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Text: Along those lines, recall that in the third quarter of 2020, we recorded an impairment charge of $99 million related to an equity method investment.
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.
Our third quarter results reflect a strong performance from the team as we delivered third quarter records for operating ratio, net income, income from railway operations and earnings per share.
While volume held steady with last year, revenue grew an impressive 14% and our 60.2% operating ratio reflects a 230-point improvement on a year-over-year adjusted basis, our second-best OR performance ever, outpaced only by last quarter's 58.3% mark.
In the midst of significant supply chain disruptions and labor shortages across the country, we're delivering upon our commitments.
And we could not have achieved those milestones without the tireless work of our employees who day in and day out, keep our customers' goods moving safely and efficiently.
Now let's turn to Cindy to go through our operations.
In the quarter, we continued to successfully drive productivity improvement throughout the network.
We worked to be as efficient as possible as we adjusted to accommodate demand shifts in many of our markets.
This quarter shows continued progress as we attack our cost structure while positioning ourselves for further improvement in both cost and service levels.
The quarterly operating metrics on slide six clearly show that, once again, we generated positive operating leverage on flat unit volumes and GTMs that were up 5%.
While we are proactively hiring train crews, efficiency in all areas of our operations, including engineering, mechanical and communications and signals, enabled us to run the network with 7% fewer people in the quarter compared to a year ago.
Because assets drive activity, reducing the number of active locomotives was an important lever in managing the size of the workforce.
Both train weight and train length continue to improve, driven by a focus on improving the productivity in our bulk network.
Coal, grain and other single commodity unit trains offer real opportunity for gains through collaborating with our customers on operating trains with more cars per set and by doubling up existing trains over portions of their route.
I expect we will show continued progress in the fourth quarter as we see the fruits of our efforts.
While strong coal traffic helped drive train weight more than length, train length continued to improve and set another quarterly record.
After seven consecutive quarters of fuel efficiency improvements, we saw a modest deterioration this quarter despite the increase in train size as our horsepower leverage was challenged at times due to volatile traffic flows and we had modestly fewer of the very heavy, highly fuel-efficient trains.
I am pushing the team to respond more quickly in the face of change, and we are committed to closing the gap with our peers over time and are redoubling our efforts in this critical area.
As you can see on slide seven, train speed and terminal dwell were generally flat versus second quarter and do not reflect performance at desired levels.
While there were some effects from Hurricane Ida, those impacts were localized, and I'm extremely proud of how the team, especially engineering and our signal forces, helped us return our routes in Louisiana to operation and reopen the New Orleans Gateway very quickly.
As I mentioned last quarter, we are experiencing hiring and retention conditions that are increasingly challenging, especially in some of our more critical locations, and it is having an impact on our network.
Despite hiring all year long, attrition has been accelerating in each of the last two quarters in several of those critical areas.
In many of these locations, we've been able to absorb the impact by executing upon productivity initiatives, and this will be very much a part of the equation going forward as we grow capacity, which I'll talk about more in a moment.
Some of the things we are doing to create relief: we've more than tripled our conductor trainee rank since the first quarter so that we can effectively backfill in critical areas; we've implemented tools such as perfect attendance bonuses, referral bonuses and signing incentives to improve the stickiness of our current and future workforce; and we continue to leverage the valuable Go Teams to quickly respond to business opportunities where needed.
People are the backbone of the railroad, and we need to make progress on these initiatives to better manage the effects of a tight labor market.
We are committed to having the right amount of resources in the right place at the right time, which will drive both cost control and service quality.
As our business mix continues to evolve, creating capacity across our market segments has become an even more significant area of focus as highlighted on slide eight.
Some shippers are looking to take advantage of unexpected market opportunities by shipping extra volume.
Others are looking for us to help them adjust to volatility coming from other parts of their supply chains, and of course, all place a high value and service predictability.
We're adjusting our network and operations to generate the various types of capacity that customers are looking for.
For example, increases in both train sizes give shippers extra lift without further demands on our crew base.
Train size increases often require connecting railroads, customers and Norfolk Southern to change processes, and we have found those process changes are worth the effort because they improve asset turns and capacity.
We also continue to focus on terminal efficiency, whether helping to drive dwell at our biggest hump yard, Elkhart, to very low levels or tactically redirecting trains to intermodal terminals that have the capacity to unload quickly.
Moving to slide nine.
I want to show how we can use these capacity efforts to drive productivity.
We've had great success over the past two years driving train size and, in doing so, have addressed a handful of infrastructure bottlenecks.
We're fast-tracking a set of siding improvements, the first of which went into service at the end of the third quarter so we can keep making progress.
Bigger trains unlocked by siding extensions helped drive locomotive utilization because it allows us to fully match train size to available pulling power.
And because locomotives are at their most efficient when pulling hard, this is a key lever to our fuel efficiency improvement.
While I've used locomotives and fuel as my primary example, capacity additions have a similar effect on our crew productivity: more cars per crew, asset turns, keeping trains moving with greater train capacity, and also helps our customers with improved train and car performance.
On slide 10, we are complementing our investment in physical capacity with a comprehensive technology strategy that makes our crews more efficient and our assets more productive.
Virtually all of our routine signal and track maintenance is now scheduled via the mobile track authority app, a process that used to be measured in minutes can now be accomplished in seconds.
It is inherently more efficient than the radio process of the past, and most importantly, safer because it reduces transcription errors.
In the words of our chief engineer, the app has been a game changer for the productivity of his forces.
We're doing the same with our mobile train reporting app, which enables our train crews to quickly report completed work and to receive updated customer work requests while in route.
This takes a lot of hands out of the process, including significant retyping and delay and enables our crews to be more productive.
We're still early in the deployment of this application with rollout to the local trains that do the preponderance of pickups and setoffs just beginning.
The use cases for this technology in the field are numerous, and driving adoption and innovation around this platform is a focal point that will allow us to capture additional benefit.
The common use thread in these apps is that better information allows people to plan.
Our track supervisors can better plan their schedule knowing the availability of track time, and our customers can better plan their plant operations and product pipeline with up-to-date shipment information.
In the third quarter, we continued to execute on our growth plan, yielding double-digit revenue gains in each of our three markets, further demonstrating our ability to deliver value for our customers and shareholders.
Beginning on slide 12, I will highlight our results for the third quarter.
We achieved total revenue of $2.9 billion, representing a 14% increase from the same period last year despite flat volumes.
Our revenue performance this quarter was driven by significant gains in revenue per unit and revenue per unit less fuel, both reaching record levels with double-digit year-over-year growth.
This reflects the success of our ongoing efforts to yield up and improve revenue quality, a strategy that enhances our long-term potential for revenue and margin growth as conditions improve.
Revenue in our merchandise segment improved 10% year-over-year, while volume increased to 5%.
Growth was led by our Chemicals franchise that benefited from recovering energy demand that drove higher shipments of crude oil and natural gas liquids.
Also contributing to merchandise growth was sustained strength in steel markets due to record-high commodity prices and growth in manufacturing activity.
Steel shipments were up an impressive 34% from the same period a year ago.
Partially offsetting these gains were declines in shipments of finished vehicles and vehicle parts due to the ongoing semiconductor shortage.
This limited automotive production activity and further depleted finished vehicle inventories to new lows.
Both revenue per unit and revenue per unit less fuel improved year-over-year due to price increases.
Our intermodal franchise experienced several headwinds related to supply chain disruptions that negatively impacted volume in our domestic and international business lines.
In both segments, unprecedented demand from inventory restocking and consumer spending outpaced available capacity in the supply chain ecosystem.
The combination of drayage shortages, warehouse productivity, equipment availability, labor force participation and rail network fluidity pressured intermodal volume throughout the quarter, resulting in a 4% year-over-year decline.
Overcoming these headwinds, we delivered revenue growth of 16% in the third quarter due to higher revenue from storage services, increased fuel surcharge revenue and price strength.
Coal revenue increased 32% in the third quarter as both domestic and global economies continued to recover from the pandemic and drive demand for electric power.
Export coal shipments increased significantly as strong demand and record high seaborne prices increased opportunities for US.
Utility volumes declined in the third quarter as coal supply was limited and some crossover tons moved into the higher-rated export market.
The mix shift from utility to export, coupled with price gains, led to a 20% increase in revenue per unit less fuel for coal in the third quarter, a new record for the franchise.
Moving to our outlook on slide 13.
We expect the third quarter environment to continue through the end of the year.
Strong consumer demand will continue, while pressures from material shortages and labor issues remain challenging global supply chains.
Inventory levels remain at historic lows despite the continued push to replenish stock, providing a boost to transportation demand.
We remain confident in our ability to leverage our strengths in these market conditions and deliver robust revenue growth for the full year.
We expect merchandise business will continue to benefit from recovering economic activity as conditions that limited business and recreational activities in the fourth quarter of last year have been much less impactful in the fourth quarter of 2021.
We anticipate our markets for crude oil, natural gas liquids and waste to experience higher volume as a result.
Ongoing demand for steel will also be a growth driver, with forecast for industrial production up more than 5% year-over-year in the fourth quarter and steel prices currently above $1,900 a ton.
A projected 4% year-over-year fourth quarter decline in US.
light vehicle production will remain a headwind as the industry remains challenged by the chip shortage.
Within intermodal, we continue to see strong demand from consumer spending and tightness in the truck sector.
These favorable conditions are offset by constraints from supply chain congestion and equipment availability.
We are working closely with our customers and our channel partners to mitigate these challenges.
However, we do not see meaningful improvement in these headwinds before the end of the year.
Coal demand is expected to remain strong with extremely favorable market conditions, although coal supply will be the governor on year-over-year growth.
Natural gas prices continue to climb, and declining inventory levels leading into the winter months are the current focus of utility customers.
Seaborne prices are at decades-long highs in the export market, creating demand beyond capacity and supply abilities.
Overall, we are optimistic about the opportunities in the fourth quarter and confident in our ability to execute our plan to generate value and grow our business.
Turning to slide 14.
There are several factors impacting the supply chain in which we participate.
This includes external factors, such as the chip shortage and intensifying congestion in the intermodal supply chain.
Coal supply availability continues to be a constraint to meet the higher demand in every market as both thermal and met production remain tight.
NS has taken action to mitigate some of these factors and effectively position us for revenue growth.
As drayage challenges affected international intermodal, we provided an alternative storage solution to our customers.
We're working diligently to add chassis capacity to support demand and alleviate shortages across the supply chain.
Last quarter, we outlined our plan to repair a portion of our chassis fleet that was impacted by a manufacturing defect.
I appreciate the quick action and effort from our team, and I'm pleased to report that this issue is effectively behind us as we have repaired and returned approximately 95% of the recall chassis back to service.
We are also in the process of taking delivery of leased chassis to augment our fleet.
We've added terminal capacity to support growth driven by e-commerce and a recovering economy as well as reduced terminal congestion and improved network fluidity.
We remain focused on growth opportunities across our network.
We are continuously innovating to compete in the $800 billion plus truck and logistics market, as shown by our Thoroughbred Freight Transfer or TFT service launched earlier this year.
TFT is one of our initiatives to drive growth by targeting opportunities for highway conversions to rail.
This service combines the efficiency of our intermodal trains, the capacity of our boxcar assets and the last mile flexibility of trucks to provide an innovative door-to-door service.
We're also leveraging our sustainability advantage to propel long-term growth.
The choice of transportation mode is one of the most powerful levers any shipper has to reduce the size of its carbon footprint, and we are working closely with our customers to deliver additional value through sustainability.
We have proven our ability to deliver results despite challenging market conditions by providing innovative solutions that our customers value and position us for future market demands.
On slide 16, as Alan just detailed, revenues were up 14% on flat volumes.
With operating expenses up 10%, we delivered strong incremental margins leading to 230 basis points of operating ratio improvement, driving us to a Q3 record of 60.2%.
The improvement Alan detailed in RPU, coupled with strong productivity, led to record Q3 operating income, with growth of 21% or nearly $200 million.
And our free cash flow is also at record levels, a 33% increase during these nine months compared to last year.
Moving to slide 17, let's drill down into the change in operating expenses.
While operating expenses grew $149 million or 10%, it's up only 4% or $67 million, apart from fuel cost increases.
The fuel cost increase of $82 million is driven mainly by price, but the 5% increase in GTMs also drove more consumption.
You'll see purchase services up $35 million, with the majority of the year-over-year increase in areas.
We have an increase in technology spend, which is consistent with our technology strategy, and you've heard a couple of project examples in Cindy's remarks.
There are also headwinds from Conrail operating expenses.
And there are increases in intermodal costs.
More specifically, we had trucking costs associated with shuttling longer dwell containers to satellite parking lots in order to reduce congestion at our terminals and keep the freight moving.
Lift expenses were actually up in the quarter despite fewer lifts, and that is primarily because of inflation we absorbed on lift rates associated with contractor labor availability.
This is an area we do expect to see continued inflationary pressure going forward.
And we also absorbed costs in the quarter related to our chassis repairs.
Moving on to compensation and benefits.
It is up 5%, but you'll note the $40 million in savings from 7% lower headcount that more than offset increases in pay rates and over time.
Meanwhile, incentive compensation comparisons in the quarter are a headwind of $43 million, similar to what we reported in the second quarter, reflecting our strong 2021 financial outlook compared to lower accrual rates last year.
Materials, claims and other expenses were all down year-over-year.
Turning now to slide 18 and looking at the rest of the P&L below operating income.
You'll see that other income of $14 million is $25 million unfavorable year-over-year, and that is due almost entirely to lower net returns from company-owned life insurance.
Our effective tax rate in the quarter was 23.6%, close to our federal and state statutory rates, but unlike Q3 last year where the rate was 21.9% and benefited from tax advantages related to both COLI investment gains and higher stock-based compensation.
Net income increased by 17% and while earnings per share grew by 22%, supported by 3.6 million shares we repurchased in the quarter.
Wrapping up with our free cash flow on slide 19.
As I have mentioned, free cash flow is a record through nine months of 2021 at $2.3 billion, buoyed by very strong operating cash generation, and that translates into a 102% free cash flow conversion.
While property additions are trending a bit lower than run rate for our $1.6 billion guidance number, capital spend is never linear, and we expect fourth quarter property additions will get us close to the $1.6 billion.
We first demonstrated our commitment to sustainability with our visionary appointment of a Chief Sustainability Officer back in 2007, the first in the industry.
And our efforts to support a low-carbon supply chain have greatly accelerated since then.
Building upon the momentum earlier this year with the approval of our science-based targets for greenhouse gas emissions reduction and our launch of $500 million in green bonds in the second quarter, we're excited to report another set of milestones on our sustainability journey.
In August, we released our 2021 ESG report, our 14th annual report on corporate responsibility, highlighting the transformational role sustainability is having on our business as we further integrate sustainable practices into daily operations.
We celebrated our 500th modernized locomotive unit in partnership with Wabtec in August and announced our collaboration with Progress Rail in September on a first of its kind Tier four locomotive prototype for yard and terminal operations.
And just earlier this month, we announced our decision to purchase 100% renewable energy to power company operations in Altoona in Reading, Pennsylvania.
Our commercial and sustainability teams work hand in hand to provide demonstrable low-carbon solutions to a wide variety of current and prospective customers, providing a compelling value proposition as we convert more freight from truck to rail, simultaneously benefiting our customers, our communities and our shareholders.
Before we open the call to Q&A, I'll take a moment to provide an update to our outlook based on the current economic environment.
As shared previously, we expect to achieve an operating ratio improvement above 400 basis points for the full year versus our adjusted 2020 result.
And there's likely upside to the 12% year-over-year revenue growth, as strength in our consumer-oriented and manufacturing markets drive the majority of the growth.
Near-term upside in coal markets provides a boost for the balance of the year as well, though coal remains challenged in the long term.
We are delivering on our financial commitments and remain focused on creating long-term sustainable value for our customers and shareholders.

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qtrly railway operating revenues of $2.85 billion increased 14%.
qtrly railway operating ratio was 60.2%.

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