Norfolk Southern

Norfolk Southern reported record quarterly revenue while increasing buybacks and dividends for investors

Norfolk Southern’s President told analysts the company saw “record” revenue despite a decline in shipping volume. “Alan Shaw — President: Thanks to the combined efforts of our team. We delivered solid financial performance in the second quarter with record revenue and earnings per share. Revenue increased 16% as a 20% increase in revenue per unit more than offset a 3% volume decline. Expenses grew by 21% year over year due primarily to higher fuel prices. Operating ratio was up 260 basis points versus last year’s quarterly record. Comparisons were adversely impacted by the absence of a large property sale we called out last year, as well as fuel price headwinds. Despite these headwinds, EPS improved by 5% and to $3.45 per share, a second quarter record.” (Norfolk Southern Q2 2022 Earnings Call, 7/27/2022)

Norfolk Southern’s “record revenue” for Q2 2022 was $3.4 billion, 16% higher than the same quarter last year. “Ed Elkins — Chief Marketing Officer: Thanks, Cindy, and good morning, everybody. Let’s go to slide 13. Our results for the quarter reflect strong revenue growth amid still recovering volume from network challenges. We achieved record revenue for the quarter of $3.3 billion. That’s up 16% year over year on higher revenue from fuel surcharge and price improvement. Revenue per unit was also a record and revenue per unit, excluding fuel, saw a double-digit increase from the same period last year. This revenue growth more than offset a 3% decline in overall volume, resulting from service disruptions. Within merchandise, overall volume was down slightly as declines in steel and construction-related shipments from strained network fluidity were partially offset by gains in sand, driven by increased drilling activity in response to rising demand for natural gas, also helping to offset those declines with notable growth in our grain shipments due to rising export demand. Merchandise revenue and revenue per unit were records for the quarter on higher revenue from fuel surcharge and price gains.” (Norfolk Southern Q2 2022 Earnings Call, 7/27/2022)

Norfolk Southern told analysts “Shareholder distributions are up and you’ll observe here the 19% higher dividend payments through six months on top of continued strong share repurchase activity” “Mark George — Chief Financial Officer: We’ve generated nearly $1.2 billion in free cash flow through six months with property additions trending higher than last year, with strong progress being made on both our rail replacement program, and our DC to AC locomotive conversion program, where, as Cindy touched upon, we gain operational benefits, as well as improved fuel efficiency. Incremental inflation is also having an impact on property additions. So I would expect capex to be at the high end of our $1.8 billion to $1.9 billion guidance range. Shareholder distributions are up and you’ll observe here the 19% higher dividend payments through six months on top of continued strong share repurchase activity.” (Norfolk Southern Q2 2022 Earnings Call, 7/27/2022)

Norfolk Southern described labor compensations as less of a burden thanks to “lower incentive accruals:

Norfolk Southern described labor compensation and benefits as a “tailwind” thanks to “lower incentive accruals,” but warned labor negotiations could lead to “incremental headwinds” “Mark George — Chief Financial Officer: Compensation and benefits is a tailwind with lower incentive accruals, offsetting the cost of trainees, as well as general wage inflation. As you can imagine, the current labor negotiations are likely to play out here in the second half and may result in incremental headwinds to comp and benefits that we are unable to estimate at this time. Shifting to the P&L below operating income on slide 19. Other income is actually an expense in the quarter of $14 million, driven by losses on our company-owned life insurance investments.” (Norfolk Southern Q2 2022 Earnings Call, 7/27/2022)

Norfolk Southern executives admitted difficulties keeping employees due to unpredictable schedules and shift life

Norfolk Southern admitted that new employees “end to get the work that others do not necessarily — they do not want…So as they step into that role, some find that that’s not really what they’re looking for.” “Cindy Sanborn — Chief Operating Officer: Great. Well, let me start with the training retention piece. One of the challenges for our trainees when they mark up as a seniority-based system, they will tend to get the work that others do not necessarily — they do not want. Those will be the jobs that they can hold. So as they step into that role, some find that that’s not really what they’re looking for. Our training process allows us to convey that information, but sometimes it doesn’t become real until you come up and you mark up. I will say in terms of what could be a solution at the national table is conductor redeployment that will allow us to have a more structured work environment for more conductors than we do today. So that is part of what we feel like is a good solution, and we feel like it will fit the needs and demands of our workforce in the future, which is why we’ve got it on the table for negotiation.” (Norfolk Southern Q2 2022 Earnings Call, 7/27/2022)

Norfolk Southern’s CFO: “Despite the very rich and attractive pay structure that the railroads offer, sometimes, they’d rather work in a more predictable schedule in warehousing or in home construction, where they can be nearby where they live and not stay in hotels and also just not be on call or work their shift. ““Mark George — Chief Financial Officer: Jeff, it’s really more of a lifestyle challenge in a very unique market where everybody is looking for talent. So you have to compete against everybody simultaneously. So labor has their choice of what they want to do. And in many cases, despite the very rich and attractive pay structure that the railroads offer, sometimes, they’d rather work in a more predictable schedule in warehousing or in home construction, where they can be nearby where they live and not stay in hotels and also just not be on call or work their shift. So we’re just in a very unique environment right now where the entire labor market have their options to choose from.” (Norfolk Southern Q2 2022 Earnings Call, 7/27/2022)

Norfolk Southern’s COO said the company was looking at “sign-on and attendance bonuses, retirement deferral and referral incentive” to deal with hiring and employee attrition. “Cindy Sanborn — Chief Operating Officer: We’re maintaining a very strong pipeline of conductor trainees. And even more encouraging, as you can see that in July, we’re really making progress on getting those employees qualified more than offsetting ongoing attrition. And the impact on our network is being felt. We are continuing to start classes weekly and expect this momentum to continue. I will note that the labor market is still very challenging, particularly in certain locations. We’re taking advantage of every option to get folks where we need them, including go teams, transfers, sign-on and attendance bonuses, retirement deferral and referral incentives and more. We’re also examining how we can adjust our operation to best align resources with demand. An example of this is that our two of our major terminals, Macon and Bellevue, recall that both of these former hump yards were converted to flat switching in 2020.” (Norfolk Southern Q2 2022 Earnings Call, 7/27/2022)