Norfolk Southern Corporation

Good morning, ladies and gentlemen, and welcome to the Norfolk Southern Fourth Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call has been recorded on Wednesday, January 29, 2025. I would now like to turn the conference over to Luke Nichols, Senior Director,

Investor Relations. Please go ahead.

Good

morning, everyone.

Please note that during today's call, we will make certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or future performance of Norfolk Southern Corporation, which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for a full disclosure of those risks and uncertainties we view as most important. Our presentation slides are available at NorfolkSouthern.com in the Investors section, along with our reconciliation of any non-GAAP measures used today to the comparable GAAP measures, including adjusted or non-GAAP operating ratio. Please note that all references to our prospective operating ratio during today's call are being provided on an adjusted basis. Turning to slide three, it's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Mark George.

Good morning and thank you everyone for joining today. I'm joined here by John Orr, our Chief Operating Officer, Ed Elkins, our Chief Marketing Officer, and Jason Zampi, our Chief Financial Officer. Following our strong Q3 performance, we are very pleased to close out 2024 with another quarter of solid results, which further narrowed the margin gap to peers. Our strong operations enabled us to move 3% more volume in the quarter, yielding a 2% increase in revenue ex-fuel. We continue to deliver on our commitments while building momentum to position Norfolk Southern for sustainable growth. Our network is running fast, our terminals are efficient, service metrics are as strong as they have ever been. Our customers are noticing and rewarding us with more business, and we continue to exercise a strong cost discipline. When you put it all together, we delivered a Q4 that was in line with the guidance we gave, wrapping up a year where we delivered or exceeded on all the commitments we made. We removed nearly $300 million of costs, $50 million more than the $250 we committed to in the spring. Our adjusted operating ratio ended at a 65.8, surpassing the guide we laid out of improvement between 100 to 150. And our second half OR was 64.1, at the favorable end of the range we outlined. The organization worked hard to deliver these results. I am proud and grateful to all the employees in Norfolk Southern. It's not just the financial results that are worth celebrating. Our safety metrics improved dramatically throughout the year. Our employees are embracing safety as a guiding value, protecting one another as well as the communities we serve. Our employees are driving positive change and propelling the company forward. As you evaluate the operating and productivity improvements, remember that we did this while taking on 5% more volume in 2024. I'm excited

for John, Ed, and Jason to share our results with you. Let's start with John. Good

morning. Thanks, Mark. I'm excited to update you all on our safety and operating performance. Turning to slide 6, safety is the value through which all operating decisions are made. Our entire team is committed and engaged in our pursuit of safety excellence. The improvements to date are a testament to the rigor of our safety protocols and a strong indication of the positive outcomes we can achieve in 2025. Our FRA reportable injury ratio increased from 1.1 to 1.15. And I'm encouraged that our Q4 results improved by 13% compared to the same period last year. In fact, in December, our FRA ratio was 0.61 and was the lowest reportable injury ratio since December of 2020. Our FRA train accident rate for the full year improved by 27%. And in both cases, we were carrying positive momentum into Q1 and building on these strong results. For example, we finished 2024 and started 2025 injury free for over a million man hours across all operations. At Norfolk Southern, people are at the heart of our strategy. Our thoroughbred academy is educating thousands of leaders. Its curriculum offers an integrated approach that combines technical training with skill building in operational readiness, business planning, and management engagement. We are proactively driving safety performance and enterprise excellence. We are building generational railroaders. Turning to slide seven, our PSR 2.0 approach is delivering simultaneous efficiency and service improvements. In 2024, our network performance progressively gained traction anchored by dwell and velocity. We are dwelling less in yards, moving faster between terminals and right sizing the fleet. This is generating fluidity and capacity, aligning our active fleets to volume, decreasing fleet maintenance expenses, and reducing capital. Year over year, our system speed improved by 10%. Taking it down a level, in the quarter, intermodal train speed gained 3.1%. And the true success stories were the remarkable gains in merchandise and unit train speeds up 11 and 17%, respectively. As we drove up velocity, we took out assets, grew the business, and we did more with less. Ultimately, growing volumes by 5%. For example, year over year car miles per car day rose over 13%. We are seeing similar benefits in our locomotive fleet. Velocity allowed us to store more locomotives, decrease our material expenses, increase our fleet reliability, and drove overall fleet productivity. Year over year GTMs per available horsepower improved by 19%. We also delivered record fuel efficiencies, both for the quarter and the full year. As we drive operating efficiencies, we are also delivering a quality product for our customers. After all, we're a company committed to outstanding service. We finished the year very strong, culminating with a successful intermodal perfect peak season. Year over year, handling 7% more parcel volume per day with zero controllable failures. Turning to slide 8, deeds matter. In 2024, we committed to tackle network underperformance and to close our margin gap. As Mark said, through a total team effort, we exceeded. For example, our car maintenance war room meticulously drilled down to root causes, fine-tuned our repair processes, and provided near real-time feedback for the field. As a result, year over year running repair and repaired well were down 31% and 23%, respectively. Improvements are also coming from our Need for Speed war room, whose mandate includes design speed into the network, overcome historic speed barriers, and drive out infrastructure bottlenecks. The Need for Speed war room has contributed to our year over year 10% AAR speed increase. They are now turning their attention to challenging every permanent and temporary slow order to actively reduce stops and drive additional fuel efficiencies. Over the road interruptions decreased by 25%, delivering significant gains in crew productivity and crew availability. For example, year over year, crew overtime and terminal detention costs were both down 19%. When I say this is a team effort, I am talking about every NS railroader. We are working cross-functionally, cross-structurally, and broadly across the entire enterprise ecosystem to eliminate waste, increase revenues, and drive efficiencies. These disciplines have allowed us to restructure our capital requirements, freeing up funds for key projects without compromise. We are entering 2025 with tremendous momentum, and we are unlocking productivity value for our network. The next phase transformation of our operating plan is in development. The new plan will roll out in Q1. It will further reduce handlings, introduce tighter standards for terminal times and connections, and will require us to continue stretching for improvement in our operating processes. In 2025, we will focus on fuel and mechanical infrastructure. These are big rocks for efficiencies and savings. I am incredibly proud of the results the operating team has achieved in 2024. They rose to every challenge, showing NS grit, tenacity, and drive. Coupled with PSR 2.0, their capabilities are driving network value creation and closing the service and productivity gaps with our peers. I will now turn it over to Ed.

Thank you, John. Good morning, everyone. I apologize up front for my cold and ask that you bear with me here. Let's start on slide 10. Overall volume for the fourth quarter improved 3% year over year. That was led by our intermodal and agriculture groups. Our total revenue and RPU declined primarily due to lower fuel surcharge revenue, along with negative mix within the portfolio and rate pressure within intermodal and coal that we've noted for most of the year. Merchandise volume improved slightly from higher soybean and corn shipments driven by new business and some spot opportunities. But these gains were offset by declines in automotive, metals, and energy related markets. The quarter saw a 2% increase in RPU less fuel, which marks another quarterly record in that metric with 38 out of 39 consecutive quarters of year over year growth. We also set quarterly RPU less fuel records for both industrial products and for automotive. In intermodal, we realized a 5% year over year volume increase with gains in both domestic and international through sales pipeline winds, increased freight demand, and empty container volumes. Premium continues to face market headwinds. Truck prices remained low, causing domestic intermodal rates to be generally in line with last quarter. However, note that RPU less fuel finished up 2% due to a lift from contract recoveries and rate true ups. Let's turn to coal. RPU volume decreased 1% with coal prices driving a 9% decline in revenue. Utility experienced reduced burn demand due to continued low natural gas prices while lower seaborne prices impacted our export business. Okay, moving to slide 11, let's talk about full year results. We achieved strong 5% volume growth. Overall, revenue was flat as we faced significant fuel headwinds of $261 million, along with lower coal rates. The intermodal unit led the company in volume growth, and an important bright spot in revenue was the Merchandise Business Unit that achieved record revenue, revenue per unit, and RPU less fuel for the full year of 2024. Let's go to slide 12 and look ahead. Our 2025 outlook is for modest volume growth driven by the reliable service product that our customers are enjoying now. For our merchandise markets, we expect lower vehicle production due to weaker than expected sales and some inventory build. We expect improved manufacturing activities supported by lower interest rates and strength in our chemicals markets such as plastics and waste. However, the potential for new tariffs will introduce some near-term uncertainty in the many markets that we serve. Despite these uncertainties, we are confident that we're well positioned to recapture market share and deliver the value that our customers expect of us. Turning to our intermodal markets, USMX and ILA reached a tentative agreement which helps remove a key source of uncertainty. Strong import and export demand has been a growth driver. However, new tariffs will probably create some headwinds. We expect volume growth driven by new business and continued empty repositioning to partially offset these headwinds. Truck pricing has yet to recover, but excess capacity has finally started to come down. We're seeing some gradual improvement in some of the key industry metrics such as increasing tender rejections. We expect falling export prices in coal along with softer demand for utility in our territory due to lower natural gas prices and generally elevated inventory levels. We're going to continue to keep a close eye on these factors as the year progresses. 2024 was a transformative year for us and we now have reliable service that's consistent, resilient and is built to grow in the markets that we serve. I just want to end by once again thanking our customers for their partnerships and their trust as we move into 2025. And with that, I'll turn it over to Jason Zampi to review our financial results.

Thanks, Ed. I'll start with slide 14 which reconciles our gap results to the adjusted numbers that I'll speak to today. There are four items I'd highlight for you. First, a net benefit of $43 million related to the Eastern Ohio incident. Insurance recoveries exceeded the incremental cost in the quarter. I'll recap where we are with these costs here momentarily. We also recognize the $53 million gain related to the finalization of the Virginia line sale transaction, the first portion of which was recognized last quarter. Additionally, we continue to sunset certain technology projects resulting in an additional $27 million in restructuring costs. And finally, as we have wound down the proxy campaign and signed the cooperation agreement, you'll note the final tranche of advisory costs incurred below the line in other income. Adjusting for these items, operating ratio for the quarter was $64.9 and EPS came to $3.04. Slide 15 provides a recap of the Eastern Ohio derailment-related financial impacts. You'll see that to date, we have incurred nearly $2.2 billion related to the incident with incremental costs in the current year related to the class action settlement, further environmental remediation efforts, and other community assistance. However, the pace of insurance recovery is accelerated, bringing in $650 million this year alone, and we have now recorded over $750 million in total. Moving to the comparison of our adjusted results versus last year and last quarter on slide 16. We generated 390 basis points of operating ratio improvement in the face of revenue headwinds, driven by strong productivity gains, and that drops down to high single-digit net income and EPS growth. From a sequential perspective, the operating ratio was up 150 basis points, a little better than we projected due to the approximate $20 million in contract recoveries that we recognized at the end of the quarter, as Ed just discussed. Drilling into the $153 million of -over-year expense decline on slide 17, you'll note improvements in all expense line items, except depreciation, which was up on our larger asset base. Strong productivity improvements within labor and fuel efficiency drove over half of the expense improvement and helped to offset wage inflation and higher incentive comp accruals. In addition, purchase services was down $40 million -over-year in the face of higher volumetric costs. Great progress in this cost category. You'll also note the materials expenses come down as we continue to store locomotives, yet another benefit of our fluid network. Turning to the full year results compared to 2023 on slide 18, we had guided to a 100 to 150 basis point operating ratio improvement, and you'll see that we exceeded that commitment and delivered 160 basis points of improvement, and that's despite revenue being down slightly. It really comes down to a productivity story. John and his team over-delivered on productivity gains, exceeding our original $250 million target and delivering nearly $300 million of -over-year cost savings. So we're moving into 2025 with a lot of momentum from all fronts, operational, commercial, and financial. I'll turn it over to Mark to wrap up and discuss how we're thinking about 2025. Thank you,

Jason. So you heard about the really strong performance to close out 2024. We have powerful momentum entering 2025. While markets are hard to predict at this point, we will lean into our outstanding service and the resolve of our people to capture share. We made that happen in 2024, and we are confident we will do it again in 2025. Turning now to guidance on slide 20, we are planning on 3% revenue growth with positive volume and healthy core pricing, more than offsetting headwinds from fuel and coal. One thing fully in our control is productivity. We exceeded our 2024 target of $250 million of cost takeout, and we are again looking to exceed the original $150 million target for 2025. That equation translates to margin expansion of 150 basis points, which is at the high end of our long-term baseline guidance range that called for OR improvements from 100 to 150 basis points per year. Ultimately, we will continue to close the margin gap with peers, whatever the volume environment. CAPEX will be in the $2.2 billion range, and with strong free cash flow driven by our operating performance, our balance sheet restoration will be complete in 2025 and allow us to resume share repurchases.

So with that, let's get into Q&A.

Thank you, ladies and gentlemen. We will now

begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Chris Weatherby with Wells Fargo. Your line is now open.

Hey, thanks. Good morning, guys. If we could pick up on the productivity mark, obviously the 150 is the target for 2025. Maybe we could break that down into buckets so we can understand where we can source that. And then if you zoom out a little bit and think bigger picture over the next maybe couple of years, what you think the potential on OR is? You guys have made significant strides from where you were a year ago. I guess if you think about sort of the next couple of years, what do you see as the opportunity?

Hey, thanks, Chris. Appreciate the question. I'll have John talk to you a little bit about where we're seeing the runway on productivity. But we're really excited and confident because we laid out the 250 target for 2024. We exceeded that. We think we can exceed. We know we can exceed the 2025 target that we laid out at 150. So we're going for more. We're really optimistic now going forward. And with regard to the long-term OR, I think we definitely have the self-help opportunities here to continue to improve OR. We put out the 100 to 150 basis point improvement guideline on the long-term basis on kind of a regular where we are volume environment. And once we get the kind of the surge, the economic recovery that we're expecting, that's kind of the turbo boost where I think we've got a path to that 60 range. So John, do you want to talk about the buckets?

Yeah, absolutely. Thanks, Chris. It's a really, really good question and one that we're really pushing ourselves hard to answer for everyone. And I think it starts and stops with our standards that we're increasing. We're coming off a great platform and bedrock of solid service and good productivity in 24. We're building a new operating standard to increase the availability and reliability of important assets and the framework for continuous improvement in our tighter and more deliberate operating model. And it's going to be step functions across certain assets, utilization for cars, locomotives, even the rubber-tired vehicle fleet. Working hard across all segments of the business with IT and network infrastructure. And really right sizing the network to the capabilities, increasing the skills and output of people through safety and the Thoroughbred Academy of Education. And really trying to align the head count to the GTMs and really have a deliberate structure on how on board resources and deliver capability.

So Chris, I think as you look at the P&L, you're going to see it show up a little bit everywhere. Comp and Ven will be an area, again, where we can continue to be more efficient. We've taken out a ton of overtime and excess costs this year. There's more that John's identified by just running more efficient and cleaner connections in that line item. You remember we had a pretty meaningful head count reduction in 2024. We'll get the full year effect of that as well in 2025. But also I think we'll see reductions in materials, as John just touched upon. We'll see reductions in fuel from efficiency improvements. And we'll even see improvements in purchase services, rents, car hire, equipment rents. So pretty much across the board.

Thanks a lot, Chris. Got it. Thank you.

Your next question comes from Scott Group with Wolf Research. Your line is now open.

Hey, thanks. Good morning, guys. Just on the 3% revenue growth for the year, any color on how to think about the mix of volume versus yield? And then maybe just want to follow up on the labor productivity side. Really good in Q4 with volume up three, head count down five. How do you feel about incremental labor productivity opportunity in 2025? Hey, Scott. It's Ed. I'll

take on the first part of your question there, which I think was how do we think about the sort of mid single digit 3% revenue growth next year? We expect growth in most of our markets. Coal is really the only place where we see a lot of overt weakness. But we still got a fuel headwind out there. We know going into this year, and coal price will be another headwind. So we expect volume growth and our price plan to deliver a 3% against both of those headwinds. I'll turn it over to Jason.

Yeah, I think on the labor productivity front, as you called out, appreciate the call out there on the great labor productivity we've had in the fourth quarter. Probably more focused on the T&E side. I think as we move into 2025, we'll not only have continued benefits there, but we've got some runway in labor productivity across all the operating ranks.

Yeah, I couldn't agree more, Jason. You think about our Q4 24 versus 23, where we had an .5% reduction in overtime and full year of almost 15%. Getting back to the basics, creating a lot more discipline within our terminals. Empowering and developing local supervisors to really drive that performance and creating that discretionary effort. And things as basic as getting ahead of the labor negotiations and really distilling purpose and intent on how we engage with our craft employees. And it's all coming together and leading ourselves to some very, very solid productivity initiatives. Thanks

a lot,

Scott.

Thank you.

Your next question comes from Ken Hexter with Bank of America. Your line is now open.

Hey, great. Good morning. Just if I can clarify on the volume comment or I guess the revenue. Was that all volumes then? You see yields fairly balanced and so it's all a volume commentary in terms of how you're looking at growth. And then thoughts on the buyback cadence into 25. And lastly, John, I want to join the need for speed war room when you get a chance.

Hey, Ken, we've always got a seat for you. Just bring your seatbelt because they move fast in there.

Hey, Ken, this is Ed. You know, when I think about how we're going to deliver growth next year, it's really a combination. Yes, it's going to be led by volume across most of our markets. And then we got a price plan that's going to beat inflation again this year, just as the past.

Yeah, and Ken, your second question on share repurchases. You know, we've really done a good job this year rebuilding our balance sheet. And that's, you know, through really three fronts, improved profitability, the insurance coverings, recoveries that we've been able to achieve here and the line sales. And our philosophy on those capital distributions hasn't changed. So we always invest in the business first, then pay dividends and then, you know, have share buybacks. Obviously, that was interrupted this year in 2023 and 24. But we've got a path to deliver the balance sheet throughout the year. And we're going to be able to start resuming share repurchases at a measured pace. And, you know, it's critical to us. That's a key component of our value creation framework that we laid out a couple years ago.

Just to add a little bit more on the revenue, because I think maybe others are probably also trying to hone in here on the volume. We do expect some volume growth, I think is what Ken is saying. You know, probably a couple few points of volume growth. We're going to get good, really solid core pricing again, in particular merchandise. You know, we probably don't have the headwinds and intermodal pricing like we've had to face. So and we're hoping that we'll start to see that maybe come up with a stronger, stronger truck market. And then, you know, we do have headwinds still with regard to fuel and in particular coal, coal pricing, but also coal volume. So you put it all in the mix master and that's how you end up with the 3% revenue growth that we're guiding to. So thanks a lot.

Thanks. Can I just clarify one thing there? Does that include the tariff thoughts or is that before any of that?

Yeah, I mean, correct. That includes our outlook today. Okay. Thanks for the time. Thank you.

Your next question comes from Brian. We'll send back with JP

Morgan. Your line is now open.

So I just wanted to ask a little bit more about pricing

to the value of the service as it improves here and remains more consistent. So in the past, you've talked about maybe losing some market share based on some of service challenges and disruptions that you had. So when that improves, do you see more of that as market share gain and recapture or do you see a little bit of upside of yield or is it perhaps a little bit of both? So now that you got to momentum, interested to hear how that's progressing this year. Thank you.

You know, we, this is Ed, thanks for the question. It's a good one. It is. And we actually talk this around a lot internally. I think the way that I think about it and the way I would put forward the way that everyone else should think about it is we are very interested in how much wallet share we have with our customers and whether that's share reclaimed that's coming from somewhere else where it used to move on us or whether it's share that has never moved by rail, but now it has the opportunity to because of the value of the service that we're delivering. We're very interested in how we can expand our wallet share with our customers, both our existing customers and adjacent customers in the supply chain. So we're working really hard on that in terms of pricing, the value of the service. We've been very successful, particularly in our merchandise markets where we offer exceptional value when we can deliver a good service product. We've been very diligent about being able to recognize that value through price. And we fully expect to continue to do that again this year. The value of our service continues to improve as we deliver a reliable, resilient service that customers can count on every day.

So in short, Brian, both. We think that the value of really good service gives us leverage on both sides, pricing and volume, share recapture I should say.

Okay, understood. Thank you. Thank you very much.

Your next question comes from Tom Wadowitz with UBS. Your line is now open.

Yeah, good morning and nice to see the continued strong momentum in what you're doing with the network and results as well. Wanted to see, I think, kind of following on Brian's question, how do you think about, you have optimism on chemicals being stronger? Is that just kind of customers doing well or is that gaining some share? And I think also at the beginning, Mark, you said customers are noticing. Are there specific examples where you say, okay, part of that chemicals is, hey, we've got some new wins that are a component of that. Are the new wins more likely to come in other segments? I guess just more around the kind of where some of the growth comes from. Do you already have some of that set up in terms of new business?

Yeah, that's a very good question. For us, when we look across our markets, particularly at our merchandise markets, we know that we have, our customers have suffered because of our service over time in a few very specific areas and one of those is chemicals. And so we're putting a lot of emphasis on making sure that we can deliver value in that particular segment. When I think about our local service product and how we deliver for our customers, John and I spent a lot of time, we were on the call this morning actually, talking about specific customers and how we can deliver more value for them on a much more rateable basis. That's really fundamentally where we want to go and that is be very specific and targeted for wallet share with our customers. The second piece of this is as we deliver a better service and higher velocity, it actually gives us more agility inside the network to respond to what's going on in the marketplace. I look at our success in our ag markets over the past two quarters where we were able to actually be very agile and take advantage of what the market was offering in a way that we couldn't have previously as a good example of that. In terms of other markets where we see growth, I think Intermodal is going to lead growth this year. They did last year, they will again this year. We have a very bullish consumer still and it appears we have a very resilient economy. I think both of those things are going to manifest themselves in more opportunity for us with a better service product.

Yeah, we've had a really good Intermodal service product for a couple of years now but it is at extraordinarily high levels.

I guess to be clear on the chemicals comment though, you have visibility to some business coming back. That's not just chemicals market looks good. That's like getting business back as well as maybe some growth in market.

That's correct. Yeah, we have a lot of sites with specific wallet share opportunities

that we're on top of. Great. Thank you. Thank you, Tom.

Your next question comes from Brendan Oglenski with Barclays. Your line is now open.

Hey, good morning everyone and thank you for taking the question. John, I was wondering if you could elaborate on the changes you're making to the OPP plan this year. I think you called it refreshment in the slides but maybe like a newer operating plan in your comments. So can you maybe elaborate more there?

Yeah, absolutely. The refreshment or the new operating plan as you call it is really the next iteration of continuous improvement. We've been turning out improvements in our terminals. That was our starting point on time performance and over the road speed. As we've moved through the progression of improvement on our network health, our asset efficiencies and our customer facing metrics, the next evolution is tightening down standards. So connection standards in terminals creating better yield for our train lengths, for our train weights, for our customization of the service that Ed needs in order to be competitive and to grow the business. We're looking then over the road and how do we make our end to end a lot more competitive and once we do that and we leverage up on the speed increases that we've got, sizing our service plan to meet that speed and that gives us a lot of flexibility to use our collective agreement articles on employee availability and accessibility to do more at the front end of their trip or the back end of their trip and start to really yield out on productivity. It will help us right size our fleet, right size our cars and really be more disciplined in how we operate. So reduce handling. Absolutely. Again, back to that philosophy of extending the length of the trains as long as possible. That will allow us to leave our locomotives in active service longer. That will reduce the dwell time of locomotives, the demand of locomotives, the fuel consumption, all of those things. It took a while. It took the last nine months of heavy lifting to get us in position to take this next step and it will be one of many iterations as we continue to improve but very confident in the capability of the team to deliver.

Thanks, sir. Brandon, thank you.

Your next question comes from Walter Spracklin with RBC Capital Markets. Your line is now open.

Thanks very much, operator. Good morning, everyone. So this question is for John. John, I know you've been targeting 100 to 150 base point OR improvement and it's still a bit of a gap relative to Pearson. My question is, what's kind of holding it back from a faster clip? And I know when you saw Hunter go over somewhere, you'd just be fast and furious and kind of take a hatchet to that OR. Are you protecting customer service? Is there constraints in labor agreements? Just curious as to where we could see upside of that speed like we did in 2024 and what might be holding it back, if anything?

Well, I'll tell you, we're not leaving any stone unturned. But let's just be clear about that. And we have to set a flag in our budget. Jason's got me challenged on a number of things, including how do we increase our car miles per day, our fuel efficiencies, our recruise. I mean, he's right down to the taxis on me. But what I think is that we're going to leverage up on our locomotive productivity. We've got big rocks to gain on our fuel and our purchasing services. And so while we finish the year slightly ahead of our guidance and we're really, really proud of the team for the $292 million or $293 million in cost takeout, we're attacking everything. And I'll go back to the last question, is that restructuring the operating plan to leverage up on the disciplined approach to improvement is putting more pressure on me and the team to deliver to a higher standard. I love our war room mentality where we triage problems, we pull it out of the triage in the day to day and take it elevated up to continuous improvement philosophies and educate people, drive out anomalies from the system or give us a better competitive edge. And so these are things that Hunter didn't really do and we're doing. And it's Mark's leadership, it's a partnership I've got with Ed and Jason that are giving us a holistic approach to this. So there's no stone unturned. We're not holding back. There's nothing structural that's holding me back. We're locked in on the continuous improvement agenda. And our customers are why we're here. And I will not foreclose on our customer capability for a few cents of advancement. I know that's going to come and we're going to do it in a disciplined way.

You know, Walter, obviously there's a lot of history that you probably have studied about the pace of change that happened in some of the other roads. I would say I'm super proud of John's cerebral approach to what he's doing here. It's a very cerebral approach based on all the lessons that he learned being part of it in the past, which is why he calls it a Brandsit 2.0, PSR 2.0. So the evidence is here that we're doing this while we're taking on more volume and not compromising customer service. So, you know, I think this is a great story and I think we should all be proud of John for what he's doing here.

I'm proud of the whole team. It's a team effort. It takes everybody here.

Yeah, you're definitely delivering and just keep it up. Appreciate it. Thanks, everyone. Thank you, Walter.

Your next question comes from Jason Seidel with TD Cowan. Your line is now open.

Hey, thank you, operator. Marketing team, congrats on the good quarter and I hope you feel better, sir. Wanted to focus a little bit on the intermodal performance and the merchandise trip plan compliance, you know, clearly much better than last year when you look at that. You know, but there was what I think is probably more of a seasonal dip in 4Q. Can you talk to us about two things? One, what's the normal seasonal progression from Q3 to Q4 for both those measures? And what should we expect going forward in 25?

Well, why don't I start it? Because you hold me accountable for delivering trip plans. And we've got really good trip plans, especially in the quarter. But we're hard on ourselves. I mean, we came through the fourth quarter despite getting hit by a number of hurricanes and port strikes and started this year into the polar vortex. But, you know, we my philosophy is drive hard, go as deep into the environmental conditions as you possibly can without being impacted and work like the devil to get out of it as fast as you can. And we saw that we saw some V shaped impacts to these things. But overall, when we came back strong, we were able to recover it fairly quickly. And I think we over communicated with our customers and prepared for the worst and delivered pretty solid results.

Here's what I would say about the third, fourth, third quarter, fourth quarter progression. We had a lot of things going on this year. And I say we is the royal way the whole industry did, whether it was a couple of hurricanes, one port stoppage and one threat of another one, which really distorted volumes and volume flows. And I'm very proud of the way that we responded to both of those challenges with regard to snapping back. That's really the definition of resilience. Something changes. You get hit with something you didn't expect. How fast you snap back to the norm. And I think we did a really good job.

Yeah. And I think they were underpinned by a three and a half or .1% improvement in overall velocity that allowed us to get end to end on intermodal. And what I really love is is a merchandise and unit trains were up 11 and 17% respectively in the same period. So all of our trains rose with that tide of continuous improvement.

And guys just go. Thank you.

Your next question comes from Stephanie Moore with Jeffreys. Your line is now open.

Hi, good morning. This is Joe Halfling on for Stephanie Moore. Congrats on the good results. Maybe piggybacking on a question we had heard earlier, John, on sort of the next stage of optimization, you specifically called out mechanical infrastructure and some fuel efficiency gains. I guess, could you help me understand maybe more specifically what are some of the items that you're looking to tackle and kind of what the magnitude of those savings could look like?

For sure. I'll just start with fuel. It's a number of things, including we finished 2024 at a 1.08 fuel efficiencies. And we had a bit of a headwind coming in and Q1 of 24. We were at a 1.22. And we really worked hard to get it down to where we were that ended up at a fairly solid number and a record in the quarter and a record in the year. So that was founded by having a really strong balance on HPT and disciplined use of distributed power, right size locomotives for the right size trains, stopping less. So the number of disruptions over the road decreased significantly because of our mechanical war room and the intelligence we could gather there. So we're building better trains, more capable trains across the road. And when you're not idling cars and idling locomotives, you're not wasting fuel. So our fuel productivity was increased because of our over the road capability and the discipline of pulling out additional resources, storing them, and having more constrained asset utilization. So our locomotives dwelled less in between work events. We're also looking at a deliberate impact on how we distribute fuel. So our vendors, the vendor structures, the distribution systems, and all of those things that the categories that drive ownership reduction and new discipline, arbitrage opportunities, and balancing out how we self-supply our locomotive fleet with fuel. So those things are in flight. We started to really get traction towards the latter part of the year. We're doing it on a quasi-manual basis right now. And we expect as the year progresses, we'll have further and further automation towards that. And I would say we're also pretty blessed with our energy management systems that we've put in place towards the latter part of the year that have delivered significant results. From a mechanical process, we're looking at all of the assets and how we cycle our car fleet and locomotive fleet for repair. So the physical assets, the production that we've done, and even the AAR visibility and how we bill and how we get value from our locomotive, or sorry, our mechanical efforts on car. So all of these things are in flight. And we'll really start to see strong performance on those things as we get through the year. I don't know, Jason, if you have any further color on that.

Jason Sperling No. I think, you know, those, as you mentioned, John, I think, you know, those are going to be the key, some of the key areas as we think about our productivity moving into 2025 and really accelerating on that total commitment there of $150 million plus.

So it's

great

work. John O'Brien It was really helpful, guys. Thank you so much. You can wrap again. Jason Sperling Thank you.

Operator Your next question comes from Bascom Majors with Susquehanna. Your line is now open.

Mark, you've been in the CEO seat almost five months now. You've gone through your first annual planning process as CEO, a couple board meetings. Can you talk a little bit about the board dynamics, you know, where everyone is clearly aligned and, you know, what the board's number one priority for you and senior management is over the next 12 to 18 months? Thank you.

Jason Sperling Hey, thanks, Bascom. Look, our board has been really remarkably unified. They came from different avenues. We've got a lot of new board members. The majority of them are within the past 18 months. Yet they've all congealed in a beautiful way in the boardroom. I'm really pleased to see the engagement from all quarters and the mutual respect that's being shown, given everybody's unique background. So I would say that their principal objective, and we had a board meeting yesterday, actually, and the questions are what can we do to help support management on its journey, because they believe in the strategy. They believe that it's yielding results. They believe in the team that we've assembled, which I'm super proud of. And they really just want to be as supportive as they can, but also coach and guide where they see opportunities. So right now, I'm thrilled with the dynamic, and I think our management team feels

fully supported by the board as well. Thanks, Bascom. Jason Sperling Thank you.

Coordinator Your next question comes from Ravi Shankar with Morgan Stanley. Your line is now open.

Ravi Shankar Great thanks, morning, everyone. Just a clarification here. You mentioned tariff headwinds to volumes through the course of the year, but do you expect to see tariff tailwinds before that? What are you hearing on potentially shippers restocking and that spillover into the rail side, potentially being a tailwind before we see the headwinds?

Jason Sperling You know, Ravi, I think what we said is uncertainty around tariffs, and I think reasonable people can have differing opinions on how tariffs may impact their business, but certainly in the rail transportation space, I have a different view that maybe even Ed may mildly disagree with, but these things take a while to play out. We don't know how they're going to play out, and from a producer's perspective, a manufacturer's perspective, if suddenly they're subjected to tariffs, how they respond may vary. You know, where are the alternative sources? At the end of the day, things will play out over time, but we move the U.S. economy. We move GDP, and whether that GDP is coming across the border as an import or whether it's now being produced domestically due to some on-shoring, we're going to be there to move it. So I kind of think it's going to be a net wash in terms of volume, but it could play out a little bit different, and the beauty is that our network now is nimble enough to adjust to wherever the change in the source of supply comes from. So I wouldn't say that we're baking in, and I think Ken tried to ask that question, but I don't think we're baking in a particular headwind, per se. It's just we're nimble enough, we don't know exactly how it's all going to manifest, but we'll be ready to move it, whether it's domestic, whether it's crossing the border as an international move. Ed, why don't you clean that up a little?

Look, I don't disagree at all. I think our customers would tell you that they all have different opinions on how it's going to manifest itself or not, but let's talk about some facts. Over three quarters of our business is tied to our domestic economy. That leaves less than 25% that's tied to international trade, and I think you're exactly right, Mark, and I'm not saying that because you're my boss, but I think you're exactly right. We have enough operational nimbleness now, and frankly, with the capability that we're developing in our sales force, that we're going to be able to respond to whatever the economy delivers or whatever trade policy delivers. We're going to be there to make the most of those opportunities, whether they're domestic or international.

Understood. Thank you. Thank you, Robbie.

Your next question comes from Daniel.

Ember with Stevens.

Your line is now open.

Yeah. Hey, good morning, guys. Thanks for your questions. Maybe one just on the call outlook. You mentioned a few times expecting more bearish outlook versus your prior expectations, and that's in the slide deck. I guess you talk about what's driving that software outlook, given the stronger back half of 2024 results there, and then any update on the contract you're bringing online this year. I think it was about 5 million tons annually when you announced it, but is that still the contribution, and when should that flow into numbers?

I think you're referring to coal. Is that right, Daniel? I couldn't hear you at the beginning there. Yes, sorry. Yes, all of the coal side. When we look at the forward curves, that's the first thing that we look at when we think about what's going on with the international markets. Coal price has been under pressure now for a couple quarters, and we see that continuing. I think there's probably a downside risk for the market in that particular dimension. On the volume side, we'll have to wait and see. I think that there's clearly some downdraft in terms of demand currently on the seaborne side. Then on the domestic side, we've had a couple of nice winter weeks here, which probably has helped burn rates, but there's still plenty of stockpile out there on the utility side. We're watching gas prices, nat gas prices, very closely, which I think will help determine the trajectory going forward for that domestic demand on the utility side.

I think that's an important variable. There's upside if nat gas prices go up, and they've moved up a little bit in recent weeks, but right now, that's not the way the curves are indicated.

Your second question was about our new customer. We expect to see volumes from that coming on in the second quarter and going forward.

Thank you, Daniel.

Your next question comes from David Vernon with Bernstein. Your line is now open.

Hey, good morning, guys, and thanks for fitting me in here. Ed, can you help us understand how we should be modeling the average RPU in coal moving forward here sequentially? Then a secondary question for the broader team, we're thinking about the 150 bips of OR improvement kind of year over year. Is there anything that we should note around seasonality or when those gains should be showing up in terms of the margin performance? We've got a lot of questions around whether 1Q is going to be getting hit from export coal falling or remarking some of those contracts. I'm just trying to kind of blend that all together if you could help us shape out what the, when that headwind starts to hit for 2025. Thanks.

Well, I think the headwind is kind of there now and probably continues going forward. As we get later in the year. He's asked about coal. Yes. RPU. Yeah, that's exactly what I'm talking about. We see that seaborne price, you know, it's down now. It's going to continue to be down, we think. Certainly in the near to medium term, longer term as the year manifests itself, we're just going to keep adjusting our models. But, you know, we think there's probably still some downside that we've baked into our models. And I think everyone else should too.

Yeah. And David, on your question on the OR, you know, we've got a lot of momentum from our strong service product and operational progress. And, you know, that's really what makes us confident to guide at that top end of our original range. So that 150 basis points of annual improvement. You know, I'd point out that that improvement is in the face of nearly 200 basis points of pressure on the OR from, you know, inflation, fuel price and depreciation headwinds. If you think about it in the quarters, you know, I would just say there's puts and takes in the individual quarters. For example, you've got the timing of incentive comp in the first quarter. Things like seasonality of volumes and the timing of wage increases. You know, you know all those. But so when you average it all out, we're again confident in that ability to deliver the 150 basis points of annual improvement despite those headwinds.

Does the momentum comment push some of that more in the first half of the year or is that offset by some of the seasonal factors you mentioned?

I think the momentum I'm referring to is just, you know, operational momentum. And we're really, you know, pleased with how that's going, I think, on all fronts. Thanks.

All right. All right. Thanks, guys. And congrats on your first quarter here. Thanks.

Thank you, dude. Appreciate it.

Your next question comes from Ari Rosa with Citigroup. Your line is now open.

Hi. Good morning. So you mentioned some of the port stop, which is distorting volume flows. I just wanted to get your perspective on to what extent we might have seen full forward of volume in fourth quarter given some of the strong intermodal results that we saw and then to what extent did you kind of have to add costs or add resources to manage through some of the variability in the kind of port stop jizz or variability in volume?

Thanks. Sure. This is Ed. I think we did see certainly during the third and fourth quarters, you know, more volume turned back to the west coast for some east coast destinations and we were able to handle that really truly. I think I'll defer to John, but without much of a hiccup in terms of additional resources or train starts, it was really incremental volume on existing trains with a very good service product which kept fluidity rolling. Probably the biggest challenge for us was attempting to make sure that we were servicing our customers on the east coast as long as we could up until the anticipated work stoppage. And thankfully that didn't happen. John, you got any other commentary?

I absolutely agree with your assessment. We were able to handle it very well. I think we communicated pretty effectively and knew what we're up against. There was a little bit of sloshiness in the car supply that was a sector issue, but we were able to smooth that out really quickly and get back on track as soon as the market gave us a chance to.

Yeah, thanks for the question.

Your next question comes from Jordan Allager with Goldman Sachs. Your line is now open. Yeah,

hi. Good morning. So I think a week or so ago you put out a release talking about industrial development across your network, adding about 150,000 of incremental carloads sort of tailwind on that active pipeline. I'm just curious sort of the timing of this and is some of that even factored into 2025? And what's the potential for that to upsize over time? Thanks.

So we have a nice, very robust pipeline and pipeline process for our industrial development team. In the fourth quarter we had eight new locations and four facility expansions that came online and our 2025 pipeline continues to be very strong. Those numbers we put out really are going to manifest themselves throughout the year and represents full production for those facilities. And you know, the great thing about it is these are projects that are not just for this year, but they're for hopefully many years to come. And I think that's just a powerful testament to the value we can offer customers with the service that we offer. Thanks for the question.

There are no further questions at this time. I will now turn the call over to Mark George for closing remarks.

Okay, thank you everyone. We really appreciate you all participating. We look forward to connecting throughout the quarter. Be safe. Take care.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.