Norfolk Southern Corp (NSC) May 2026 Conference Transcript

Good morning. It's my pleasure to welcome Norfolk Southern to the conference today. Thank you guys for being here. I'm Fitz Middleton. I'm on the B of A specialist sales team. I look at industrials. Given the pending transaction, I'll be sitting in and hosting the Q&A instead of Ken Hexter this year. B of A has the privilege of welcoming Norfolk to our conference for the 22nd year out of the 25 years that Ken has hosted the event. Pleased to have Jason Zampy, CFO, Michael Barr, VP, treasurer, and IR are both here for their second time, and Luke Nichols, IR, is here for the fourth time. There we go. We appreciate the partnership and your participation in the conference over the years. So Jason, let me turn it over to you, maybe for an update on some of the key takeaways you want us to learn from today.

Yeah. Thanks for having us here. As you mentioned, we've got a long and great history with bank of america and coming to this conference so we're pleased to be here again this year um you know i'd say we we've really got a um you know situation here where we're working very well with our customers to help them grow and we're obviously right in the middle of uh you know this very transformative merger uh to unlock additional value so it's it's an exciting time for us as a company um i think you know three key takeaways i would say is you know first we're executing on the plan we've laid out so that's really focused on safety service and cost discipline and you saw that play out during the first quarter you know we had I'd say kind of a mixed demand environment in the first quarter we had some challenges operationally due to weather and some other things but it's you know it's it's how we performed during that you know during those things and it's it really shows our ability to again to execute on that plan So I think, you know, very strong execution there, whether it be safety service and obviously cost. So happy with that. I think the second thing, obviously, is the merger and, you know, where we stand on that. So we've resubmitted our application. We think we have a materially stronger application with the STB addressed all of the concerns out there. And, you know, we're anxious to get them looking through to the merits of this. And, you know, I feel like the point of this all along throughout this application process has been to have a fact-based, data-driven approach. And we feel like we've done that. So we think we're in a really good place with the application. And then third, I think just from a value creation standpoint, you know, it's kind of what we call our operating flywheel with safety service and, again, cost. So, you know, you have to have a really good service product, and that earns us the ability to grow. you take safety and reliability and that enhances the trust and confidence that our customers and regulators have with us. And then on top of that, you add in productivity and that's, it really just generates this kind of self-reinforcing flywheel that we're seeing. So, you know, again, executing on the plan, making strong progress on the merger. And then that, that operational flywheel is, is what really drives kind of long-term value creation. Great.

Maybe if we, if we follow up and, and talk about the deal, and the recent refiling with the Service Transportation Board of the merger application with U&P. Can you talk about some of the changes versus the first application, particularly some of the capex downshifts, maybe decreasing of the revenue synergy target? Thoughts on any of the more obvious changes that were in there?

Yeah, sure. So, you know, obviously the big change was implementing the three key areas that the STB called out. So that was, you know, forward-looking market share data, the TRRA ownership railroad there in St. Louis, as well as some of the merger appendices. So we feel like we've addressed all of those. And another piece, though, is, you know, we've now used 100% of traffic data from Class 1 railroads. So that's kind of, you know, above and beyond what normally happens in these things. when we put in the initial application we had some sample data in there now we have 100 of the traffic data so what that resulted in is some changes as you may imagine in traffic flows the diversion model shows you know maybe a little bit more on the intermodal growth side a little bit less on the on the car load side so you know the combination of that is really what what impacted the revenue synergy side um and then you know on a capex side again from when you look at where that traffic's going to be flowing, you see that, you know, you have different needs from an infrastructure perspective. And so, you know, maybe a little bit less CapEx spending on things like sidings and stuff like that. But, you know, all in, even going from that sample of data to the 100% data set, you know, it really did not change the overall thesis for the merger. And in fact, just reinforced what we knew to be true.

Right.

And then one of the things that you guys kept the same and committed to was the the gateway pricing commitments as the as they were can you talk about some of the benefits of the of the cgp and why it should be viewed as enough to get the merger through sure so you know at its core the committed gateway pricing is really it it extends the enhanced benefits to local interline lanes right so you take bnsf or csx and it allows them the ability to offer an end-to-end rate to to a customer and that you know obviously uh increases optionality for the customers and ease of doing business so that's that's a great um outcome here you know what i would say too there's there's a whole host of um you know pricing and rate mechanisms that exist today this is incremental to that so this is additive to to what currently exists and then i think the other benefit from this is it's um you know kind of in line with the STB, you know, themes and policies, it's a practical, you know, solution on the front end versus, you know, after the fact, try to remedy, you know, some potential issues. So we think that those are all, you put all that together, it's a pretty powerful provision that we have in the merger agreement here. But what I'd say is also, you know, the committed gateway pricing is just one aspect of how we, you know, how we view the benefits from this transaction. You know, That's really about providing, you know, better service, better route options for our customers, you know, really ease of doing business with this combined coast to coast, you know, railroad. So those are what the real values are. And, you know, being able to unlock this watershed market that we've talked about. And, you know, all of those things are really what, you know, enhances optionality and competitiveness for our customers. um same topic you and jim vena have both talked directly about no need for concessions of of any major scale uh given the commitments that you're making and and that this is an end-to-end merger what do you think the pushback is is to that and and why are you guys confident that no major concessions after all the discussions you've had uh today yeah sure you know i mean i think it's you know it's understandable you you know you see all the the maybe the pushback and noise from some of our competitors out there you know not unexpected even before we filed the application there was you know positions people were taking out there so again not unexpected I think what we're really excited about is moving to this next phase where the STB can focus on the merits of the deal and we can really get into you know looking at that again the reviewing the data the fact base set that's that's on the record here and you know moving past some of the noise that's out there but again you know from a concession perspective we think that you know this this deal on its own provides um you know a ton of value enhances competition is in the public interest and you know that's that's kind of where we came out from a concession perspective great thanks for that sure um if we kind of talk about the system and and and trends that you guys

are seeing i think volumes quarter to date are trending up about 2.8 percent um that kind of trails csx at 4.6 is this indication of some share loss but still part positive car loads um is it a good run rate number for the quarter how would that lead you to you know um to just about break even volume for the year any thoughts there yeah so you know if you think about first quarter we were you know down a little bit from a volume perspective but it was really lumpy i would say So January, we started off pretty strong from a volume perspective.

February had a lot of, you know, winter weather and you saw volume kind of crater during that period and then a pretty significant rebound in March. And we're seeing that, you know, saw that really through April here. So we're kind of in that 140,000 car loads per week range. I think we've been there now nine or 10 weeks in a row. So, you know, really strong performance on the volume side. and you know again speaking to kind of the resiliency of the the railroad we're able to able to handle that so um you know i think we're we're in a really good shape there um you know we kind of see that probably continuing for the remainder of the quarter and we'll we'll see you know where the where the rest of the year shakes out great and you guys have noticed some enhanced competitive environment given the the merger announcement will have an adverse impact on on volumes in in the short and maybe medium term is that quantifiable at this point yeah so we we put that right around um you know a percent of our total 2026 revenue um so you know we we started to see that last year um it's primarily within our obviously our domestic intermodal business um but we kind of quantified in that one percent range i will say we've we've seen you know outside of that we have seen some pretty strong performance in our domestic intermodal um franchise that we're you know really pleased with here and you know coming out of the first quarter and into into april so international remains weak but um pretty pretty good progress on the domestic side awesome and then kind of from an economic backdrop um you guys have talked about that improving um something like eight of nine commodity areas have had green circles or kind of half green where do you think the economy is in in that backdrop yeah um maybe not surprisingly but we we take a lot of time thinking about the colors of those circles so um but you know i would say where we are right now is probably um you know cautiously optimistic you know i think it's it's still a little bit mixed bag out there but um i i think we're we're starting to feel you know i'm for sure feeling better than i did you know a handful of months ago um if you look at a couple of things i mean i think you know from what you're seeing from an energy price perspective we think There's some opportunities for modal shift, you know, probably not surprising to anybody. We've seen that, you know, in prior cycles when fuel prices, you know, become elevated. We see those modal shifts and we're ready to handle that. I think the second thing, you know, utility coal has really, really been a, you know, an outperformer for us running well ahead of where we expected. You know, utility coal was up from a tonnage perspective, over 25% in the first quarter. and, you know, attribute that to the, you know, energy demand that exists out there. So I think, you know, two bright spots for us there. You know, we're looking at all the same economic indicators, you know, as you guys are. I think two things for us to watch out for is, one, you know, what's the break point for the consumer? You know, do fuel prices hit a magnitude and a duration that, you know, that impacts consumer spending? I mean, the consumer has been very resilient, so we'll see how that shakes out. But that's something to watch. And then, you know, our business is obviously highly tied to the housing market. And, you know, unfortunately, we don't see a big turnaround there in the near future. But, you know, with what's happening with rates, but definitely something we're looking out for. Makes sense.

And then if we think kind of about spending, so I think you've set adjusted OPEX to be in the range of $8.2 to $8.4 billion for the year. could you just walk us through some of the highs and lows within that target is it holding employees flat do you need to add back with car load um growth kind of how do you think about cost per employee fuel exposure any lag benefits it's kind of what are the what are the puts and takes within that within that range sure so if you think about it from a year-over-year perspective we kind of talked about this at at year end but you know the 8.2 to 8.4 is really informed by a couple of things One, we've got some pretty significant inflation coming into this year, more in the 4% range, which is, you know, higher than maybe you'd think in the two to three.

But that's wage inflation, health and welfare benefits, insurance premiums, things like that. So that's a significant headwind for us. You know, the other thing we're experiencing on the cost side, again, just year over year, compare is, you know, fewer land sales than we had last year. Fortunately, we've got a lot of productivity initiatives in the hopper. We're targeting another $150 million in productivity savings this year, and that's on the back of $500 million over the last two years. So that's kind of how we got to that 8-2 to 8-4. You take those three things, and then you kind of slide that based on what we think volume is going to be. Now, the uncertainty and the kind of wild card that's presented itself, obviously, is And we'll see how that shakes out. But, you know, very, very significant increase in our fuel price. If you think about kind of our, you know, price at the gallon, that's, excuse me, price we pay at the pump, that's up 45% in March, and it was up another 80% in April year over So very significant increases there. So, you know, that's something we're watching. I think when we get to the end of the second quarter and report earnings, we'll be able to provide a little bit better range and where we think that's going to come out. So I just thinking about some of the other components. So I think from a headcount perspective, you know, we were we're down about 1% in the first quarter from where we finished 2025. I think that's a pretty good run rate for the rest of the year kind of staying flat from that point. um you know we're we're hiring for attrition and and in some some of our key areas and making sure we have a good conductor trainee pipeline but um you know kind of holding that that flat um and i think the last part of the question there just uh you know cost per employee comp per employee we we think about that in the 38 000 per quarter range so that's you know as puts and takes first quarter is usually higher moving to the second half of the year you've got you know wage wage inflation that takes effect July 1 but we've got some productivity initiatives so I think that 38,000 is a good good range to think about great and then maybe we think a little bit about the

quarterly cadence I think historically you guys improved the operating ratio about 250 bps from 1q to 2q so you did 68.7 percent in q1 kind of what would lead to underperformance or outperformance versus normal target you know and and would it be a fuel lag benefit you know weather in one queue just kind of you know what are what are your thoughts on on that yeah yeah sure so you know we we think about historical sequential um or improvement from first quarter to second quarter more in the 200 basis point range thank you and again it depends you know what period of time you look at and everything but kind of recent history we're thinking about 200 basis points um and you know we've we flagged that we we will achieve that or you know are on

track to achieve that going from first quarter to second quarter this year so you know you always have weather in first quarter you always have you know step ups and incentive comp and things like that um and this this year is no different but what i will say is even with those fuel headwinds that i talked about we still feel like we can hit that 200 basis point improvement so that so that that's a pretty big deal and we're able to do that you know through through the productivity initiatives that that we have in place right and then on those i think you've delivered 30 million in productivity in Q1 of this year and reiterated the 150 million plus of efficiencies for 26, which is on top of 500 million over the last two years.

Kind of thoughts on how much of that remaining cost opportunity is structural? How much is volume dependent? How should we think about that?

You know, I think we're really proud of what we've accomplished over the last two years. Like you said, you know, over $500 million of productivity savings. But I would tell you, you know, it's really the initiatives that we have in place are really structural versus volume dependent. And you saw that in 2025. So we had flat volume basically in 2025, yet we still still achieved over 200 million dollars that year. And this year is no different. So the 150 million in productivity initiatives that we have in place this year, really, you know, you think about labor productivity, not just T&E, but on the mechanical and engineering side, fuel efficiency. and then the work we're doing in purchase services, materials, and on the G&A side as well. So really kind of agnostic to the volume profile now. That volume comes through. We've got capacity to move it and should have good incrementals. And so then as you think about how that productivity compounds and kind of matures with PSR 2.0, how do you think about NS's long-term operating ratio, potential um kind of maybe on a standalone basis and then a combined basis um if you if you can if you can talk about both of them yeah sure so you know i think you know the psr journey is never done right and it's it's something that we're continuing to focus on um you know and i laid out you know kind of focusing on safety service and productivity and and those things together will generate growth and and uh you know cost savings and that will improve your operating ratio now i'll say you know the focus right now is truly on you know getting getting the merger across the finish line here and that's you know that's what our investors have uh have clearly signaled that is important to them so that that is our focus um and i think when you think about the combined entity from an operating ratio perspective i mean we've laid out you know significant revenue synergies of this combined entity um you know you asked earlier a couple small tweaks to those estimates but you know really strong um revenue growth and that's what that's what this merger is about it's about growth and on top of that there's you know a billion dollars in cost synergies as well um as we combine these two entities and and gain more efficiency so you know i think all in you put that together it's a pretty pretty powerful um full financial

benefit but also an operating ratio story as well right and then if we think about kind of volume and card load growth lately chemicals have been robust i think kind of up single digits um is that sustainable you know do you need an industrial turnaround is there new partnerships kind of is you know is this a u.s versus the rest of world when it comes to pet chems how do you how do you think about those volumes yeah so you're right you know chemicals was a kind of bright spot for us in the first quarter within our merchandise business um we're really seeing that growth and kind of energy related markets so you know sand um uh frac sand ngls petroleum

products things like that and those are really picked up since the the conflict and you know in iran have started so we'll see how that plays out but i think just you know as the impacts of those higher energy prices uh you know flow through the global economy those you know will probably be sustained for us i think overall though just taking a step back putting the macro side what what makes growth sustainable is really a strong service product and a reliable service product that we can provide to our customers and so you know we're doing making good progress there and we feel like you know that that'll allow us to gain share in any any macro background um the other thing that i point out just kind of in this merchandise space you know you think about our industrial development pipeline have a really strong pipeline but in 2025 you really saw that kind of stagnate from a standpoint of starting projects so there's a lot of things in the hopper but people kind of sitting on the sidelines from a standpoint of starting projects in 2026 kind of towards the end of 25 and now into 26 we're seeing a lot of those projects actually start okay and so that that's a really good sign for us and um you know something we're we're pleased about those those that pipeline will provide a lot of volume growth for us kind of moving into the future nice curious your thoughts on coal we get asked this question a lot at uh at bb you know it's kind of up single digits in one q i think trending double digits in in two q um what kind of how

do you think about the the drivers of this or and how should we is it pushing out retirements is this growth increasingly you know sustainable um do you think it should flip to declines later later in 26 um domestic versus export um and then kind of same on pricing you know um how do we think about revenue per car load um sequentially and through the year yeah so i'd say you know i think it's easier to kind of break out the components i think you know like i talked about earlier from a utility coal perspective up significantly in the first quarter we're seeing that continue here into into april and it's really you know energy demand from whether it's you know AI, or, you know, just kind of what's happening from an inventory rebuild perspective.

So expect that to continue on. You know, we are hearing from some of our customers that their plants are, you know, staying open longer than planned. And so, you know, that's a good sign there. I think on the export side, it's a little bit more mixed. We saw that kind of in first quarter flat, you know, flat performance overall year over year. So we're kind of watching um the export side as well but i think you know really good strong progress on the utility side i will say you know in anyone that's followed us you've seen you know coal can be pretty volatile quarter to quarter so i don't want to call it you know for the full year but at least for second quarter things are looking you know pretty strong um from an rpu perspective i'd i'd look at it you know we've seen now you know four to five quarters in a row of kind of sequential degradation in in price and that's really you know the utility and export benchmarks but what i think we're finally seeing is some stability there okay so i'm not ready to call you know kind of a steep inflection

point there but i think we found some stability and um you know that's that's a good sign for us as well great and then you mentioned intermodal in the in the beginning can we just talk on that one for a little bit so there's increased competitive environment but there's also elevated fuel prices kind of are you seeing any of the secular growth opportunities return in intermodal um and kind of you know how do you think about competition whether it's some of the stuff going on in in baltimore and i-95 traffic and um kind of maybe some of the meridian big b traffic what do you what do you think about intermodal yeah so again i think intermodal is kind of a you know tale of two cities if you will you know on the domestic side um even with those

those competitive pressures that we talked about you know i think the domestic market is is really performing well and we see potential upside from some modal conversion due to you know due to uh higher fuel prices and we're we're seeing that we're hearing that from from customers um on the international side you know still a depressed market and really i think more of a you know trade tariff kind of uh impact there um see that probably continuing but just as a reminder we kind of started to see that last year in the july to june to july time frame so back half of this year you'll see some easier comps on the on the international side um i think from a you know competitive standpoint you know our our approach is right we we we want to provide the best service product that's out there i also think you know our advantage we have a great uh intermodal franchise you know fantastic routes really you know hitting a lot of the key markets and it's it's really capitalizing on that so that that's kind of how we think about it from a competitive perspective great does anyone in the room have a question pause okay i'll keep going all right um i think last week you guys did 145,000 car loads um peak i think is 147,000 kind of what's what's capacity look like how what are you built to handle how do you think about it yeah i mean we've you know in the past have moved you know well in excess of that 147 um i think what's important for us is you know sustaining a level over time like i talked about first quarter it was was kind of lumpy from a volume perspective and that's tough to manage there right it's easier when it's obviously more stable so from a capacity perspective and you think about that in different fronts whether it's you know people having you know conductors and engineers out there whether it's infrastructure whether it's you know locomotives and equipment i think we're good on all fronts okay you know like i said we're continuing to hire in key markets um to balance that attrition and make sure we're able to serve growth from an infrastructure perspective we've done a lot of work over the last several years specifically a lot down in uh kind of our 3b corridor down in alabama we're now reaping the benefits of those things and you know from an equipment perspective we've we've got um you know we still have locomotives and certain freight cars and storage so we're kind of we're poised for that growth so the capacity is is uh is there to move quite a bit more and again like i mentioned that's you know all comes through at strong incrementals great um maybe a little bit on pricing it's probably the biggest theme we get asked about across all of industrials over the last two months um average revenue per car load sequentially kind of considering fuel increases in mix um how should we think about it up sequentially for 2q and 3q um is that is that an okay framework yeah so again maybe like let me separate this a little bit first on the fuel side you know um a good chunk of our business merchandise and coal is on a two-month lag from a fuel perspective so you know the prices that you saw in kind of march and april or what what come through in in may and june so um you know those elevated prices now intermodal is more real time-ish on a two-week basis so so yeah i think just if you looked at fuel i think you'll see see an uptick there from a from an rpu perspective now if you strip out fuel and just think about kind of core pricing maybe again splitting this into different components from a merchandise perspective um done really well you know from a kind of uh you know pricing to to the service product we're out there and are you know getting i would say kind of inflation plus type pricing so really proud of what we've done there on a core price perspective intermodal um and coal kind of based on more underlying benchmarks if you will so intermodal kind of more tied to the truck market um but what we're seeing there is you know maybe some some uptick there finally after you know four plus years of a great recession so hopefully we see that come back a little bit and then i mentioned you know on the coal rpu side um maybe not a you know quick recovery but at least maybe uh you know past the bottom and now a little bit more stability from a from a price perspective so it kind of helps me to think about it you know with fuel without fuel and then amongst those three categories it's helpful thank you um and And then maybe a little bit on metrics like velocity and dwell, maybe a little shy versus last year's numbers.

You know, does that indicate anything? Is there a cost story there? How should we look at that?

Yeah, I think, you know, again, we talked a little bit about the weather we had in February. We obviously have, you know, weather every year. Last year we talked about we had, I don't know, 17, 18 named storms that hit us. But I think those were more, you know, there were more discrete impacts. The storms that hit us in February were really broad-based and impact our entire network. So we kind of had that as the first hit, if you will. As we were coming out of that, we actually had a derailment in a pretty key corridor for us in Pennsylvania. And while, you know, fortunately no injuries and, you know, the damage related to that was not that significant from a cost perspective, it did, you know, kind of delay things on that corridor. and so you know trying to come back from the storms uh with that on the on the back of that um caused some of the degradation that you call out kind of in speed and dwell so you know i'm not expecting any you know significant impact to cost you know there'll be things like you'll you'll see you know maybe some increased overtime and some uh some recrew expense that we have but um you know to get that back on track to where we need it to be but no no like sustained structural increase in cost right and then if we focus on capex maybe for for one um you've targeted 1.9 billion i think it's down 14 year over year then there's also maybe a new locomotion locomotive order and some and some refurbs can you talk about those those decisions and and is the right spending level as a percentage of revenue 16 yeah so you know like like you said um we're we're at 1.9 billion around 1.9 billion for this year the you know a significant chunk of what we do from a capex perspective is really you know focused on the the safety and reliability of the network so you know like i said a very large piece we put in 500 miles of rail last year two million cross paths we're going to do the same this year right it's we have to do that every year and it's it's important for the the safety and reliability of the network so those things don't change. The way we've been able to bring down the capital spend a little bit is through two things. One, like I mentioned earlier, we're able to now kind of reap the benefits from some of the growth projects that we've had in the past. We don't have the need for as many of those this year. And two, when the network running really well and the kind of operations flywheel that I talked about, you've got better asset utilization and higher velocity, you just don't need as many locomotives and freight cars and that type of thing so that's that's kind of how we've got to that 1.9 billion dollar envelope from a locomotive perspective just mentioned not needing as many locomotives but what we're doing with the um the dc to ac conversion refurbs that you call them we we are um not adding to the fleet we're just replacing okay you know kind of maintaining that same uh locomotive count and able to get rid of older you know less efficient locomotive so the modernizations that we've done really you know very fuel efficient high highly

reliable um more attractive effort and they're they're less expensive than you know buying a uh brand new locomotive so um really good you know story for us there on that front and again it's about you know having a more reliable fleet versus adding to the fleet okay great helpful thanks um we have a couple minutes left maybe close it out with two more on the on the pending transaction can you just remind us on on the process with the stb um from here i think 30 days to decide if the application is complete and then 250 days for for hearings comments environmental reviews 90 days for ruling that pushes us to mid 27 is that a right timeline and and any pushback to that

yeah i think you know the obviously the focus right now is you know getting this getting this application approved through the process um you know i think from a longer timeline perspective you know the sdb has been pretty clear about you know they've got rules in place and they're going to follow those rules we saw that very clearly with the the first application that we put in and hitting the deadlines that they laid out there so you know this application's gone in they offered um people to respond to the application that's happened and now the the combined nsup response will go back in today to those to those comments and hopefully by the end of the month we'll know here one way or the other on the uh the acceptance of the application i think the good thing is when the application is accepted what we'll get is is a definitive timeline right right again that the stb has you know kind of laid out that they will commit to follow and i think that's important for a lot of you know a lot of different stakeholders you know most importantly our employees to kind of know kind of what to expect over the next you know year and a half so i think that i think you know kind of that first half of the year is a is a good um a good target but we'll see kind of when we get this final timeline how it exactly looks great and then maybe lastly how how should we think about any of some of the public pushback or comments that are out there um whether it's from you know peers or or labor kind of um how do how would you guide us to to think about that yeah you know i think on the um on the labor front you know you see probably two camps there we've got you know some some folks that are maybe not yet supporting the merger and other other unions that have that see the value and you know see see what we're we're doing so you know different schools of thoughts there um i think you've got you know some coalitions that have come together to you know to speak out against this again not unexpected and and um you know it's it's all of these voices out there we obviously listen to all these things and take it take them seriously but at the end of the day what's what's important is for the stb to look at the look at the merger application and i think when they you know see the the the fact based data driven um approach that we have out on the record and the benefits that this brings it's it's clear that this is really you know it's good for our customers and good for the country so

we feel pretty pretty confident about the benefits of this great appreciate it anyone in the room before we wrap up okay we're great yeah thanks very much thank you very much we appreciate you THANK YOU.