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Text: Along those lines, recall two adjustments during 2020, including a non-cash charge in the first quarter of 2020 related to the sale of 703 locomotives for $385 million and a $99 million impairment charge in the third quarter of 2020 related to an equity method investment.
We will speak to full-year comparisons, excluding those charges from 2020.
A full transcript and downloads will be posted after the call.
It is now my pleasure to introduce Norfolk Southern's chairman and CEO, Jim Squires.
I'm pleased to be joined by Alan Shaw, president; Cindy Sanborn, chief operating officer; Ed Elkins, chief marketing officer; and Mark George, chief financial officer.
2021 serves as the pinnacle of the plan and is marked by the achievement of our 60% full year operating ratio and record productivity levels across our operation.
Through a multiyear effort, we delivered on our commitments, overcoming significant headwinds associated with first freight recession and then a global pandemic over the course of our plan.
In the past three years, we've produced industry-leading total shareholder return.
We've grown earnings per share by 27%, reduced our operating ratio by 530 basis points and returned nearly $10 billion back to our shareholders in the form of share repurchases and dividends.
We met and exceeded our goals, albeit with a very different formula than originally anticipated given the volume headwinds, demonstrating our ability to adapt and innovate and our dedication to deliver upon our commitments.
I'm so proud to be a part of this team and humbled to service its leader.
We're poised to build upon our momentum and write a new record book.
The company is in rock solid position, and we have the right team to guide our next chapter of success.
It's my pleasure now to turn the discussion over to Alan for a detailed look at the fourth quarter and full year results.
As Jim noted, 2021 represents a combination of our multiyear plan, and I'm pleased to share with you the progress we made in the fourth quarter.
As you see from our results on Slide 5.
Revenue growth of 11% outpaced our expense increase of 8%, producing an 18% improvement in earnings per share and a fourth-quarter record operating ratio of 60.4%.
For the full year, revenues improved 14%, which more than offset the 6% increase in operating expenses.
We delivered the hallmark 60% operating ratio for the full year, an improvement of 430 basis points over the adjusted full year 2020 results and our sixth consecutive year of improvement.
We are excited to share more details of our results, and you'll hear from both Cindy and Ed about work to iterate on the next phase of our Thoroughbred operating plan that will serve as the framework for our continued progress on service, productivity, and growth.
I'll first turn to Cindy for a review of our operations.
During the fourth quarter, headwinds from the tight labor market created acute operational challenges across several parts of our network.
While working to overcome the workforce planning hurdles, we remain focused on leveraging productivity initiatives to move freight for our customers.
These efforts did bear fruit, but our service quality was significantly below where we needed it to be.
I'm going to discuss with you today the strategic approach we are taking to change this.
Turning to Slide 7.
Pronounced changes in business mix were evidenced by the unit volume decline of 4% while GTMs were up 1%.
Productivity gains were key to handling volumes in the quarter as the transportation workforce contracted by 8%.
The reduction in crew starts of 4%, growth in train weight of 10%, and growth in train length of 8% were critical elements of this productivity formula as well.
Where active locomotive count increased by 5% as the network slowed, we kept focus on efficiently deploying those locomotives on the larger trains, which helped drive the 3% improvement in fuel efficiency.
As I mentioned a few moments ago, you can see the degradation of network fluidity on Slide 8.
We regained a modest amount of ground over the holidays and as we're entering the first quarter, our improvements have been sporadic as COVID-related absences have more than doubled from where they were in December.
Let me be clear, our top priority is to drive the service improvements our customers expect and need and we will get there.
We are working very hard to leverage and increased hiring pipeline as well as productivity initiatives to drive our performance.
Next, I'll provide more details on the hiring process on Slide 9.
We've made significant progress in ramping up resources to improve the pace of hiring while pursuing productivity.
And as shown on the slide, we are pulling five key levers to do so, including: number one, incorporating additional recruiting and training resources to increase hiring.
Employees from across the company have volunteered to provide support in our principal training facility and it's all hands-on deck; number two, streamlining the hiring and onboarding process.
We've trimmed weeks from the process of first identifying a candidate to have them on board; three, increasing trainee pay and offering incentives such as signing, retention, and referral bonuses; four, lengthening and combining trains.
We've made solid progress in this regard; and finally, five, we're using a variety of techniques to optimize our existing crews, including realigning crew districts and making crew bases more fungible.
Our people are getting creative and rising to the challenge, and resource additions are bearing fruit as we've onboarded over 3x more conductor trainees in January than any month in 2021.
These trainees will promote throughout the second quarter, which is when we expect to start improving train and engine service staffing levels.
We do expect to see some relief in critical crew bases during Q1 as trainees that started in 2021 became promoted, though we are still experiencing high levels of attrition in those same areas.
On average, we expect the number of certified train and engine employees in 2022 to approximate that of 2021 and are expecting GTMs per employee to increase.
So when looking at the year as a whole, our plan is to leverage productivity gains to absorb volume growth while getting the workforce rebalanced to drive improvements in service quality.
Let's unpack the productivity discussion a little more on Slide 10.
We've improved average train weight and length 21% and 20%, respectively, since mid-2019 when TOP21 was launched.
This has been a key to our success and will continue to be so going forward.
Larger trains reduce labor intensity, improve locomotive productivity, improve fuel efficiency and provide our customers with a platform for growth.
We have efforts in the pipeline to continue this trend: first, on the infrastructure front, in 2021, we launched work on 9 siding extensions, one of which was quickly completed and in service by the fourth quarter.
Most of the others will be completed throughout 2022; second, our very capital efficient and high-performing DC to AC locomotive modernization program is ongoing.
As a reminder, this is a dual-purpose program to rebuild engines at the end of their life while converting them to the latest and greatest technology.
In 2021, we improved our fleet composition to nearly 60% AC power and 65% of our road fleet is capable of distributed power.
Both of these aid with running larger trains; lastly, our operating plan and growth initiatives must be well aligned to add capacity to existing trains, which brings me to Slide 11.
In 2022, we have already kicked off the next generation of our PSR-based operating plan, which we are calling TOP SPG.
While you may be familiar with an SS legacy of Thoroughbred Operating Plans, or TOP, the next-generation SPG represents a new era of service, productivity, and growth, three equally important facets of our new operating plan.
We are embarking on this next era because we have significant improvements that need to be made in each of these areas, service, productivity, and growth to reach our full potential.
We are taking a ground-up approach to the development of the plan in order to explore what is possible when we remove historical constraints and take a fresh look at our business.
We are leveraging lessons learned from the first three years of PSR operations under TOP21 and using a rich data set to execute in a customer-centric collaborative process.
We look forward to keeping you updated as this initiative unfolds throughout the year.
Now beginning on Slide 13.
I will highlight our results for the fourth quarter.
Total revenue improved 11% year over year to $2.9 billion as strong demand and favorable price conditions more than offset the 4% volume decline in the fourth quarter.
Volume was impacted by the continuation of the extraordinary global supply chain disruptions and slower network velocity.
Pricing and strength across all markets contributed to the 15% increase in revenue per unit, and we reached record revenue per unit less fuel across all of our markets.
This demonstrates our ongoing commitment to execute our yield-up strategy and drive value for both our customers and our shareholders.
Within merchandise, volume growth in the fourth quarter was led by our chemicals franchise as rising economic activity drove demand for chemical products, particularly for crude oil and natural gas liquids.
Gains in our metals business also contributed to growth with volume in these markets up 6% year over year on sustained high demand from the strengthening manufacturing sector.
Partially offsetting merchandise growth was a decline in automotive shipments, which were down 9% year over year due to slower velocity coupled with strong comps in the fourth quarter of 2020 when the industry was boosted by pent-up demand.
Merchandise revenue per unit increased 6% year over year, driving total revenue growth of 8% to $1.7 billion for the quarter.
Revenue per unit less fuel for this market reached a record level in the fourth quarter.
We've demonstrated year-over-year growth in this metric for 26 of the last 27 quarters, which further demonstrates our ability to drive sustainable revenue growth.
Our intermodal franchise continued to face pressure from supply chain volatility, resulting in a volume decline of 7% year over year.
Strong consumer demand and elevated imports stress these supply chains and exceeded drayage capacity and equipment availability.
This negatively affected both our domestic and our international markets.
But despite these headwinds, we achieved record intermodal revenue in the quarter, up 14% year over year, and that was driven by increased fuel revenue, storage revenue, and price gains.
Revenue per unit less fuel grew for the 20th consecutive quarter.
Now turning to coal.
Revenue increased 21% year over year in the fourth quarter, which was driven by price gains and higher demand in a tightly supplied market.
Coal revenue per unit reached near-record levels and increased 16% year over year.
Our export markets continue to benefit from high seaborne coal prices, which increased the competitiveness of U.S. coals in the global market.
Shipments of domestic met and coke were particularly strong this quarter on higher demand to support steel production.
Full year 2021 revenue grew 14% to $11.1 billion on 5% volume growth.
All of our markets posted gains, reflecting strong demand for our product coming out of the pandemic, tempered by supply chain pressures experienced throughout the year.
Revenue growth was strongest in our merchandise franchise, where all lines of business, but particularly metals and construction, benefited from higher demand and favorable price conditions associated with the economic recovery.
Intermodal growth was driven by elevated consumer activity and tight truck capacity.
Total revenue increased on higher seaborne coal prices and growth in steel production activity.
We reached record levels of both revenue per unit and revenue per unit less fuel.
Both metrics were up year over year due to price gains, storage charges, and higher fuel revenue in the case of total revenue per unit.
And as markets have evolved, we've leveraged favorable conditions to drive improvement for our bottom line.
Now let's look ahead to our outlook for 2022 on Slide 15.
We're optimistic that our business will continue to grow despite the ongoing uncertainty in the economy.
We're increasingly confident that supply chain conditions, including rail network velocity will improve as the year progresses.
Overall, the demand environment for our service is strong.
We're committed to working with our customers and channel partners to develop sustainable solutions to maximize our opportunities ahead.
We remain focused on our ability to deliver value for our customers and leverage market conditions throughout 2022.
As Cindy explained, both our hiring plan and the development and implementation of TOP SPG will deliver increased fluidity, efficiency, and network capacity as the year progresses and our volume pattern will follow that same sequential improvement trend.
This will allow our customers to provide additional value to their customers for their product and build a strong platform for future growth.
Market conditions for our merchandise franchise are expected to be favorable with several customers announcing expansions in the new year that will create opportunities.
In addition, industrial production is projected to grow 4% in 2022, which will drive demand for most of our markets, particularly for our steel markets.
Residential construction spending is forecasted to grow more than 6% this year, following the sharp increase in 2021, supporting continued gains in several of our industrial markets.
U.S. light vehicle production is expected to reach 10.3 million units this year, which is approaching pre-pandemic levels of 2019.
This recovery will have a positive impact on both our automotive and our metals volumes in 2022.
Demand for our intermodal market is expected to remain favorable despite continued headwinds associated with supply chain congestion impacting our ability to capture new opportunities.
These headwinds are expected to ease in the second half of the year, creating a more favorable environment for growth.
And furthermore, a robust consumer economy, elongated inventory replenishment cycles, and a tight truck market support our growth plan.
Durable goods consumption is expected to improve 3% and that's on top of the near-record 19% growth in 2021.
This also bodes well for our intermodal franchise.
Our outlook for coal is more guarded as some of the drivers of 2021 growth show signs of easing in 2022 despite some potential opportunities in the near term.
Seaborne prices remain high.
However, they have begun to decline, leading subdued optimism going into the new year.
Expected increases in global production will likely contribute to downward pressure on these seaborne coal prices and lower the demand for export coal.
In the utility markets, while there's been strength associated with higher natural gas prices, that upside will be determined by coal supply as production levels remain high.
The pandemic has pushed manufacturers to redesign their supply chains in favor of certainty of supply and locating inventory closer to customers.
Our best-in-class industrial development team is at the forefront of these efforts, and they launched an innovative solution to drive value for our customers and support development in the communities that we serve.
NSites is a comprehensive search tool for rail-served industrial sites and transload facilities on our network.
It allows users to create customized search parameters to quickly identify industrial sites that meet their unique needs.
And more importantly, this portal makes it easier to do business with NS and helps our customers make informed long-term investment decisions that will promote economic activity and create jobs.
We're excited to provide this product to our customers and help them expand their business on Norfolk Southern.
Overall, we are grateful for our strong customer partnerships, and we look forward to growing our business in 2022 with a continued emphasis on improving our service and driving value for our customers and for our shareholders.
Starting with Slide 18.
As Ed noted, revenue was up 11% despite a 4% volume decline.
This more than offset an 8% increase in operating expense, which led to 140 basis points of operating ratio improvement to a fourth-quarter record of 60.4%.
Improvements in RPU, coupled with strong productivity led to a record Q4 operating income with growth of 15% or $145 million.
And we set another record for free cash flow, up 30% or $642 million for the full year.
Moving to a drill-down of operating expenses on Slide 19.
While operating expense grew $134 million or 8%, it is up less than 3% or $44 million, apart from fuel cost increases.
The $90 million headwind for fuel is driven almost entirely by price.
You'll see purchase services and rents of $46 million with the majority of the year-over-year increase driven by the same drivers we talked about on the Q3 call, higher expenses associated with Conrail, higher technology spend associated with our technology strategy, higher drayage expense associated with more hourly drivers used to alleviate terminal congestion primarily in Chicago, and we continue to see inflationary pressure on lift expenses going forward as it relates to contractor labor availability.
Moving on to compensation and benefits.
It is up 2%, but you'll note the $33 million in savings from 6% lower headcount and that more than offset increases in pay rates and overtime.
Meanwhile, incentive compensation comparisons in the quarter are a headwind of $24 million.
Materials claims and other expenses were all down year over year.
Turning now to Slide 20.
Taking a look at the rest of the P&L below op income, you will see that other income of $21 million is unfavorable year over year by $22 million, due in part to lower net returns from company-owned life insurance, but also fewer gains on the dispositions of nonoperating properties.
Our effective tax rate in the quarter was in our expected range at 23% and similar to last year.
Net income increased 13%, while earnings per share grew by 18%, supported by 3.3 million shares we repurchased in the quarter.
Turning to full-year highlights on Slide 21.
As a reminder, these highlights are compared to adjusted results for 2020, which excludes both the noncash charge for locomotive rationalization in 1Q and the impairment charge in 3Q.
Increased demand across all markets and strong results through yield-up resulted in 14% year-over-year revenue improvement.
Expenses increased at less than half that rate, up 6% compared to 2020 as we continued our operational transformation while responding to market changes.
We produced record operating income of over $4.4 billion, up 28% or $961 million versus the adjusted 2020 results.
That is 430 basis points of year-over-year improvement in line with the guidance we provided.
Rounding out the results, net income increased 27%, while diluted earnings per share increased 31%, augmented by our strong share repurchase program, enabled a record-free cash flow that we will wrap with on Slide 22.
Free cash flow is a record $2.8 billion for 2021, up 30% year over year and we reported a strong 93% free cash flow conversion for the year.
Property additions were about $100 million lower than our $1.6 billion guidance due to timing issues related to the continued supply chain disruptions.
This shortfall in 2021 will carry over into 2022.
The sharply higher profitability in the company in '21 allowed for an over $2 billion increase in shareholder distributions for the year.
We had two dividend increases in 2021 and more than doubled our share repurchase spend.
And I'll point out, we just increased our dividend again by $0.15 or 14% rolled in 2022.
Turning to Slide 24.
I will wrap up with our 2022 expectations.
As you heard from Ed, based on our assessment of economic indicators, we expect markets related to manufacturing and consumer activity to drive growth.
We expect total revenue to deliver upper single-digit growth with merchandise and intermodal both increasing solidly and coal, resuming its long-term secular decline.
We will develop and leverage our new TOP SPG operating plan to accelerate our service recovery and drive additional efficiency into the organization in support of Norfolk Southern's and our customers' growth.
You'll hear a lot more about TOP SPG at our upcoming second quarter Investor Day.
From an operating ratio perspective, we expect the first half of this year to look similar to the back half of 2021, with robust demand and service improvement driving stronger performance in the second half of this year.
With this positive momentum in revenue, productivity, and efficiency and based on our current expense projections, we expect to achieve greater than 50 basis points of OR improvement in 2022 and we won't stop there.
In addition, we expect a dividend payout ratio range of 35% to 40% and capital expenditures in the range of $1.8 billion to $1.9 billion.
We anticipate using remaining cash flow and financial leverage to repurchase shares.
As you've heard from Cindy, Ed, and Mark, we are optimistic about service, productivity, and growth in the year ahead, and we'll advance productivity initiatives to attract business to Norfolk Southern more profitably than ever.
We are committed to further efficiency improvements to create long-term sustained value for our customers and shareholders.
We'll now open the line for Q&A.

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qtrly railway operating revenues of $2.85 billion increased 11%, or $279 million, compared with fourth-quarter 2020.
qtrly railway operating ratio was 60.4%.

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