the industry is really focused on delivering and trying to work that off. We are, too. We've invested in new cars for that fleet, and our fluidity has improved significantly. We are continuing to refine that. That's going to offer us the opportunity to help our automotive customers meet some of that unmet demand. Going forward, I think it takes a while to work that off. I don't know that it ends this year. Turning to the question. I think your question was about EVs and future supply chains. We've seen a tremendous amount of investment in new capability for whether it's EVs, construction, whether it's battery construction, whether it's battery recycling, there's a tremendous amount of interest out there and some investment going forward that we are working to make sure that we can support.

Ariel Rosa:

So I wanted to ask about the state of labor relations as you see it. To what extent has it moved -- or has it improved since moving past the PEB? Obviously, negotiations had gone a little bit contentious, but wanted to hear your perspective on if that's improved since then? And then to what extent do you think you might have to make further concessions on benefits or sick leaves or anything around that sort of thing? And then given the benefits you're describing around kind of the flywheel effect and the service improvements that you're seeing, I'm wondering if volumes do come in a little bit weaker than expected for this year, given the aggressive hiring, what do you do with those excess employees? Or do you see yourself in an environment where maybe you have a little bit more head count than what's needed and what do you do with those employees?

Paul Duncan :

Yes, Alan, I mean, you touched very well on the very first level the lever would certainly be investing in our workforce, cross qualification, extended training board consolidations, et cetera, where we have opportunities there. But we also have the lever of attrition. And we've seen what has taken place in the industry with furloughs, we just have not seen for those come back. It's very expensive in the long term, and we do not see that as certainly one, if any lever that we want to pull. We want to ensure, again, if there is a volume downturn, we are in a position as that volume comes back to handle it and handle it well. So that is how we are going to approach a downturn in potential volume.

Bascome Majors:

If you look at the senior management incentives, they've recently been very much in the short term tied to OR and operating income with the long term tied to returns on capital with the TSR multiplier. At the Investor Day a few weeks ago, Andy Adam said that she was working with the Board to really redo the incentives both for senior management and for some other employees subject to the incentive program to really align with this new strategy that you guys laid out for us a few weeks back. Can you talk a little more about the changes that are being made and what you're doing at the compensation structure level to really encourage the behavior you're looking for in the long-term strategy?

Mark George :

And I think you'll end up seeing in '23 that the structure has been amended a bit to reflect the alignment with our strategy.

Mark George :

Not right now, we can't. No. still in discussion with the [indiscernible].

Jeff Kauffman :

There were a lot of odd issues that occurred this year, and I think you hit some of them in terms of accessorials and in terms of liquidated damages. I'm kind of curious, with the big shift that we saw with West Coast to East Coast shipments from customers and now we're dealing with this inventory overhang. How do you think that affected our business in the Eastern U.S. Is it better for you if these containers dock in the west and get handed over in Chicago? And do your customers see a return to the West Coast at some point this year, maybe when labor situation settles? Is my understanding is it still tends to be a little cheaper to dock West than East. Just kind of curious how you thought that, that shift that's probably a little more transient impacted your business?

Jeff Kauffman :

And just to follow up to that. What are your customers telling you in terms of their plans on inventory reduction where you may see more normalized shipment levels?

Operator:

Our next question comes from the line of David Vernon with Bernstein.

Mark George :

Yes, real quick, David. I mean we're talking on a GAAP basis and -- go ahead, Ed.

Operator:

Thank you. Ladies and gentlemen, our last question today comes from the line of Ken Hoexter with Bank of America.

Alan Shaw :

Ken, for now, based on the economic outlook of 7,600 target that we had still exists. We're going to continue to hire in locations where we're tight And going forward, as you look here into 2024, obviously, there's a lot of uncertainty out there. we've talked about that. And so I don't want to get too far ahead of ourselves. I will tell you that right now, the conductor training pipeline is elevated, but it will remain so until we get to target and feel like we're recruiting, hiring and training at a steady state.