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Text: Along those lines, recall that in the first quarter of 2020 we launched a rationalization of our locomotive fleet by 703 units, which resulted in a non-cash charge of $385 million, so we will speak to the quarterly results excluding that charge.
A full transcript and download will be posted after the call.
It is now my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires.
Norfolk Southern started strong in 2021.
Our successful implementation of precision scheduled railroading translated into solid financial results.
Our team delivered all-time records for operating ratio and free cash flow and achieved first quarter records for earnings per share and operating income.
Northern Southern employees accomplished this despite significant supply chain disruptions brought on by severe weather nationwide in February.
For the quarter, revenue increased 1% due primarily to volume growth up 3% year-over-year.
At the same time, expenses declined 3% or $48 million compared to our adjusted first quarter of 2020.
Throughout the quarter, we continued to streamline resources resulting in impressive gains in workforce asset and fuel productivity.
Looking ahead, we remain intent on achieving strong revenue growth and efficiencies to propel the bottom line and create shareholder value.
Investments in technology and sustainability will be critical, and I'll provide some recent examples of these after we review the quarter.
I am excited to share our first quarter achievements and what we have in the hopper looking ahead.
Our team on the ground is proving its capability and motivation to move quickly on advancing efficiency and restoring service reliability.
We've also introduced a few new team members with PSR experience who are leading initiatives alongside our field team to increase productivity inside our major hump and flat switching terminals.
These actions are having an immediate impact for our shareholders and our customers.
Slide 6 shows our operational indicators.
While volumes were variable in the quarter, efficiency gains were consistent.
By absorbing additional volumes within our existing train network, despite how those volumes varied during the quarter, we were able to realize substantial gains in train length and train weight and improve fuel efficiency.
Productivity initiatives such as locomotive horsepower optimization and additional usage of distributed power were key to the success.
Execution of our efficient scheduled railroading plan enabled us to handle more freight with fewer resources compared to a year ago.
Let me add some more color on train length.
We are committed to improving productivity by running longer trains, and accomplishing that involves targeted investments within certain parts of our network.
During the quarter, we completed an initial assessment of incremental infrastructure that will aid our long train initiative.
As a result, we've begun construction on a long siding extension in the Chicago-Atlanta corridor that will be complete ahead of this year's peak season, and we have identified two others that we will begin construction on this year.
We will quickly identify and address opportunities to efficiently deploy capital to support both train consolidation and organic growth.
Moving to Slide 7, weekly carload fluctuations tell an important story of the quarter.
Volumes rose quickly coming out of the new year's holiday and were running several percentage points higher than last year, until severe winter weather arrived in February.
This affected both railroad operations and our shippers, with Chicago being hit the hardest by both snow and extreme cold.
While we kept main lines fluid, overall supply chain congestion slowed traffic through terminals.
I would like to especially recognize our field operations, engineering and signals teams for ensuring a safe and efficient operation despite historic cold deep into our network.
Their work is critical to the success of NS and our customers.
Beyond the weather episodes, we continued to adjust our yard network to handle volume increases expected during the year.
We are focusing on driving improved efficiency and reliability at our key terminals, which in turn creates a capacity dividend that enables us to absorb both volume variability and overall growth.
We are continuing our yard and terminal focus in the second quarter.
Slide 8 shows that to start the year, network fluidity was comparable to 2019 levels, but a condensed winter that followed in February impacted our velocity and terminal dwell and snarled supply chains in general.
As you see by the network performance trends over the past seven weeks, we continue to progress and are committed to further improvement to get our service reliability to where we want it to be.
Additional progress creating consistent fluidity leads to enhanced rail car velocity, which in turn benefits our shareholders and customers.
I'll finish on Slide 9 by explaining how we continued Norfolk Southern's operating transformation during the quarter and how it showed up in the results.
We've undertaken a series of focused initiatives to improve capacity and drive down dwell at our major terminals, including current humps as well as flat switching operations.
These improvements support the longer and heavier trains we are running, allowing us to operate efficiently with fewer resources.
Finally, Q1 reinforced the benefits of effective interline cooperation, and we are building on that even though the winter weather has passed.
The results show in both productivity and asset usage.
These trends have been improving since we implemented Top 21 in mid-2019, but the team has been able to both accelerate and extend the improvement and we are very well positioned to continue these trends, leveraging our efficiency initiatives with rising volumes.
Beginning on Slide 11, we experienced significant volume volatility in the first quarter.
We delivered a strong start to the year with January volume exceeding last year, while February was challenged with winter weather events that disrupted supply chains cross the country.
Progressing into March, business levels improved as supply chain fluidity started to recover and we adjusted to dynamic shifts in the freight environment.
Despite the difficult operating conditions, overall revenue improved 1% year-over-year to $2.6 billion while volume grew 3%.
Revenue per unit excluding fuel improved in each of our individual business units this quarter, reflecting our commitment to grow yield as part of our long-term strategy, though total revenue per unit and revenue per unit excluding fuel were down slightly due to the mix of intermodal volume growth with declines in merchandise volume.
Merchandise revenue fell 4% from prior year levels on a 3% volume decline.
This segment faced difficult pre-COVID comps in the energy sector.
Partially offsetting these declines were gains in soybean, steel and automotive shipments.
March U.S. light vehicle sales surged to a 17.7 million unit seasonally adjusted annual rate, the second highest March ever, while inventories are at a 10-year low.
Merchandise revenue per unit excluding fuel reached a record high for the quarter, delivering 24 consecutive quarters of year-over-year improvement in this market.
Intermodal revenue and volume both increased compared to the first quarter of 2020.
Volume growth was driven by a continuation of the inventory replenishment cycle combined with the tight truck market and strength in consumer activity as retail sales grew 9.8% in March, the largest sequential increase since May 2020 when sales initially rebounded as states reopened from shutdowns.
Intermodal revenue per unit excluding fuel improved 6% year-over-year, supported by continued strength in the LTL market driven by growth in e-commerce.
This marks the 17th consecutive quarter of year-over-year improvement in this metric and a record high.
Our coal business delivered 5% revenue growth in the quarter.
Volume gains were driven mostly by export thermal shipments as the global economic recovery continued, as well as tailwinds from China-Australia trade tensions.
Domestic met and coke volumes continued to improve as demand for finished product accelerated.
Utility demand was down as it continued to be pressured from product substitution and lower industrial load.
Revenue per unit improved 3% year-over-year, inclusive of a $9 million incremental gain from volume shortfall revenue.
We have an unrivalled consumer-oriented franchise that continued to benefit our customers and shareholders throughout the quarter.
Although severe weather certainly impacted business levels particularly in February, our diverse industrial franchise serves the improving manufacturing economy and we saw gains from rising commodity prices.
We are delivering sustainable revenue growth in line with our long term strategy to capitalize on the strength of our franchise and provide value-added solutions in the marketplace.
Moving to Slide 13, our outlook for the remainder of the year is strong.
Consensus for U.S. GDP growth is north of 6%, the highest in the last 40 years.
PMI rose to 64.7 in March, hitting the highest level since 1983, while inventories remain low.
These are expected to be key factors driving robust economic activity for the rest of 2021.
We remain confident that our markets will achieve volume growth in the high single digits this year and our franchise is poised to capitalize on the expected growth that will drive value for both our customers and our shareholders.
Merchandise growth will be driven by continued expansion in the manufacturing sector.
Elevated demand levels coupled with low dealer inventories in the automotive segment will drive volume gains; however, the current semiconductor chip shortage creates uncertainty as to the timing of the recovery.
U.S. light vehicle production currently is expected to exceed pre-pandemic levels in 2021.
That production growth along with the return of total industrial production to pre-pandemic levels will drive steel demand, which is another market where we expect to generate volume growth as the year progresses.
We also anticipate our energy markets within merchandise will benefit from the return of gasoline demand in the consumer travel sector as the economy fully reopens.
Our intermodal franchise will continue to build on the momentum associated with the ongoing U.S. economic recovery.
An expected rise in consumer spending, low inventory levels, and continued tightness in the trucking sector are all key factors boosting growth opportunities.
Spending on durable goods is expected to grow 15% in 2021, which bodes well for our domestic intermodal franchise that is closely correlated with consumption markets.
International intermodal will benefit from the resumption of global trade activity.
Coal business will remain challenged in 2021.
The export thermal market continues as a near term strength, although with a lower RPU than average.
Domestic met and coke volume is expected to improve in line with the economic recovery.
Natural gas and renewal energy source conversions will continue to negatively impact the utility markets.
Decisions on stockpile levels will be determined by summer weather and gas prices.
In summary, we expect to generate revenue growth in 2021 as economic conditions continue to improve.
As the needs of our customers constantly evolve, we remain diligent in delivering valuable transportation solutions to the marketplace.
We continue to focus on initiatives to drive growth, margin improvement, and a strong service product.
We are confident in our ability to leverage our value in the marketplace to secure new opportunities to support our customers' growth and grow our margins.
As Jim mentioned, the OR and earnings per share records we achieved in the quarter came through disciplined cost control while handling additional volume in the midst of pretty challenging operating conditions.
On Slide 15, walking you through our summarized results compared with an adjusted first quarter 2020, we reported an OR of 61.5%, which was a 220 basis point improvement, and an earnings per share improvement of $0.08.
I will note that the $0.08 improvement in earnings per share was dampened by the absence of a gain recognized last year from a 2012 income tax refund that equated to $0.09, so core earnings per share improvement in the quarter was $0.17.
Moving to Slide 16, revenue grew 1% in the quarter due primarily to the 3% increase in volume year-over-year, with growth in intermodal and coal more than offsetting declines in merchandise.
At the same time, we drove operating expenses down by 3% as we harvested additional benefits from workforce and asset productivity.
The volume growth coupled with the productivity drove the operating ratio down to a record low 61.5%, improving 220 basis points year-over-year and 30 basis points sequentially versus Q4.
This produced operating income of $1 billion, another record, up $62 million or 7% year-over-year, and we generated first quarter free cash flow of $750 million, also a record, up $161 million or 27% versus the first quarter of 2020.
Moving to a drill down of operating expense improvement on Slide 17, the reduction of $48 million or 3% comes with improvements in nearly all expense categories.
Comp and benefits declined $11 million or 2% from lower employment costs related to a workforce that was 12% smaller than a year ago and 2% smaller than the fourth quarter.
Partially offsetting these tailwinds are headwinds this year from higher and stock-based compensation.
Purchase services and rents were collectively down $10 million or 2% as reduced freight car expenses more than offset higher spend associated with technology investments and increased intermodal volumes.
When matched to a 3% volume increase, the 3% decline in opex provides another quarter of additional productivity, building in the work we've done over the past several quarters, as you'll see here on Slide 18.
From the quarter that we launched our Top 21 operating plan, we have made meaningful progress on our workforce productivity with GTMs per employee up 16% since the third quarter of 2019 and a 340 basis point improvement in our operating ratio.
We remain intensely focused and committed to drive further improvements.
Turning to Slide 19 for the remainder of the P&L below operating income, you'll see that other income net of $7 million is $15 million of 68% unfavorable year-over-year due primarily to lower net returns on our company-owned life insurance investments.
Our effective tax rate in the quarter was just over 22%, and recall last Q1 we had the 2012 tax refund that resulted in a lower effective tax rate.
As a result, net income increased by 1% compared to pre-tax earnings growth of 5%.
Earnings per share rose by 3%, supported by 2.3 million shares that we repurchased in the quarter at an average price of $254.
Wrapping up now with our free cash flow on Slide 20, free cash flow at $750 million was buoyed by strong operating cash conversion and a relatively modest $265 million in property additions in the quarter, which was below our annual targeted run rate for the year due to timing issues, including weather related delays and capital spend.
Our company is also in the middle of a digital transformation.
We expect investments in technology to drive the next phase of improvements in service growth, efficiency and sustainability at Norfolk Southern, and we're already making great headway.
Slide 22 shows a few recent examples.
The introduction of new mobile apps and a redesign of our customer portal are giving customers a more user-friendly and truck-like experience, delivering real time shipment intelligence, facility truck to rail conversions, and reducing emissions.
We're putting an easy-to-use mobile application in the hands of our train conductors, streamlining internal workflow and improving shipment visibility for customers.
We're digitizing our internal and external communications through a new CRM platform, enabling better, faster decision making.
We're using new information systems to promote intermodal equipment utilization and efficiency at our intermodal terminals.
We're using predictive analytics to reduce locomotive failures and plan maintenance proactively.
Machine vision technology is creating a path to automated track and freight car inspections with manifold benefits to safety and efficiency.
On Slide 23, we show that NS has been a sustainability leader for over a decade.
Years ago, we recognized the importance of reducing our environment footprint, beginning in 2007 when we first established our sustainability program.
We've been reporting on our results ever since, delivering on the goals we set forth.
Here we highlight a few key milestones and also show a few examples of external recognition, including recently being named by the Wall Street Journal as one of the 100 Most Sustainably Managed Companies.
In summary, we have a track record of leadership on sustainability which is good for business and the right thing to do for all our stakeholders.
Although we don't generally update guidance, given the unusual circumstances in the first quarter with February's extreme cold and a global supply chain disruption, let me wrap up restating our confidence in our ability to meet the market for full year 2021 with the expectation that strength in consumer-oriented and manufacturing markets will drive 9% revenue growth year-over-year.
For the full year, we expect to achieve more than 300 basis points of OR improvement versus our adjusted 2020 result, and we expect to end 2021 with a 60% run rate OR.
As we've said before, once we achieve these targets, we won't stop improving.
We're optimistic about growth in the year ahead and all the initiatives we have under way to create long-term sustained value for our shareholders.
Before we open the call to Q&A, I want to quickly address the proposed transactions involving another Class 1 railroad.
We're watching the situation closely, but we won't be discussing the proposals or industry speculation generally.
As the regulatory review process unfolds, there will be opportunities for further discussion.
With that, we'll open the call to questions.

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qtrly railway operating revenues of $2.6 billion increased 1%, or $14 million, compared with first-quarter 2020.
qtrly railway operating expenses were $1.6 billion, a decrease of 21%, or $433 million, compared with same period last year.
qtrly railway operating ratio was 61.5%.

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