Earnings Call Transcript - NSC Q4 2024

Operator, Operator

Good morning. Ladies and gentlemen, and welcome to Norfolk Southern Fourth Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Wednesday, January 29, 2025. I would now like to turn the conference over to Luke Nichols, Senior Director, Investor Relations. Please go ahead.

Luke Nichols, Senior Director, Investor Relations

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

Mark R. George, President and CEO

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

John F. Orr, Chief Operating Officer

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

Claude E. Elkins, Chief Marketing Officer

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

Jason Zampi, Chief Financial Officer

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

Mark R. George, President and CEO

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

Operator, Operator

One moment, please, for your first question. Your first question comes from Chris Wetherbee with Wells Fargo. Your line is now open.

Chris Wetherbee, Analyst

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

Mark R. George, President and CEO

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

John F. Orr, Chief Operating Officer

Yeah, absolutely. Thanks, Chris. It's a really, really good question, one that we're really pushing ourselves hard to answer for everyone. I think it starts and stops with our standards that we're increasing. We're coming off a great platform and bedrock of solid service and good productivity in 2024. We're building a new operating standard to increase the availability and reliability of important assets and the framework for continuous improvement in our tighter and more deliberate operating model. We're working hard across all segments of the business with IT and network infrastructure, really right-sizing the network to the capabilities, increasing the skills and output of people through safety and the Thoroughbred Academy of Education, and really trying to align headcount to the gross ton miles and really have a deliberate structure on how we onboard resources and deliver capability.

Mark R. George, President and CEO

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

Chris Wetherbee, Analyst

Got it. Thank you.

Operator, Operator

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

Scott Group, Analyst

Hey, thanks. Good morning, guys. Just on the 3% revenue growth for the year, any color on how to think about the mix of volume versus yield? And then maybe just want to follow up on the labor productivity side and really good in Q4 with volume up 3, head count down 5; how do you feel about incremental labor productivity opportunity in 2025?

Claude E. Elkins, Chief Marketing Officer

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

Jason Zampi, Chief Financial Officer

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

John F. Orr, Chief Operating Officer

Yes. I couldn't agree more, Jason. And you think about our Q4 2024 versus 2023 where we had an 18.5% reduction in overtime and a full year of almost 15%. Getting back to the basics, creating a lot more discipline within our terminals empowering and developing local supervisors to really drive that performance and creating that discretionary effort, while getting ahead of the labor negotiations and distilling purpose and intent in how we engage with our craft employees. It's all coming together and leading ourselves to some very, very solid productivity initiatives.

Luke Nichols, Senior Director, Investor Relations

Thanks a lot Scott.

Scott Group, Analyst

Thank you.

Operator, Operator

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

Kenneth Hoexter, Analyst

Hey great, good morning. Just if I can clarify on that on the volume comment, or I guess the revenue. Was that all volumes then you see yields fairly balanced and so it's all a volume commentary in terms of how you're looking at growth? And then thoughts on the buyback cadence into 2025? And lastly, John, I want to join the Need for Speed war room when you get a chance?

John F. Orr, Chief Operating Officer

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

Claude E. Elkins, Chief Marketing Officer

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

Jason Zampi, Chief Financial Officer

Yes. Ken, your second question on share repurchases, we've really done a good job this year rebuilding our balance sheet, and that's through really three fronts: improved profitability, the insurance recoveries that we've been able to achieve here, and the line sales. Our philosophy on those capital distributions hasn't changed. So we always invest in the business first, then pay dividends and then have share buybacks. Obviously, that was interrupted this year in 2023 and 2024, but we've got a path to delever the balance sheet throughout the year, and we're going to be able to start resuming share repurchases at a measured pace. It’s critical to us. That's a key component of our value creation framework that we laid out a couple of years ago.

Mark R. George, President and CEO

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

Kenneth Hoexter, Analyst

Thanks. And can I just clarify one thing there, does that include the tariff thoughts or is that before any of that?

Mark R. George, President and CEO

Yes, I mean, correct. That includes our outlook today.

Operator, Operator

Your next question comes from Brian Ossenbeck with J.P. Morgan. Your line is now open.

Brian Ossenbeck, Analyst

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

Claude E. Elkins, Chief Marketing Officer

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

Mark R. George, President and CEO

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

Operator, Operator

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

Thomas Wadewitz, Analyst

Good morning. It's great to see the ongoing strong momentum in your network and results. Following up on Brian's question, how do you perceive the optimism around chemicals being stronger? Is that due to customers performing well or gaining market share? Additionally, Mark mentioned that customers are noticing improvements. Can you provide specific examples indicating that part of the growth in chemicals comes from new wins? Are these new wins more likely to be in other segments? I'm looking for more information on where this growth is sourced and whether you have already established some new business opportunities.

Claude E. Elkins, Chief Marketing Officer

That's a great question. When we analyze our markets, particularly in the Merchandise sector, we recognize that our customers have faced challenges due to our service in specific areas, especially in chemicals. Therefore, we are focusing heavily on delivering value in that segment. John and I have been collaborating extensively, discussing individual customers and ways to provide them with more consistent value. Our goal is to strategically target wallet share with our customers. Additionally, as we enhance our service and increase our speed, we gain more flexibility within our network to adapt to market changes. Over the past two quarters, we've seen success in our agricultural markets by being agile and seizing market opportunities more effectively than before. As for growth in other markets, I believe intermodal will drive growth this year, just as it did last year. The consumer outlook is strong, and the economy appears resilient, which I expect will create more opportunities for us with an improved service offering.

Mark R. George, President and CEO

Yes. I mean, we've had a really good intermodal service product for a couple of years now, but it is at extraordinarily high levels.

Thomas Wadewitz, Analyst

Okay. To clarify the chemicals comment, you have some visibility into business returning, not just optimism about the chemicals market but also about gaining business back and potentially some growth in the market?

Claude E. Elkins, Chief Marketing Officer

That's correct. Yes, we have visibility to specific wallet share opportunities that we're closely monitoring.

Luke Nichols, Senior Director, Investor Relations

Thank you, Tom.

Operator, Operator

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

Brandon Oglenski, Analyst

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

John F. Orr, Chief Operating Officer

Yes, absolutely. The refreshment or the new operating plan, as you call it, is really the next iteration of continuous improvement. We've been generating improvements in our terminals that were our starting point on-time performance and over-the-road speed. As we've progressed through the improvements on our network health, our asset efficiencies, and our customer-facing metrics, the next evolution is tightening down standards. So connection standards at terminals, creating better yield for our train weights, and customizing the service that Ed needs to grow the business. We're focusing on the end-to-end process and how to make it more competitive. Once we do that and leverage the speed increases, it gives us a lot of flexibility in workforce management and start to yield on productivity. It will help us right-size our fleet, right-size our cars, and really be more disciplined in how we operate.

Mark R. George, President and CEO

So to reduce handling...

John F. Orr, Chief Operating Officer

Yes, absolutely. And again, back to that philosophy of extending the length of the trains as long as possible, which will allow us to leave our locomotives in active service longer. That will reduce the dwell time of locomotives, the demand for locomotives, fuel consumption, and all of those metrics. So it took a while. It took the last nine months of heavy lifting to get us in a position to take this next step, and it will be one of many iterations as we continue to improve. I'm very confident in the capability of the team to deliver.

Brandon Oglenski, Analyst

Thanks, John.

John F. Orr, Chief Operating Officer

Brandon, thank you.

Operator, Operator

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

Walter Spracklin, Analyst

Yeah, thanks so much Operator. Good morning, everyone. This question is for John. John, I know you've been targeting 100 to 150 basis point operating ratio improvement, and it's still a bit of a gap relative to peers. So my question is what's kind of holding it back from a faster clip? Are you protecting customer service? Are there constraints in labor agreements? I'm just curious as to what's holding it back, if anything.

John F. Orr, Chief Operating Officer

Well, I'll tell you, we're not leaving any stone unturned, let's just be clear about that. We have to set a flag in our budget. Jason's got me challenged on a number of things, including how do we increase our car miles per day, our fuel efficiencies, re-crews. I mean he's right down to the metrics on me. But what I think is that we're going to leverage locomotive productivity. We've got large opportunities to gain on fuel and our purchasing services. While we finished the year slightly ahead of our guidance, and really, I'm really proud of the team for the nearly $300 million in cost reductions, we're attacking everything. This restructuring of the operating plan is putting more pressure on me and the team to deliver to a higher standard. I love our war room mentality, where we triage problems, pull them out of the day-to-day and elevate them to a continuous improvement philosophy and educate people, drive out anomalies from the system, and give us a better competitive edge. These are things that weren't done before, and we're doing them holistically. So there's no stone unturned. We're not holding back. There's nothing structural that's preventing improvement. We're locked in on the continuous improvement agenda. Our customers are why we're here. I will not compromise on our customer capability for a few cents of improvement. I know that's going to come, and we're going to do it in a disciplined way.

Mark R. George, President and CEO

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

John F. Orr, Chief Operating Officer

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

Walter Spracklin, Analyst

Yes, you're definitely delivering and just keep it up. I appreciate it. Thanks so much.

John F. Orr, Chief Operating Officer

Thank you, Walter.

Operator, Operator

Your next question comes from Jason Seidl with TD Cowen. Your line is now open.

Jason H. Seidl, Analyst

Hey, thank you, operator. Mark and team, congrats on the good quarter. I hope you feel better soon, sir. Wanted to focus a little bit on intermodal performance and Merchandise trip plan compliance, clearly much better than last year when you look at that. But there was what I think is probably more of a seasonal dip in Q4. Can you talk to us about two things, one, what's the normal seasonal progression from Q3 to Q4 for both those measures and what should we expect going forward in 2025?

John F. Orr, Chief Operating Officer

Well, why don't I start it because you hold me accountable for delivering trip plans, and we've got really good trip plans especially in the quarter. We're hard on ourselves. We came through the fourth quarter despite being hit by a number of hurricanes and port strikes and started this year into the polar vortex. My philosophy is drive hard, go as deep into the environmental conditions as you can without being impacted, and work to get out of it as quickly as possible. We saw some V-shaped impacts to these things, but overall, when we came back strong, we recovered fairly quickly. I think we over-communicated with our customers and prepared for the worst and delivered solid results.

Claude E. Elkins, Chief Marketing Officer

Yes, here's what I would say about the third quarter and fourth quarter progression. We had a lot of things going on this year, and I say we as a royal way; the whole industry did, whether it was a couple of hurricanes. One port stoppage and one threat of another, which distorted volumes and volume flows. I'm very proud of how we responded to those challenges with snapping back, which is the definition of resilience. Something changes, you're hit with something unexpected, how quickly you snap back to the norm. I think we made solid adjustments.

John F. Orr, Chief Operating Officer

Yes. We were able to handle it quite well. We communicated effectively and knew what we were up against. There was a bit of slushiness in the car supply, which was a sector issue, but we're able to smooth that out quickly and get back on track as soon as the market gave us a chance.

Ariel Rosa, Analyst

Hi, good morning. So you mentioned some of the port stoppages distorting volume flows. I just wanted to get your perspective on what extent we might have seen pull forward of volume in fourth quarter, given some of the strong intermodal results that we saw there? And to what extent did you have to add costs or add resources to manage through some of that variability?

Claude E. Elkins, Chief Marketing Officer

Sure. This is Ed. I think we did see during the third and fourth quarters, more volume turn back to the West Coast or East Coast destinations. We managed that really well without much hiccup in terms of additional resources or train starts. It was mostly incremental volume on existing trains with very good service product, which kept fluidity rolling. Probably the biggest challenge for us was ensuring that we were servicing our customers on the East Coast until the anticipated work stoppage. Thankfully, that didn’t happen.

John F. Orr, Chief Operating Officer

Yes, I completely agree with that assessment. Our performance was good, and our over-communication helped mitigate risks effectively.

Operator, Operator

There are no further questions at this time. I will now turn the conference over to management for closing remarks.

Mark R. George, President and CEO

Okay. Thank you, everyone. We appreciate your participation, and we look forward to connecting throughout the quarter. Be safe. Take care.

Operator, Operator

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