NSC Stock | Norfolk Southern Corporation Q1 2026 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Norfolk Southern Corporation first quarter 2026 earnings conference call. At this time, note that all participant lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call, you require immediate assistance, please press star zero for the operator. Also, note that this call is being recorded on Friday, April 24th, 2026. And I would like to turn the conference over to Luke Nichols. Please go ahead, sir.

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

Good morning, everyone, and thanks, Mark. Throughout 2025, our Norfolk Southern team was focused on growing our team's capabilities, skills, and speak-up willingness, creating the environment to deeply embed our safety and service maturity and capabilities. Now, with a full quarter behind us in 2026, we are realizing measurable gains from those successive efforts. We are advancing and layering progressive PSR 2.0 structural changes to build more resilience and efficiencies across the railway, develop generational railway leaders, and provide our customers with the best possible service plan. As Mark noted, extreme and network-wide winter weather in the first quarter tested the network. I'm very proud of the entire enterprise in the way we anticipated, prepared, and responded to deliver for our customers. The extraordinary commitment of more than 19,000 railroaders across our franchise was clear in the service and volume execution coming out of the system-wide storms. Thank you to all my fellow railroaders. The entire team delivered both daily and storm backlog demand, and drove post-pandemic daily GTM volume records, made possible by our operations and commercial teams. Turning to slide five, at Norfolk Southern, safety is the core value through which all of our operating decisions are made. Our continued investment in safety is producing results while building a stronger, more durable safety culture. In the quarter, our FRA personal injury ratio was 1.10. This is consistent with full year 2025 performance. Our FRA accident ratio was 1.43. This reflects a 37% improvement year-over-year in the first quarter. Our FRA mainline accident ratio was 0.26. For the second consecutive year, Norfolk Southern continues to lead the way for Class 1 railroads in mainline incident reliability. This progress is not isolated. It is also mirrored in a reduction of non-FRA reportable accidents. These improvements reflect the strategic impact of our intentional coordination of field-level technology coupled with execution across back office, work scope, process refinement, and field conversion engagement. Combined, we are creating reliable network value by engineering out risk from operations wherever our teams work. This holistic approach to safety improvement is now embedded in how we plan, execute, and manage the railway every day. While we are all proud and encouraged by our safety improvements, we are driven by a relentless drive for continuous improvement. Our enterprise is committed to putting in the work. We know there's more work to do. We are strengthening our stop work authority, reinforcing a speak-up culture, and relentlessly addressing root cause analysis to prevent blocked crossing and other incidents. Turning to slide six, throughout the first quarter, the network demonstrated resilience in the variable demand environment we faced. Our focus remains on improving our train speed while maintaining balanced discipline around energy management and service levels, a core operational priority. While shipments were modestly lower year-over-year, we moved 1.1% more gross ton miles, reflecting stronger train productivity and better asset utilization across the network. Terminal dwell improved year-over-year, coupled with continuous focus on execution to the plan. This supports gains in car miles per day. We have been intentional about protecting service and operating the network at a lower cost structure. That discipline is reflected in 8.6% fewer recrews, improved locomotive reliability, and continued reductions in unscheduled train stops. Improved crew scheduling and greater crew availability are supporting stronger crew productivity across the network. And the better aligned qualified T&E crew base, which is down about 6% year-over-year. And we continue to strategically recruit and renew our workforce in markets where we anticipate growth. Reliability drives improved productivity in crews, locomotive, and fuel efficiency. Taken together, these results demonstrate we are controlling what we can control. Managing costs, improving efficiencies, and positioning the network to respond to the evolving market conditions. Turning to slide seven. At the core of PSR 2.0 is a self-reinforcing operating system, a flywheel where disciplined execution compounds over time. At Norfolk Southern, we know when we run the plan, reduce recrews, and improve network velocity, we create stability in the operation. Stability matters to our people and to our customers. It allows us to deliver our service and utilize assets more effectively, improve locomotives and fuel productivity, and operate with better energy efficiencies. Operational gains have manifested into the continued evolution of our service plan and its execution. They feed directly back into better schedules, better planning, and more consistent execution. We now have a connected system where every improvement strengthens the next. That compounding effect is how we intentionally build a more resilient railroad steadily over time. Our war rooms continue to translate this discipline into measurable results. The mechanical room has improved detection quality in our wheel integrity systems while delivering confirmed defect identification that directly improves safety and reliability. This is a clear example of technology, process, and field execution working together at scale. At the same time, our need for speed war room is embedding advanced analytics directly into daily operating decision-making. By pairing data science with frontline execution, we are improving plan quality, accelerating decisions, and strengthening the performance across our network. Disciplined execution across the organization is delivering results. In the first quarter, we achieved a fuel efficiency record, strengthening our competitive position in a high fuel price environment while protecting margins. More importantly, it reflects the repeatability of this operating system. Taken together, our PSR 2.0 transformation and operating systems position us to continue to outperform our original cost reduction commitments, and deliver sustained progress across safety, service, and financial performance. With that, I'll turn it to you, Ed.

Thanks a lot, John, and good morning, everybody. Let's move to slide nine. We closed out the first quarter with significant volume momentum. And this is offsetting a volatile February where severe winter weather impacted our customer car loadings for several weeks. Overall, volume finished down 1% primarily due to challenging intermodal market conditions as well as merger-related losses. However, revenue ended the quarter flat year-over-year and RPU was up 2% with solid core merchandise pricing and some favorable high-level mix which were somewhat overshadowed by some puts and takes within the individual business groups, particularly within coal. Within merchandise, volume and revenue increased 1% from a year ago. And this was driven by continued share gains in our chemicals and our automotive markets. RPU less fuel was flat year-over-year within the segment as strong core pricing was offset by mix interactions due to sustained growth of lower-rated commodities within our chemicals franchise that we've talked about for a couple of quarters now. In our intermodal business, volumes decreased 4% reflecting difficult comparisons related to tariff front-running in 2025 as well as impacts from the winter storms in the quarter and ongoing merger-related losses from prior quarters. Overall, intermodal revenue declined 1% and revenue less fuel decreased 2% due to these volume impacts. While improved pricing and positive mix within the segment drove RPU higher by 3% and RPU less fuel higher by 2%. Looking at coal, volume increased substantially as higher electricity demand, stockpile replenishment, and a supportive regulatory environment powered our utility segment. Now, this strength was partially offset by reduced volume in domestic met coal. And so, while total coal volume increased 9%, revenue declined 2% as mixed headwinds from utility growth and continued overhang of export pricing drove RPU down by 9%. Let's go to slide 10. Here we highlight several dynamic factors influencing our market outlook, including the conflict in Iran, which has obviously driven energy prices sharply upward in the near term. Our fuel surcharge revenue will be the most immediate impact as an offset to fuel expense. And additionally, we're aggressively pursuing volume and revenue opportunities in a variety of energy-related markets, while also monitoring potential impacts to overall consumer demand. Looking at merchandise, we have a subdued but positive outlook for vehicle production due to near-term economic uncertainty on the part of consumers. Manufacturing activity remains mixed, with output forecasted to expand modestly amid the shifting economic landscape. Energy prices and global supply chains will be significant wild cards in the months ahead due to the conflict in Iran. And depending on the duration of supply chain disruptions, we could see near-term opportunities in markets like natural gas liquids, export plastics, and potentially even crude oil. Looking to our intermodal markets, international volumes are going to remain soft due to continued tariff volatility and trade pressures. On the other hand, retailers have been maintaining lean inventories in response to this macro uncertainty for which eventual restocking offers some support for baseline freight activity. The truck market has turned relatively positive with dry van rates trending upward in the first quarter of 26 and capacity continues to right-size while demand is firming. Taken together, we have an optimistic view of intermodal, although we're tempering that optimism somewhat due to increased competitor activity following the merger announcement. Let's turn to coal where a combination of global factors is supporting pricing across both metallurgical and thermal seaborne markets. Now, most notably, the conflict in Iran is impacting global LNG supply chains opening the global market to consider alternatives such as US-sourced thermal coal. The utility outlook remains positive as growing domestic electricity demand and inventory restocking should continue to support Norfolk Southern coal volumes. Okay, let's move to slide 11 where I'm excited to introduce an innovative new short line and transload partnership which is subject to standard regulatory approval with Jaguar Transport Holdings. Unlike traditional short line transactions across the industry which have been focused on finding efficiencies and leveraging lower density lines, our new partnership focuses on growth in a high-density switching corridor located in Doraville, Georgia. Our new partnership, which includes operation of both an industrial short line and our transload terminal, will deliver exceptional local service and responsive capacity to customers in the growing metro Atlanta market. Now, here's what I want everyone to take away. This new partnership is just the latest example of our larger growth strategy in action. We're focused on building and executing innovative deal structures that deliver unique capabilities and exceptional value for our customers. Look for more innovative solutions and new capabilities in the months ahead as we continue to execute on our strategy for growth. With that, I'm going to turn it over to Jason Zampino to review our financial results.

Thanks, Ed. I'll start with the reconciliation of our GAAP results to the adjusted numbers that I'll speak to today on slide 13. We incurred $52 million in merger-related expenses during the quarter, while total costs related to the Eastern Ohio incident were $10 million. Adjusting for these items, the operating ratio for the quarter was 68.7 and EPS was $2.65 per share. Moving to slide 14, you'll find a comparison of our adjusted results versus last year. From a year-over-year perspective, the operating ratio increased 80 basis points. Inflation and fuel price headwinds drove an approximate 280 basis point increase. However, we were able to mitigate a large part of that increase through productivity and higher revenue per unit. Taking a closer look at our quarter on slide 15, overall costs were up 1% as we were able to offset an estimated 5% headwind from inflationary pressures. Specifically, fuel price alone was $31 million higher than last year and over $40 million higher than our expectations. A phenomenon that really accelerated in the later part of March and has continued here into the second quarter. We have continued to deliver on our productivity initiatives with fuel efficiency and labor productivity delivering over $30 million in savings. Partially offsetting those gains, we had some volumetric increases that drove purchased services and rents higher in the quarter. So, to summarize our financial results on slide 16, while first quarter costs were only up 1% and in line with our cost guidance for 2026, the lack of revenue growth combined to drive a modest EPS reduction. While we overcame typical operating ratio seasonality in Q1, we are constantly striving to improve. We continue to refine our focus to unearth other opportunities, and you heard John talk about some of those initiatives as we work towards the 150 plus million dollars of efficiencies planned for this year. On top of the over 500 million dollars in productivity we generated over the last 2 years. Fuel is obviously going to be a wild card for the remainder of the year, and we anticipate it to be a headwind in the second quarter. But despite that, we expect to achieve typical margin seasonality from 1Q to 2Q. We continue to move forward. John and team are continuing to drive productivity while maintaining a safe railroad with consistent and predictable service levels, and Ed and his team are pursuing high-quality growth opportunities across the entire book. Overall, we're executing to the plan we laid out, focusing on safety and service within a reasonable cost envelope, while progressing through our merger application with UP. And with that, I'll turn it over to Mark to wrap it up.

Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touch-tone phone. You will then hear a prompt your hand has been raised. And should you wish to decline from the polling process, please press star followed by two. And if you're using your speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. Thank you.

First, we will hear from Chris Wetherbee at Wells Fargo. Please go ahead, Chris.

Yeah, hey. Thanks. Good morning, guys. Maybe one point of clarification and then the question. I guess, Jason, you mentioned normal OR seasonality, 1Q to 2Q. I'm just kind of curious what you see that normal seasonality is being, just to clarify. And then you talked a little bit about competitive activity, I think particularly in intermodal as it relates to the merger. I guess as you think about that, have we seen most of that happen already? Is that something that maybe still has yet to play out? And is it more than intermodal or is it really more sort of contained within intermodal? Thank you.

Hey, Chris. Jason. Let me start with the OR question. You know, just a reminder first about some of the headwinds that we've got in our plan. You know, we've talked about inflation and some of those year-over-year pressures in that 4% range. We've got lower land sales. Specifically, you may recall we had a $35 million land sale in the second quarter last year that we don't expect this year. We've got to absorb those revenue losses from the competitive merger responses. And now, obviously, we have to deal with these fuel headwinds that are going to continue into the second quarter. So, that said, you put all those together, all those headwinds, you know, we're really still expecting to be in that normal kind of sequential OR improvement. We think about that at about 200 basis points and that's really due to all the productivity initiatives that we've got going on. And an uptick in revenue from first quarter to second quarter, Chris.

And this is Ed. To your second question there, yeah, it's really we think primarily an intermodal story and it's playing out the way that we've anticipated so far and frankly, we're doing everything we can to make sure that we're earning everything we can from both the road and from other modes.

Thanks, Chris.

Our next question will be from Scott Group at Wolfe Research. Please go ahead, Scott.

Hey, thanks. Ed, I have a question. You know, intermodal pricing is arguably somewhat cyclical tied to truck pricing. Coal pricing's volatile. It feels like merchandise pricing has been like the constant and I see merchandise RPU X fuel flat and so maybe you'll say it's mixed, but just some thoughts I would have thought or hoped we'd see some better merchandise pricing. And then Mark, just you mentioned quickly the merger, just, you know, applications coming next week. You've had months now to gather feedback. Anything that gives you more confidence in approval? Any feedback that gives you concern? Just any high-level thoughts. Thank you, guys.