Good afternoon, ladies and gentlemen, and welcome to Norfolk Southern Second Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Thursday, July 25, 2024. I would now like to turn the conference over to Luke Nichols, Senior Director of Investor Relations. Luke, please go ahead.

Thank you, and good afternoon, everyone. Please note that during today's call, we will make certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to future events for future performance of Norfolk Southern Corporation, which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for full disclosure of those risks and uncertainties we view as most important. Our presentation slides are available at norfolksouthern.com in the Investors section, along with our reconciliation of any non-GAAP measures used today to the comparable GAAP measures, including adjusted or non-GAAP operating ratio. Please note that all references to our prospective operating ratio during today's call are being provided on an adjusted basis as referenced in our earnings release. Turning to Slide 3, it's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

Thank you, Luke, and thank you, everyone, for joining us. Here with me today are John Orr, our Chief Operating Officer; Ed Elkins, our Chief Marketing Officer; and Mark George, our Chief Financial Officer. Earlier, we reported our second quarter financial results, including adjusted operating income of $1.1 billion, net income of $694 million, and diluted earnings per share of $3.06. Notably, we delivered 480 basis points of sequential margin improvement on our adjusted operating ratio. The operating ratio was 65.1% in the second quarter, with a first half operating ratio of 67.5%, fulfilling our commitment to our shareholders for a first half operating ratio in the range of 67% to 68%. Our strong progress this quarter demonstrates our ability to close the gap to our peers by executing our balanced strategy of service, productivity, and growth, with safety at its core. The Thoroughbred team delivered significant margin improvement in the quarter despite revenue headwinds by accelerating productivity initiatives. As you will hear from John, Ed, and Mark, we were able to overcome market weakness through increasingly strong progress on our six key operational metrics by responding to market opportunities and growing volume while remaining laser-focused on controlling costs. We also take seriously our commitment to being the gold standard of safety in the industry and continue to make progress on improving our safety culture and metrics. This is the strength of our strategy, driving operational excellence and discipline that will deliver and continue to deliver productivity gains and create the foundation to onboard significant growth when the market returns. This is the flywheel effect that delivers tangible benefits for customers and shareholders. Efficient operations with a compelling service product allowed our teams to gain share in service-sensitive markets such as auto and intermodal, while participating in spot opportunities in coal and agriculture. As a result, we posted record performance in several key merchandise measures. While our work continues, our second quarter results represent an encouraging inflection point in our operating performance. We have plenty of runway in front of us. I'm excited for Norfolk Southern's opportunities ahead. We're committed to our strategy and delivering the results with pace and urgency that demonstrate the power of a better way for our employees, customers, communities, and shareholders. I'll now turn it over to John to further discuss our operational progress.

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

Thank you, John, and good afternoon to everyone on the call. Let's go to Slide 11, and I'll review our commercial results for the second quarter. Overall results were driven by a notably more fluid network that delivered a better service product to our customers. Revenues came in just above $3 billion, a 2% increase versus last year. Volumes rose 5%, led by an 8% increase in intermodal, while revenue per unit (RPU) fell 3%, driven by unfavorable impacts from intermodal mix. Merchandise revenue improved 4% while volumes increased 2% and RPU rose 3%. RPU less fuel increased 4% versus last year, which once again set an all-time record alongside a new all-time record for revenue less fuel. This marks the 36th out of the prior 37 quarters where merchandise RPU less fuel grew year-over-year. In intermodal, revenue was flat. Volume increased 8%, and RPU declined 8%. In coal, revenue declined 3% on a 2% volume decrease. Now, these were impacted by the outage of the Francis Scott Bridge in Baltimore. I do want to take a second here to reflect on coal's performance in the face of extraordinary challenges around the unprecedented closure of the Baltimore port complex in April. We and our customers demonstrated extraordinary operational agility and creativity to keep global supply chains intact via Lamberts Point, Virginia until service was restored in Baltimore. I'll note that propelling our record merchandise less fuel in the quarter was our automotive book, which set a record for total revenue and RPU less fuel. Metals achieved an all-time quarterly record for revenue less fuel and chemicals, which marked an all-time record for RPU less fuel. Intermodal revenue was flat in the quarter. However, if we exclude pressures from fuel and storage charges, revenues grew by 2% despite the mix and price headwinds. All of these superlatives are supported by the strong service product that John and his team are delivering. Let's turn to Slide 12 and review our outlook for the rest of 2024. We're lowering our expectations for full-year revenue growth to around 1% based on continuing market headwinds, and we expect overall adverse mix headwinds to continue. In merchandise, new industrial activity may be constrained by higher interest rates and borrowing costs, but we expect to see continued benefits from ongoing infrastructure and manufacturing projects underway. Our improved network fluidity will also deliver growth and unlock shareholder value. Intermodal volumes remain a driver of overall volume growth as international shipments rise through import and export demand, while excess capacity and weak truck prices are expected to remain headwinds to domestic volumes. Finally, in coal, we foresee a challenged environment within the utility space continuing, while export markets see some momentum from the reopening of the Baltimore channel and new production. Let's finish up on Slide 13. I'm going to take a minute to highlight a recent win-win with a large met coal producer in the US. Set to be developed in 2025, our rail lines will link this new coal production facility with the global market. This mine will produce nearly 5 million short tons of premium grade met coal annually when it reaches full production. This new partnership is a concrete example of our strategy to grow high-quality carload revenue, close the gap to peers in key markets, and significantly enhance our met coal portfolio for years to come. This win also demonstrates our customers' confidence in Norfolk Southern in our service and our commitment to our strategy. We're grateful to be chosen for this project, and we're excited for the future of this opportunity. Investing strategic capital to support regions of our network with economic growth is also in motion. The State of Alabama is an example where our investments include terminal and mainline infrastructure projects that support customers as they invest and expand their businesses. These investments are a key part of our balanced approach to deliver top-tier revenue growth over the long term. Lastly, I just want to thank our customers for their business. I'll now turn it over to Mark to cover our financial results.

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

Thanks, Mark. Let's turn to Slide 20. As you heard from Ed, we lowered our full-year revenue guidance from approximately 3% to approximately 1% growth. And you heard from John and Mark that we're overcoming the revenue drop with a focus on the significant productivity opportunities in front of us, which gives us the confidence in reaffirming our full-year operating ratio guidance despite the lower revenue outlook. The momentum demonstrated in the second quarter is a testament to the strength of our strategy. I want to thank all 20,000 of my Norfolk Southern teammates for all they have done and are doing every single day to deliver on our shareholder commitments and accelerate our operational improvements. John, Ed, and Mark have identified specific actions and outcomes to deliver improved results in workforce, T&E, fuel, mechanical, purchase services, and rents capital productivity, as well as smart growth in merchandise, intermodal, and coal. We have a clear line of sight on multiple initiatives and a roadmap for margin gains in several key areas over the next 18 months as we close the operating ratio gap. I'm proud of our progress in the second quarter, encouraged by our trajectory, and confident in our team's ability to execute and deliver results in the quarters ahead. We will now open the call to questions.

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

Yes. Good afternoon. Ed, you highlighted a number of the yield ex-fuel records and the performance in merchandise. So I wanted to ask you about intermodal yield. Are we seeing intermodal yields at a bottom? Or are there potential drivers that they go down further? And how do you think about the opportunity and the timing to see stronger pricing and revenue per unit in the intermodal business?

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

So, it sounds like maybe stability in the second half looked to 25% for maybe some growth in revenue per unit. Is that a reasonable way to think about it?

Yes. I think revenue per unit on the domestic side is moving sideways.

Thanks, Tom.

Thank you.

The next question will be coming from Scott Group from Wolfe Research. Scott?

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

Thanks, Scott, for the question. I'll ask Ed to help tag-team on that second part of the question on the mix. But do you want to go first with that?

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

Yes, Ed, you got something going on in intermodal. We're leveraging the most powerful intermodal franchise in the East; we rationalized 15% of our lanes. John is providing the best service product we have provided in years, and volumes are up 8%.

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

We're expecting to see more incremental volume growth in the third quarter, which will definitely be a positive factor. While we might experience some negative impact from an adverse mix, we also have strong momentum on the productivity front. I anticipate continued reductions in crew starts and overtime, even with higher volumes. Fuel efficiency should keep improving, and we're just beginning to enhance our purchasing services, with several broad initiatives underway. This should provide positive momentum in the third quarter. However, we also have challenges ahead, including a 4.5% wage increase starting July 1, leading to a $25 million rise in compensation and benefits, which translates to an 80 basis points headwind on our operating ratio. Additionally, we expect fuel costs to contribute around 50 to 60 basis points of sequential operating ratio headwind as well. We'll see how everything unfolds, but we're optimistic about our position entering the third quarter.

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

Got it.

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

Hey great. Good afternoon. I know that was recorded, but it seemed like you were speaking at super speed. It was pretty good. Following up on Scott's question about the sequential performance, it appears that the five-year outlook suggests little movement in operating ratio. But you’re looking at 64% to 65% from a 65% or 65.9% if you exclude the real estate. I understand what you just discussed with Scott. However, considering the steps you’re taking, Alan, you mentioned being really confident in those savings. Shouldn't we be aiming for a more significant decrease with some of the initiatives you're implementing? Could you elaborate on the potential upside and downside to that target? If you’re confident in 64% to 65%, what conditions need to be met on John's side to achieve a bigger improvement against the counter costs you're facing?

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

I would say, Ken, my confidence comes from the power of the people and the engagement that we're delivering in the field. In the early days of my onboarding, I would go into major terminals and see opportunities, engage the team, inspire them to lead change, and now as we build the team and reframe how our management structure is in the field, really focused on the day-to-day as well as strategic intent, we're doing that to scale, more people seeing more things. We're creating the flywheel of finders and increased capability. Just today, I signed off on a service design that eliminates 42 starts a week. That's the result of 4 or 5 people just being out in the field, doing safety blitzes, seeing other things happening, and finding ways to improve safety, synthesize train starts elongate trains and create more capability in the field. This is the power of the flywheel. We're doing it based on safety and service sustainability. I'm very confident as we build people and structure. We're going to keep delivering.

So, to address your question about why things aren't improving, I want to reiterate what I mentioned to Scott. There are some challenges in the third quarter compared to the second quarter due to an 80 basis point wage increase. Additionally, considering how we expect fuel costs to develop, we anticipate another 60 basis points of challenges. These are significant obstacles. It's possible that fuel costs might not be as severe as expected, which could provide some positive impact. However, we also need to see how the volume plays out.

I think there's going to be a lot of hard work to overcome what we're doing to meet our guidance, and it's going to be sweat equity all the way.

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

The next question will be coming from Jeff Kauffman from Vertical Research Partners. Jeff, go ahead.

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

The STB has got a hearing coming up about growth. That's part of our balanced strategy. The STB is focused on service, so are we? And we're delivering, right? We are improving service, we're reducing costs, we're growing revenue, and we're enhancing safety. So we've got a good story to tell here, and we're aligned.

Just to add, Alan, when we were in Washington a few weeks ago meeting with the STB commissioners, they strongly supported our business plan and resilience as key to providing service and boosting the US economy, and they fully aligned with our vision. It will always be a challenge for the sector when the commercial regulator engages with us. However, by taking the lead in these discussions, I believe we are well-positioned to continue our current efforts.

The next question will come from Chris Wetherbee from Wells Fargo. Chris, go ahead.

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

Well, I can tell you this, while it's true, there are fewer T&E head counts, this is not a headcount reduction exercise. This is rightsizing the service and aligning the asset efficiencies with the customer and the customer requirements. So sequentially, we did show a 2% improvement on T&E. We've frozen hiring except where there's a really substantial reason or an acute skill that we need to bring on. But it really is working with labor to address outliers, rightsizing the organization, and where we're long on people, getting the flexibility to move them where they need to be. I really watch our expense and the cost for T&E headcount in our KGTM. I made that clear in my opening remarks that despite the fact that we're improving service and providing some of the best operating efficiencies in the network, we're doing it at a lower cost overall. That's where I think you can look forward to seeing more of.

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

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

Good afternoon. Thanks for taking questions. So Mark, just to maybe come back to the sequential headwind of about 140 basis points into Q3 from Q2, certainly implied that it's more of a fourth quarter weighted impact to get to the target? Or are there some other sort of big ticket items you're counting on coming through the next quarter? And I guess to that point, Ed gave us a couple of examples, but the volume environment has been tough to call. It's been a little softer than expected. So what gives you the confidence that some of that's going to come through sequentially to help you hit that target in Q3?

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

The next question will be coming from Jon Chappell of Evercore ISI. Jon, go ahead.

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

Yes. I'm trying to remember the first part of your question.

Any volume.

Yes. Our customers have been very supportive of our strategy throughout the first half of the year, and they continue to back us as we work to unlock additional value for the supply chain. Moving forward, we are confident in our ability to grow our volumes overall. However, our main focus is on restoring our share in the merchandise markets. It's not that customers are unwilling to return; rather, we need to earn their business back because they have sought alternative supply chain solutions that may have been more costly. We are dedicated to working hard every day to win those customers back, and that's our primary focus.

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

The relationships that we've built over a long period of time with our customers, who, like I said, supported this whole thing.

Great point.

The next question will be coming from Brandon Oglenski from Barclays. Brandon, go ahead.

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

Ed, I'll answer that second part first. So the large land gains that I was referring to would be things that we would typically call out and refer to as probably more on the non-GAAP side. That's really in terms of trying to augment our balance sheet. So no, they are not in any way part of the path on the operating ratio going forward. It was really more of a conversation on capital and restoring our balance sheet. Typically, we guide to $30 million to $40 million a year on real estate gains in the normal course that we absorb within the operating ratio. There are years where that's $20 million, there are years where that's $50 million, but it's kind of in that 30/40 range. I was making a more general smoothing commentary talking about, call it, $50 million, but it could be in that neighborhood of $40 million to $50 million range this year.

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

The next question will be coming from Ravi Shanker from Morgan Stanley. Ravi, go ahead.

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

Sure, I’ll address that. The ILA made significant progress on September 30 by reaching an agreement with the port operators. We are engaging with all our steamship line customers as well as our domestic intermodal partners. Shippers are beginning to adopt a cautious approach. We are observing an increase in activity on the West Coast for various reasons, including developments in the Red Sea. As this unfolds, customers need to transport their freight to market, which is leading them to move freight to both the West Coast and the East Coast. From my perspective, due to the shortage of seaborne containers resulting from extended supply chains, steamship lines will likely refrain from sending their boxes inland from the West Coast. This suggests a significant demand for domestic intermodal services out of the West Coast. That's how I see this situation developing.

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

Thank you. This is Elliot on for Jason Seidl. You brought up the next lever for margin will be some of the broad-based initiatives in purchased services. Hoping you could elaborate on that. You talked about some of the OpEx items that will be headwinds through the back half of the year. Maybe how should we think about the cadence of purchased services as we progress through the year?

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

Yes. We look—just take fuel, for example. We're really driving hard to pull locomotives out, reduce our exposure there. But at the same time, looking at our fuel distribution process. We've been able to streamline that, reduce some DTL trucks and reliance on that, similar to how we're pruning the intermodal franchise, we're pruning some of the more expensive fuel and fuel distribution. At the same time, we’re looking at how do we create more vendor accountability and visibility. We've got some really short-term, midterm, and long-term views on fuel. And even putting locomotives down cascades into our materials and the services associated with maintaining locomotives that we're able to put down.

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

We've got broad-based focus on productivity, right? Purchased service is a big part of that. But we've got a clear line of sight on the roadmap, drive productivity, workforce, fuel, purchased services, and equipment rents. At the same time, we're really focused on leveraging this great service product to drive more merchandise revenue and leveraging our powerful intermodal franchise as the truck market responds to drive more revenue there as well.

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

And how much of that drives services? What you've done on reducing that over time?

We are not increasing recrews and are instead reducing our exposure to taxi cabs, hotels, and all associated costs. This is a positive strategy because by decreasing recrews, we enhance service stability, which is critical for our sales success. This resilience allows us to operate at the lowest possible costs and supports our mobility initiatives.

The next question will be coming from Daniel Imbro from Stephens Incorporated. Daniel, go ahead.

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

Yes. A lot of it is just leveraging that improved service product and also the capacity that we have to bear. As we increase the utilization of our equipment and our customers' equipment, we can put more capacity up against the market. Frankly, even in this freight environment, customers want to save money. And rail has a cost advantage relative to truck.

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

And I think that's why our approach to customer service is better, and we're still getting productivity, reducing resources, creating capacity—creating capacity without impacting service.

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

Yes. Hi. Afternoon. Just sort of a question from an operational standpoint, a whole bunch of operational initiatives that you talked about to close the margin gap. I'm just sort of curious, as we think about all of them, how much of the plan this year and as we flow into next year is what you would consider for lack of a better word, basic blocking and tackling, fine-tuning versus major sea changes. Just trying to assess the difficulty of execution as we go along from here?

There is no secret to it. It's about hard work and running an efficient and effective railroad every day. Stability creates opportunities in areas like asset utilization, crew utilization, and fuel efficiency. I've committed to achieving a $450 million improvement to make this happen, which involves a series of smaller and larger wins. We have a clear view of a significant pipeline of opportunities that we are developing, which will arise at various times. Today marks an inflection point for us. As we progress, we will establish stability and continue to move forward. It's a combination of these factors, and we are committed to pushing hard.

Look, it's leadership, it's plan, it's discipline of execution. What John and his team are producing is the acceleration of our operational improvements which allows us to have the confidence to reaffirm our guidance and overcome market weakness for the second half of the year.

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

Thank you, operator. Good afternoon, everyone. I'd like to shift our attention to a market opportunity that we haven't discussed much before, which is Mexico. Union Pacific has mentioned it several times, indicating it’s a major focus for CPKC amidst the trends of near-shoring and onshoring. When you first provided access to CPKC, it might have seemed somewhat conditional at that time. However, as I understand it, this now creates a new route or destination for Mexican products into the Southeast via CPKC, connecting with your network and CSX's network. This opportunity has not existed in the past. Do you perceive this as a viable opportunity? Could this become a new business source for you to transport Mexican products into the Southeast through your described routes, or do you foresee more challenges ahead?

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

Ed, we said General Motors in the office yesterday talking about some of the supply chains, and it wasn't lost on me that Mexico was part of that conversation. It's going to be a part of the conversation, and I've just spent the last three years that part of the world and really understand where the connection opportunities are. And you're right, we've got a great opportunity for both major railways in Mexico as well as the short sea. I think that's a real opportunity in the immediate and near term.

Yes, I would say standby for future developments.

The last question from this call will come from Stephanie Moore from Jefferies. Stephanie, go ahead.

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

Hi Stephanie, at the beginning of this year, we set out a pretty aggressive long-term operating ratio targets. We are doing everything we said we would do. We are delivering despite a weak freight environment. We are in the first year of a multiyear plan to reduce operating ratio to a sub-60 rate, and then we'll keep going. But Stephanie, at the beginning of this year, we set out a pretty aggressive long-term operating ratio targets. We are doing everything we said we would do. We are delivering despite a weak freight environment. We are in the first year of a multiyear plan to reduce operating ratio to a sub-60 rate, and then we'll keep going. We're executing, we're improving service, we're reducing costs, we're growing revenue in a tough freight environment, and we're enhancing our safety. We've laid out a road map, and we're delivering on it.

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

There are no further questions at this time. I'd now like to turn the call back over to Alan Shaw, President and CEO for the final comments.

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

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