Norfolk Southern Corporation

Good morning, ladies and gentlemen, and welcome to the Norfolk Southern Corporation fourth quarter 2025 earnings conference call. Note that at this time, all participant lines are in the listen-only mode. Following the presentation, we will conduct a question-and-answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Thursday, January 29, 2026. 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 discussion of those risks and uncertainties we view as most important. Our presentation slides are available at NorfolkSouthern.com in the Investor section, along with a reconciliation of any non-GAAP measures used today to the comparable GAAP measures, including adjusted or non-GAAP operating ratios. 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, I'll now turn the call over to Norfolk Southern's President and Chief Executive Officer, Mark George.

Good morning, and thanks for joining. With me today are John Orr, our Chief Operating Officer, Ed Elkins, our Chief Commercial Officer, and Jason Zampe, our Chief Financial Officer. Before we get into the numbers, I want to recognize our Thoroughbred team. 2025 was a demanding year in every sense, and our people have met it with resilience, focus and commitment. They kept serving customers, improving our railroad, and they did it while tuning out the noise and concentrating on what matters most. Look, Q4 played out in an environment where volume was clearly softer than anyone had predicted. But even so, we controlled the controllables. costs landed exactly in line with the guidance we provided last quarter, reflecting disciplined execution across the company. And while there's been heavy external attention around the merger, I'm really proud that the team maintained its focus on the business, prioritizing safety, dependable service, and strong cost control. Now, looking back at the full year, 2025 was dizzying. It started with a challenging winter, followed by persistent tariff uncertainty, and then competitive dynamics tied to the announced merger. In the back half, the macro softened further and freight flows shifted. But through it all, our operating foundation held. Safety, our most important work, continued to advance, and service was consistent and reliable. We expanded our digital train inspection program, so now more than three-quarters of our traffic each month is scanned by portal technology. We had zero reportable mainline derailments in the fourth quarter. Let me repeat that, zero reportable mainline derailments in the quarter. Our investments in our one-of-a-kind digital inspection technology, our enhanced processes, as well as investments we've made in our people are collectively paying dividends. John will share more detail, but based on current data, 2025 stands as our best year in more than a decade when it comes to train accident rates. That progress comes from better technology tools, rigorous standards, and a culture that treats safety as a value, not a statistic. A year ago, I spoke about our desire to adopt a total quality management mindset at the railroad. And in our results, we are now seeing evidence of what we call total quality railroading. On costs and productivity, we did what we said we would do. And in several areas, we did better. We moved 3% more GTMs in 2025 with 4% fewer employees. That's 7% productivity. Our network is humming, and in 2025, we delivered steady efficiency gains with improved fluidity, asset utilization, and day-to-day execution that our customers can feel. These aren't one-off wins, but they're the product of sustained discipline and a team that knows how to execute. With that, I'll turn it over to the rest of our leadership team to walk through the quarter in more detail. John, let's start with you.

Good morning and thanks, Mark. I want to repeat Mark's opening comments, recognizing the outstanding railroaders across all of Norfolk Southern. Today, I will highlight their resilience, discipline, and committed leadership that produced the transformational results that I'll share with you today. 2025 was a defining year for operations. We strengthened the core of the franchise, delivered measurable improvements in safety and service, and advanced the structural changes required under PSR 2.0 to build a more resilient and efficient railroad. Despite macroeconomic volatility, weather-related disruptions, and the operational transitions required by the zero-base plan, the team executed with discipline and intention. The progress achieved in 2025 reflects the maturing operational culture, one grounded in accountability, transparency, and intentional leadership, and positioned us enter 2026 with stronger fundamentals, improved cost discipline, and a more reliable network for our customers. Turning to slide five, safety as an operating system. In 2025, we close the year with exceptional safety performance. As we enter 26, operations strategy is clear. A relentless commitment to our core value of safety. A relentless focus on service and decisive actions operate with cost discipline, positioning Norfolk Southern to compete and win. The data points on the slide represent a structurally safer, more resilient railroad, poised to deliver consistent and reliable performance. Our FRA reportable injury ratio improved 15% to 1.0, and reportable accidents improved 31% to 2.19. reflecting meaningful, sustained progress that underscores the effectiveness of our transformation. We closed the year with a capstone and tremendous momentum, delivering a quarter with zero reportable mainline derailments, finishing the year with an industry-leading 0.43 ratio. For the quarter, our mainline accident rate dropped to 0.13, a 71% improvement year over year. Taken together, these results are balanced and intentional. We are developing generational railroaders through the Thoroughbred Academy, placing people in the right roles with the right workload and reinforcing organizational clarity. Top work authority is respected and safety accountability is synchronized at every level. Turning to slide six, disciplined scheduled operations. Our PSR 2.0 transformation has been rapid, multidimensional, and disciplined. It is an operating model designed to simultaneously deliver safety, service, and productivity. In 2025, we focused on delivering high-quality service and reducing costs in response to variability. One of our most effective productivity levers was train operations. increasing train size while lowering the horsepower used to move those trains. Throughout this effort, we were intentional about protecting service performance and keeping the network operating at a low-cost structure. This strategy delivered meaningful results. Train load increased 4%. Horsepower per ton decreased nearly 10%. Fuel efficiency improved 4%. And GTMs per crew start rose 2.5%. War rooms have matured into a core competency, improving over-the-road performance and tackling complex mechanical and need-for-speed challenges. Year-over-year, unscheduled stops declined 31%, and through zero-base plan migrations, Q4-24 versus Q4-25, we reduced qualified T&E headcount by 7% and 6% for the full year. Let's go to the ballast line for a minute. Our new wheel integrity system, introduced just last quarter, has already proven its value, pinpointing a critical external vendor casting flaw on a wheel set that had been in service for less than a week. The new system, internally developed by NS, coupled with our relentless root cause investigation with stakeholders, confirmed there were seven additional brand new wheel sets across North America with the same manufacturing defect. Our findings and the collective actions of stakeholders led to an immediate industry-wide recall of these defects across North America. This is a powerful example of how Norfolk Southern's advanced digital capabilities help us solve real problems with scale, speed, and accountability. From an infrastructure point of view, mega workblocks continue to elevate productivity. In 2025, we delivered our $2.2 billion capital programs on time and on budget. Network reliability derived from our PSR 2.0 flywheel has allowed us to reduce our 2026 capital envelope by a further 14%, bringing our 2026 capital budget down to approximately $1.9 billion. delivering a two-year $450 million planned capital reduction while supporting a safe and reliable network ready for future growth. Turning to slide seven, continuous measurable improvement. Our team delivered a clear and compelling result. Even after raising our cost takeout commitment to $200 million during the year, we outperformed that higher target, delivering $216 million in full-year savings. As we've said before, our team is never satisfied. As you can see in the chart, we exceeded our 2025 cost takeout targets, and we are once again raising our 2026 cost takeout savings commitment from $100 million to $150 million, bringing our three-year cumulative total cost takeout to approximately $650 million. This underscores the strength of our PSR 2.0 transformation. and our committed leadership to deliver. Turning to 2026, we are intensifying efforts to lower dwell for both cars and locomotives. We will apply our new zero-based terminal methodology to terminals with outsized consumption of core resources and assets. By challenging and strengthening processes, our ZBT will instill factory management mindset, empowering terminal teams to operate their yards like small businesses. Supporting this shift are our clarity camps, which will equip frontline supervisors to think like owners, understanding how their decisions influence cost, how they drive profitability, and how to do so while maintaining industry-leading safety performance. They will gain a deeper appreciation for the cost of every asset and help build a bottom-up culture of discipline cost control. I'm proud of how our team performed in 2025. They embraced change, delivered results, and strengthened the foundation of this railroad. We have talent. We have 19,000 railroaders who deliver safety with intention, where discipline drives performance, where accountability builds trust, and where culture fuels pride. Our people are propelling our PSR 2.0 transformation, shift by shift, mile by mile, with intention and clarity. Now I will pass the mic to Ed.

Thanks, John. Let's move to slide nine. Overall, this quarter presented challenges for both volume and for revenue. As you can see on the slide, merchandise led the way, although our success was tempered by challenging market conditions. within intermodal along with persistently weak export coal markets. Overall volume for the fourth quarter was down 4%, driving a 2% reduction in total revenue. The volume impacts were partially offset by positive mix with RPU increasing 2% year over year. Now within merchandise, volume increased 1% from a year ago, driven by auto and our chemicals markets. Merchandise revenue, less fuel, grew 2% year-over-year, reflecting strength in both volume and price, supported by our strong service product that John mentioned. RPU-less fuel grew 1% year-over-year within the segment, as negative mix offset core pricing, most notably mixed within the chemicals franchise. In our intramodal business, shifting market conditions during the quarter drove a 7% decline in volume, RPE was up slightly at 1% as we continued to compete in an unexceptional pricing environment, leading to a 6% decline in revenue. Let's look at coal. Volume was up as increased electricity demand, favorable natural gas prices, and regulatory support gave strength to our utility markets, which was partially offset by reduced volume in exports. So while volume was up 1%, revenue was down 11% as lower seaborne coal prices drove RPU less fuel down by 12%. If you'll turn with me now to slide 10, let's review the full year. Walking left to right on the waterfall chart, we achieved an outstanding year in our merchandise business, growing revenue less fuel by $287 million, or 4%. through volume growth and pricing discipline. To underscore the strength, we delivered record annual revenue and record revenue excluding fuel across each of the underlying merchandise business groups for the full year 2025. Now, I want to drill into this one just a bit. We delivered a record year for our automotive franchise, setting a record for total revenue and revenue less fuel. and this performance was enabled by strong train performance and car order fill thanks to our operations group, as well as focused efforts by our customer logistics group to reduce on-terminal dwell. The key result of these combined efforts was a 4% year-over-year improvement in equipment cycle times and substantially greater terminal fluidity, allowing us to take advantage of the favorable market conditions and deliver the record revenues that I just noted. A really nice job by everyone involved, and our customers took note, gaining confidence in our service throughout the year. Back to the numbers. Intermodal revenue finished flat as we weathered trade volatility throughout the year and second-half share losses due to merger-related competitor activity. Seaborne coal market weakness throughout the year drove a $108 million year-over-year decline, even as utility coal volumes increased in 2025. Finally, volatile fuel surcharge revenue represented $134 million of drag for the year. These factors combine to produce a modest increase to overall volume and revenue. Moving to slide 11, we have our market outlook. Like last quarter, we continue to navigate an uncertain economic environment. For our merchandise markets, we expect a mixed outlook for vehicle production due to affordability challenges, and the fading EV incentives. Overall manufacturing activity remains mixed, with output forecast to expand modestly amid ongoing economic uncertainty. Elevated natural gas fracking and drilling activity in the Marcellus Utica is contributing to stronger demand across non-crude chemical energy sectors, driving increased engagement and business development with both new and existing customers. Looking to our intermodal markets, import volumes are expected to remain soft due to continued tariff volatility and evolving trade pressures. Warehousing capacity is increasing as companies deplete inventory backlogs, and truck capacity remains oversupplied. All these factors, plus an enhanced competitive environment in response to our merger announcement, shape our restrained view for intermodal. Seaborne coal prices have remained pressured, with significant uncertainty surrounding export trade. But we expect that utility demand to remain elevated due to continued strong demand for electricity generation in our service area, along with supportive natural gas pricing. All right, let's quickly turn to slide 12 while we're on the topic of coal. We're proud to be partners with Warrior Met Coal in servicing their new Blue Creek facility in Alabama. Back in 2024, we noted that the mine was in development, and we're equally proud now to have attended the formal ribbing cutting ceremony earlier this month. As the mining operations, the belts, and the rail loadout are now fully operational, we're pleased to be ramping up rail service and delivering high-quality metallurgical coal to markets around the world. As always, we want to thank all of our customers for their continued partnership and their business. The entire NS team is aligned around delivering the service that our customers need every day, building trust as a vital partner in their supply chains. And with that, I'll hand it over to Jason to review our financial results.

Thanks, Ed. I'll start with the reconciliation of our gap results to the adjusted numbers that I will speak to today on slide 14. Total costs attributable to the Eastern Ohio incident were $29 million, which included 24 million of recoveries under our property insurance policies. In addition, we recorded 65 million in merger-related costs, consisting primarily of legal and professional services and employee retention accruals. Adjusting for these items, the operating ratio for the quarter was 65.3, and from an EPS perspective, we earned $3.22 per share. Moving to slide 15, you'll find the comparison of our adjusted results versus last year and last quarter. Both comparisons reflecting a degradation in the operating ratio due to the top line headwinds as I just discussed. The drivers of the revenue decline are similar to what we discussed last quarter. And additionally, as we previously guided, we absorbed a full quarter's worth of impact from competitor responses to the merger in the fourth quarter. Expenses were favorable by 1% in both periods, primarily due to one large land sale in the quarter that benefited operating expenses by $85 million. Those year-over-year expense variances are laid out on slide 16. Overall, we had guided to quarterly expenses of $2 billion to $2.1 billion, and absent the large land sale that we weren't counting on closing in the quarter, we were right within that range. Notably, inflationary pressures we've experienced throughout 2025 in wages, materials, and depreciation continued to be headwinds in the quarter. That, coupled with timing of certain expense activity, drove increases primarily within purchase services and materials. Nonetheless, we continue to focus on the controllables, delivering significant improvements in fuel efficiency and continued strong labor productivity. Lastly, I point out we did have some recoveries in the quarter associated with storm damage incurred throughout the year. All in, while there were some puts and takes in the quarter, we are pleased with how our team handled a dynamic environment. Turning to full year results on slide 17, you'll note favorable performance across all metrics compared to last year. However, not in the way we originally intended. A year ago, we were projecting 3% revenue growth, which didn't materialize, but we did control the controllables. We had good cost discipline and exceeded our original productivity targets, as John just discussed, by over $65 million. In addition, while the timing of large land sales are hard to predict, the actions we took to monetize these underutilized assets during the third and fourth quarters helped to mitigate the operating income shortfall from the weak macro. The fourth quarter and full year also benefited from the resolution of a state tax issue, which increased net income and EPS by $50 million and 22 cents, respectively. Overall, the bottom line grew by 5% compared to last year. Finally, moving to cash flow on slide 18, we generated $2.2 billion in free cash flow, an increase of almost $500 million over the prior year. In addition, our free cash flow conversion was very strong, with the highest conversion rate since 2021. As we had guided to, we spent $2.2 billion on our capital plan, a 7.5% decrease from 2024. Going forward, we are planning for a $1.9 billion CapEx spend in 2026, with continued focus on the safety and resiliency of our network. I'll hand it back to Mark to wrap it up.

Okay, thanks, Jason. Before we wrap up, I want to leave you with a clear view of how we are approaching the road ahead. With the amount of change and uncertainty around us given the demand environment and, of course, the pending merger, we are keeping our team focused on simple priorities for 2026. We will prioritize safety. We've got to keep our employees and our communities safe. We must continue to deliver consistent and reliable service. And we will control costs. by driving productivity across the network, all while we fight for every dollar of quality revenue that is available. While we are seeing long-awaited stabilization in truck pricing, the impacts of shifting tariff policies remain uncertain and many customers continue to adjust to fluid conditions. But a macro backdrop remains hard to read, but we are staying sharply focused on the fundamentals. For the year ahead, we expect our cost base to be in the range of $8.2 to $8.4 billion, with an ability to accommodate a variety of volume growth scenarios within this cost envelope. We are also reducing capital spending by nearly $300 million to $1.9 billion, reflecting a prudent approach in this environment, while still supporting the reliability and safety of the network. Now let me close with a brief update on the merger. As you heard from Jim on Tuesday, we are working closely with UP to include the additional information requested by the STB and submit an augmented application, taking the necessary time to ensure that it's thorough. We remain committed to working constructively with all stakeholders throughout the regulatory review. We continue to firmly believe in the benefits of creating the nation's first TransCon rail network, one that connects the United States from east to west, and gives shippers a more competitive single-line rail option to ship across and within the watershed. Growth has eluded the U.S. rails, and I strongly believe that this merger is a necessary catalyst to grow, helping us recapture freight from the highway while supporting the reindustrialization of our country and strengthening our supply chains while offering better opportunities for employees across a unified network. We will have a more efficient, flexible, and reliable railroad, providing single-line access to more than 100 ports connecting to global markets and 10 gateways to markets in Canada and Mexico. So to wrap as we move into 2026, the priorities for our team are clear. Focus on the preservation of safety, protect the excellent service that our customers count on, maintain tight control of our cost structure, and compete hard for quality revenue. That's how we will continue delivering value both as Norfolk Southern today and as part of a stronger future transcontinental network. So thanks for your time and your continued confidence in our team. We'll open it up to questions.

Yes, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touchtone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. And out of consideration to other callers on the line today and time allotted for questions, we ask that you please limit yourself to one question. Thank you. Your first question will be from Tom Wadowitz at UBS. Please go ahead, Tom.

Yeah, good morning. I wanted to ask you a bit about the how you're thinking about volume. You know, you gave us the expense guide. I, you know, I just want to see if you can kind of point us to an area for volume and revenue. And also, I guess, within that, how are you thinking about, I guess, the strategy on volume? Obviously, you took a bit of a hit from the shift in some of the J.B. Hunt business over to CSX. I'm just wondering, and, you know, and it's a weak overall freight backdrop, right? So I'm wondering, do you get more aggressive in your, you know, focus on growing volume or those efforts? Or do you kind of say, look, we'll just kind of deliver good service, and we'll see what the market does, kind of take what the market, you know, brings to us. So, yeah, thank you.

Hey, Tom, thanks a lot for the question. And, you know, look, like I mentioned, it's a tough demand environment out there. It's actually pretty hard to predict. As we go into 2026, just you have to understand, we're also swallowing about a point of revenue headwind. from the enhanced competition that already exists out there and some of the losses that we've had because of that new competitive environment. We feel really good coming off of 25 based on our performance in merchandise where, you know, we grew healthy and we also took share. Obviously, Intermodal was the battleground for us where, you know, we faced some real challenges. So it's a little bit hard to say and, you know, I'll hand it to Ed to give you his perspective, but right now, We're really focused on just maintaining our cost within the guidance range that we gave you where we can accommodate a variety of different volume scenarios. And, you know, so we can handle growth, you know, up to several points. And, frankly, you know, whatever revenue we get, it's going to come with really strong incrementals because we've got the capacity. But, Ed, why don't you build on that? Sure.

And thank you, Tom, for the question. Look, we know what we have to do in 26. We got a great record on safety right now, and our service is where we want it to be. And that's what our customers have really come to depend on. And so we're going to fight for revenue for every dollar, both in terms of share as well as pricing. And, you know, frankly, I expect to continue the momentum that we've had in merchandise, particularly around our price model. Now, it's going to be offset probably by intermodal, which still looks sluggish when you think about all the trucks that are still out there on the highway, and the enhanced competition that Mark mentioned. And frankly, we don't see a lot of support from coal going forward, at least in the near term in terms of price. So, 25 is a volatile year, and November and December in particular, we really had a loss of momentum across the industry, I would argue. in terms of volume and demand. So it's really hard to predict where 26 is going to land. But again, as Mark said, we know we've got a 1% headwind to start with, and we think softness is probably going to continue in the first half at least. We're going to wait and see what happens, but we are ready. Thanks, Tom. Next?

Next question will be from Brandon Oklinski at Barclays. Please go ahead, Brandon.

Hi, good morning, and thanks for taking the question. Mark, maybe you want to reply to some of your competitors because we had a call last night where maybe the view was that this merger really doesn't enhance rail-to-rail competition. Maybe customers aren't really asking for it. So maybe you want to provide a little bit of insight from your perspective.

Sure, Brandon. Look, the railroads came out, the competing railroads came out pretty early on opposed to this before we even filed an application, okay? Before we could even lay out the case, there was a little bit of a panicked reaction. And let's face it, they're all taking positions that they believe will benefit their own business. I understand it, you know, but it's not really – However it's couched, it's not really positions that are based on customer interests or benefiting the industry. I feel when you look at it, there's a lot of misinformation out there. There's a lot of scare tactics that are out there, and those are being circulated by the other railroads, and we're addressing those. But when it comes to prices, as an example, those are based on market principles, not simply the elimination of arbitrary geographic barriers that exist, like the Mississippi River. Remember, the customers aren't losing options. BNSF, they're still competing in the west with the combined railroad. CSX is still competing in the east against the combined railroad. You know, they all say alliances work just as well as a merger. But then they've, you know, so they've quickly joined up with each other in various alliances, and they took business from us. It's enhancing competition, no doubt about it. So their arguments are deeply inconsistent. Ultimately, they know that to compete with, you know, seamless, single-line service, they've got to compete harder, including likely lowering their prices. And that's what customers should be excited about, and frankly, that's what scares the other railroads. and that's why you hear such a backlash about this merger. I would argue we're on the side of nobility here because we're giving customers more options than they have today. And the customers I speak with, they know it. Really, they're rolling their eyes at a lot of the noise that they're hearing from the others. They actually want deeper access into the watershed via rail to new and unserved markets or underserved markets so they can move the freight onto the railroad from the costlier highway solutions. So that's basically it from my perspective, full stop. Thanks, Brandon.

Next question will be from Jason Seidel, PD Cowan. Please go ahead, Jason.

Thank you, operator. Marketing team, good morning. Sticking on sort of the competitive nature, do you guys still think that there's going to be a little bit of bleed of freight to some of that competitive environment that exists in the marketplace as we move throughout the year and sort of what steps are you taking to sort of stem the tide? And then maybe as a quick follow-up, the $300 million reduction in CapEx, can you talk about where it comes from? Thanks.

Sure. Yeah, I mean, more bleeding, I would say we've got to lap the impact of what happened in the, you know, September timeframe. And as we lap that, we're looking at, like I said, a full point of headwind. Could there be more? Well, I mean, like I mentioned, we are in a new enhanced competitive environment. And, you know, we're fighting back. We've offered new services. And will the other railroads compete harder? Probably. But right now what we've got line of sight to is about 1% of revenue headwind. But, you know, I've kind of told the team we're going to fight like hell for quality revenue here. So we want to go get attractive car loads and we want to try to, you know, optimize our revenue line as best as we can. We're not sitting back and take body blows. So we're going to fight like hell. We're, like I said, offering new products at the same time. So, Ed, you want to add on to that a little bit? Yeah, not much to add.

You know, you think about products like our new Louisville service in conjunction with UP as well as What we just announced up in Ayr, Massachusetts, which will enhance the competitive landscape in New England, that's just two examples of what we're doing to fight back. There's more in the pipeline, and we'll have those out as soon as we're ready. You know, frankly, Mark hit it. Of what we know, you know, it's about a point ahead win. Customers, as Mark said, they're going to choose the options that make the most sense for them economically, and that's what we're focused on.

Jason, do you want to talk about capital? Yeah. Yeah. So, you know, Jason, thanks for the question. I think, you know, just to be clear, our capital spending, as it's always been and as we will continue to as we move forward, is really focused on the safety and resilience of our network that I talked about. You know, we've also done a lot of work over the last couple years to build a foundation for growth. You've heard us, you know, talk about that in strategic areas like the 3B down in Alabama. to support the Warrior Coal Partnership, as an example. So we're now benefiting from a lot of those investments. Specific to the reduction in capital that you've seen not only over the last year, but our projection for 2026, It's really the result of asset efficiency and the gains we've made from a network fluidity perspective. It's really allowed us to pull back on some of the equipment spending as we're turning our assets more quickly. John, I think maybe some color on locomotives and the capacity that we've created.

Yeah, Jason, I couldn't say it any better than you did. It starts with our productivity. We're sweating every asset, creating accountability for the consumption of our resources. And the value we've generated over the last, call it two years, is really paying dividends in that. So we're able to protect all of the core investments to harden the network from an engineering perspective, harden and modernize our technology structure, and then take some reinvestments in our growth and our capacity so that we're able to grow, be poised for growth for Ed without having to do those capacity projects. And as we've committed to, as always, as our business pipeline comes to fruition, we'll make those smart, strategic, and very tactical investments from a capital perspective very, very specifically. So we have a no regrets approach to things, and we're going to sweat every asset.

All right. Thank you.

Next question will be from Chris Weatherby at Wells Fargo. Please go ahead, Chris.

Hey, thanks. Good morning, guys. I was hoping maybe you could unpack the OPEX guidance, maybe help us walk from, I guess, the roughly 8 billion in 2025 to where you see it going in 2026. And I know it's difficult to predict the top line from a volume perspective, given the macro and competitive forces, but I guess Do you see a path to year-over-year earnings growth? I guess the OPEX number gives us a little bit of context of what the potential earnings power of the business could be and just kind of careers how you think about year-over-year earnings growth in that context. Jason? Yeah, let me start with the OPEX side. So, you know, when I look at this, Chris, I'd really put the expense drivers into three buckets. So, first, we've got some outsized inflation. You know, you think about, I think, the latest CPI inflation. The forecast I saw was about 2.6%, 2.7%. We're expecting inflation more in the 4% range. So, you know, we've got things like our wage inflation. We had a 4% increase last July that's, you know, coming in still into the first half of this year and another 3.75% as we move into the back half. Our health and welfare rates are up over 12%. You know, we've got insurance premium increases. So you put all those things together. 25% insurance premium increase, right? That's right. That's right. And so, you know, you put all that together, and that's about a 4% increase in inflation. In addition, you know, from a land sale perspective, we're expecting some more normalized land sales. You know, we had two large ones that we called out in the third and fourth quarters. But even without those, we had some smaller sales that totaled about $70 million in 2025. And next year, we're really back to that $30 to $40 million run rate. So that's another headwind. Finally, the third bucket is productivity. So we talked about another $150 million of productivity that we're going after here. And that's on the back of $500 million that we've already achieved over two years, almost hitting our full three-year guide within that two-year timeframe. So you put all those three things together, and then I think, you know, when you think about the range, it's really based on a range of, you know, various volume outcomes that Mark talked about that we're really ready to handle in any scenario.

Yeah, so, I mean, in the end of the day, we've got higher inflation than obviously any of us want, so we've tasked ourselves with going after more productivity than we originally had in the line of sight, but there's still some, you know, some leakage that It was the OPEX line, so. All right. Thank you very much.

Next question will be from Scott Krug at Wolf Research. Please go ahead, Scott.

Hey, thanks. Good morning. So, Mark, anything from the STB process or rejection of the application, anything in there actually concern you as it relates to sort of ultimate merger approval odds? Just separately, Mark, I've heard you now say fight for business five times, including, I think, one fight like hell. I haven't really heard that language before. What does this ultimately mean from a pricing standpoint? Do we need to think about what are we seeing with price right now? Do we need to think about price just differently right now, given this backdrop?

All right, I'll start with the first point. Obviously, the turn back from the STB was not what we wanted, but all the precedent and history shows that this is what typically happens. It's hard to get this right the first time around. Nobody really does. When an application is 7,000 pages and marked incomplete, you feel kind of bummed about it, but we shouldn't You know, we shouldn't be too, too surprised. And so the beauty is they've given us the path to completeness. We know exactly what we need to do, and we're working on it. And as kind of Jim mentioned on Tuesday, we're going to get it in, and we're going to get it in right. We're working hard together to make sure that it's thorough. And at the end of the day, the STB has made it very, very clear they are not reviewing, they did not review this based on the merits. They reviewed it based on completeness. So don't read anything else into it other than It was incomplete. So they've given us the answer key to completeness. We'll get it done. So we're not too worried about that. Yeah, look, when I say fight for business, it's a rallying cry to this organization to go out and continue what we did as an example in merchandise, where we had an excellent year last year. We grew our merchandise business, and we grew yields. So we're really proud that we had that double coupon, and it's a rallying cry. we're going to remain disciplined. We actually had very, very good yield performance in the areas under our control. Pricing, core pricing was really good, and the volume growth was really good in merchandise and auto. It was kind of overwhelmed and offset by the challenges that we had in seaborne coal pricing as well as fuel. So that kind of neutralized what you see a little bit on that great top-line performance we had in March and autumn in particular. So that's kind of what I mean, and I wouldn't read anything into it. There's, you know, we need quality revenue, and you heard me say that too. So we're not going to do anything other than what we've been doing this past year, which is to fight like hell to offer new products and create a compelling environment for customers to come onto our railroad. Yeah, we're going to fight for every revenue dollar. Yeah, quality revenue dollar. Yep. Thanks a lot, Scott.

Next question will be from Bascom Majors at Susquehanna. Please go ahead, Bascom.

Thanks for taking my questions. Just to follow up on the fight like hell commentary, can you talk about where you see maybe more tactical opportunities where there are some potential wins in the merchandise portfolio that hits those quality revenue thresholds and On the other side, the enhanced competition sort of leakage from some of the competitive actions. You've talked a lot and sized up the J.B. Hunt thing. Is there anything else you think might be on the horizon that could move the needle in 2026 there? Thank you.

Ed, why don't you talk about that?

Sure. I'll start back at the beginning of your question, which was where do we think we can grow? You know, we had really good tailwind behind us in our automotive markets as well as some of our discrete chemical markets throughout the year. That includes non-petroleum chemicals as well as some of our energy markets and waste markets. We think about automotive in a couple different ways. One is we serve more direct auto origins than I think just about anybody. And because of the network and the way it's running right now, which I talked about during prepared remarks, we were able to take everything that our auto partners can throw at us in terms of volume. And that is a real testament to fluidity of the network and, as John mentioned, sweating every asset. That's what gave our partners in the industry the confidence to deliver that volume to us because they knew we could handle it. And that confidence increased throughout the years. I look at those markets and that kind of performance as a place where we're going to be able to continue to capitalize. We'll see what Intermodal does. You know, we're four and a half years into a freight recession, and at some point it's going to end if demand comes back, and we're ready for that, too. And, frankly, you know, the utility markets, we think, for coal are going to be strong this year, like they were last year. Seabourn is going to be a tough fight, though, another fight. So that's where we see the opportunities. Thank you.

Next question will be from Brian Assenbach at J.P. Morgan. Please go ahead, Brian.

Thank you, Maureen. Thanks for taking the question. Just a quick follow-up for Jason or Mark. How much retention expense do you have in your OPEX guide? Maybe you can give us a little bit of color on how that's going given some of the challenges you're talking about here. And then maybe for John, obviously the STB has talked about some form of reciprocal switching. You've got experience of your career in Canada. How do you think that would be applied or how will the impact be if it was applied as written in an Eastern network? You know, what would you think would be some of the challenges that could come from that? And do you think you're going to have to deal with this with or without M&A? Thanks for your time.

Jason, why don't you start? Yeah, Brian, on the retention dollars, so that's in our merger-related cost line item, which is excluded from a non-GAAP perspective. So the guide we gave you of $8.2 to $8.4 billion is excluding those amounts.

John, do you want to talk a little bit?

Well, I think the proposed rulemaking is really indicative of customers being dissatisfied with service in general in certain locations. And the good news is that we're building the case of great service and the focus we're putting on our franchise, the commitment we've made to our customers to deliver outsized service performance and value really moots the whole argument associated with that proposed rulemaking. If they've got great service, there's no reason to want to go somewhere else. And it's a little different than in Canada where you have, you know, to to to transcontinental railroads that that don't give the options that customers have here in the US. And so I say it's early, it's proposed rulemaking. And I think there are two different distinct options. And from an Eastern Railway, and really for the sector, our job is performed with exceptional reliability with enough resilience to carry the planned and the emerging volumes that come with it, and to have the overall commitment to the ecosystem that we support. That's what PSR 2.0 does. And we're really proud of how we performed. My job is to give no customer any reason to want to talk to Ed about going somewhere else or anything else like that. So we're really, really pleased with the competitive performance service product we put out there. We always want to be better. Mark is – you guys hear the word fight a few times, you get excited. We hear it every day here. And he's tenacious on safety and service, and that's what we're all about. That's why we have 19,000 committed railroaders with absolute clarity on what makes this company work, service and safety. Thanks, Brian.

Next question will be from David Vernon at Bernstein. Please go ahead, David.

Okay, good question, David.

One moment, please. Moving on to, yes, I'm sorry, moving on to at Deutsche Bank. Please go ahead.

Hey, is this working? You guys hear me okay? Yes. Yes. Okay, great. Yeah. Basically, what I wanted to talk about was, Mark, you said your cost target, the cost target you laid out is ready to absorb a variety of different revenue scenarios, including higher ones. Back of the envelope math for us suggests you need to grow revenues by like a pretty significant amount, call it maybe mid-single digits to not see a deterioration in OR. Just is that correct? And is there a reasonable scenario you think that could get you there? And then Just, you know, on that, if you are getting some revenue tailwinds, should we assume higher personnel expense? Or like you said, you know, you've been doing a really good job on productivity. I think headcount was down 4%, volume up 3%. Should we assume headcount kind of can stay where it is if you potentially pick up extra revenue? Thanks.

Yeah, I'll let Jason talk to this. But I think, you know, when you look at the low end of our range, it's, you know, I think basically a one point. 1.8% growth. So in spite of all of those inflation numbers that we gave you and other headwinds, the productivity really offsets a lot of it and leaves us with 1.8% growth. So that's where we kind of see a more moderate revenue outlook. And as you grow revenue, you might have some volumetric costs that bring you higher into that cost range. Now, you know, from a headcount perspective, I think what you're going to continue to see is us continue to trick down a bit, especially if the volume isn't there. I mean, we have to continue hiring our trainees, our conductor trainees, to replenish the pool because we do have a fair amount of attrition, but there will still be net attrition. And I think, you know, we put that model out there in 2025. You saw incredible productivity, you know, I think GTMs were up 3%, and headcount was down 4%. That's 7% productivity right there. We expect you're going to see similar type of results here in 2026. But, Jason, what else do you want to add? Yeah, no, I think you hit it well, Mark.

I think, you know, the key here were the guide to expenses, controlling what we can control. And, you know, specific to your headcount question, just a little more color there. You know, we've held headcount relatively steady during 2025, around that 19,350% employees' quarterly average a bit lower than we were projecting for 2025. And as Mark said, you know, we'll let it tread down a little bit, kind of flatten it down for 2026, but really trying to maintain that trainee base.

The one thing that we've always reinforced as well is the overall productivity and decreasing the overall cost associated with an employee and the workload that they have. And so, As we make the system work better, we reduce recruits by our technology and the implications of running a tighter network. That translates into less overall wages by less detention, less taxes, less cost of disruption. That feeds itself into the productivity we associate with locomotives. They're not sitting idle longer. They're not wasting fuel. All of those things go hand in hand. So one indication on productivity headcount really drives or is driven by dozens and dozens of metrics that create on their own a lot of small wins, some outsized wins, that all come into the cost reduction program that we've got so we can manage expense to workload.

Okay, thank you.

Next question will be from Walters Braxton at RBC Capital Markets. Please go ahead, Walter.

Thanks, operator. Good morning, everyone. I just want to understand the productivity gains that you flagged. I think it was $216 million in total. Land sales, I know you did north of $150 million in land sales. Was that in the productivity number? And then just following up on the truck competitive lane, on the pricing side, Truck competitive lanes, we've heard about capacity taken out of the truck market now on some of the regulations and higher prices. So is that having any positive impact on your efforts toward truck-to-rail conversion as truck prices move higher and their capacity lower?

Yeah. Thanks, Walter. This is Jason. I'll start with the productivity question. So we had, as you mentioned, about $150 million in kind of outsized land sales, third and fourth quarter. That is excluded from the $216 million in productivity that we earned during the year.

Yeah, and talking about, you know, truck competitive lanes and competition from the highway, look, all those factors are going to help over time, whether it's a reduction in the available driver pool or the amount of trucks that are out there on the roads themselves. But to be clear, in my career at least, I've never seen a recovery that was supply-side led. It has to be demand led. And that's where I think we're really going to be looking hard to see what the U.S. consumer does and, you know, what the market can offer us. Thanks a lot, Walter.

Thank you. Next question will be from David Vernon at Bernstein. Please go ahead, David.

Hi. Thanks for getting me back in the queue. So, Ed, with the coal outlook, I wonder if you can help us understand kind of What's happening on the pricing side right now? Obviously, on the MET side, I understand it's a challenge, but are rates still declining or are they stable and we just have to get through the comps? And it feels like or it actually looks like when I go and check, like, Australian benchmarks in the global market, pricing's actually recovered a little bit there. And I'm wondering if you can help us understand, you know, maybe why that's decoupling from the U.S. market a little bit. Thanks.

Sure. Well, it wouldn't be Ernie's call if we didn't get a cold pricing question. So thank you for that. You know, we've seen that benchmark price slide throughout the year pretty consistently. But you're right. We've seen a little uptake here in January in the benchmark price. And that's given us some encouragement. But when I look at the forwards, you know, it's still declining for at least the first half of the year. And we'll see what happens in the second half. In terms of decoupling, I'm not sure. It's a pretty thinly traded market, frankly, on a global basis even. And, you know, there's a lot of weakness both on the domestic side for met coal and, frankly, on the global side. We're ready to handle it. And as we talked about with Warrior, you know, we have a fantastic new coal mine that's now pumping out coal for the global markets, and that's exciting. As those markets recover, we're going to be in a really good place. But I don't see it, at least in the first half.

I think there's probably some geopolitics at play, too, where Australia is largely supplying China now. Yeah, not us. Right. So I think some of who procures from who can create a little disconnect in the markets. Thanks for the question. Yeah, thank you, David. Hey, look, to recap 2025, just to put it all in perspective, I think we delivered extremely solid productivity. $216 million of productivity, and that follows $292 million that we delivered in 2024. But this year in particular, we moved 3% more GTMs with 4% fewer employees. That's 7% headcount productivity. T&E productivity actually improved 9%. We drove 21% reduction in recruits. And on top of that, We delivered 5% fuel efficiency in the year, which is what we budgeted for, that I thought was going to be a stretch, and probably we wouldn't get there all the way, but we did. We delivered 5%, and we pretty much got 4% to 5% each quarter of the year. So really great performance there. We improved our locomotive productivity by 10%. And we kept a lid on our OpEx by really offsetting inflation with this incremental productivity. And then on top of that, We grew merchandise and our merchandise share with healthy core pricing. So really pleased with that. And we did it all while delivering outstanding service throughout the year and really excellent safety performance, as John detailed in his prepared remarks earlier. You know, we've got industry-leading accident rates right now and mainline derailment rates. So really proud of what we did. And we did this all. while we negotiated a transformational merger for the industry and began the heavy lift of a whole application process. So we didn't get distracted by that. We still delivered on that. The challenge in 25 was just simply revenue was flat. We had flat carloads and, you know, the negative fuel and seaborne coal pricing offset that good core pricing we had in merchandise, as well as we had some favorable mix that got offset. That's kind of 2025 in a nutshell. And, again, for 2026, we aim to keep the priority on safety, service, responsible cost control that don't compromise safety or service, and fighting for quality revenue. So we guided you to a cost envelope. The demand environment, it's the wild card, but we can handle whatever demand comes our way. And I can tell you, whatever revenue growth we do get, it's going to drop through at attractive incrementals. given the capacity that we have. And I'll just leave you with this. Several of us are going to be working quite hard through the year to try to get this merger across the finish line with the STB process, but we will protect the vast majority of our business leaders from distraction so we can continue to execute on a daily basis to bring these two well-run railroads together. So thank you very much for the participation today, and please all stay safe.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. Enjoy the rest of your day.