Norfolk Southern Corporation (NYSE:NSC) Q3 2023 Earnings Call Transcript

Norfolk Southern Corporation (NYSE:NSC) Q3 2023 Earnings Call Transcript October 25, 2023

Norfolk Southern Corporation misses on earnings expectations. Reported EPS is $2.65 EPS, expectations were $2.74.

Operator: Greetings. Welcome to the Norfolk Southern Corporation’s Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce Luke Nichols, Senior Director of Investor Relations. Thank you, Mr. Nichols. You may now begin.

Luke Nichols: Thank you. 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 a full discussion of those risks and uncertainties we view as most important. Our presentation slides are available at nscorp.com in the Investors section, along with a reconciliation of any non-GAAP measures used today to the comparable GAAP measures. Turning to Slide 3; it’s now my distinct honour to introduce Norfolk Southern’s President and Chief Executive Officer, Alan Shaw.

A driverless train traversing vast countryside, illustrating the companies long-distance rail transport services. Editorial photo for a financial news article. 8k. –ar 16:9

Alan Shaw: Good morning, and welcome to our discussion of third quarter earnings. Here with me are Mark George, our Chief Financial Officer; Paul Duncan, our Chief Operating Officer; and Ed Elkins, our Chief Marketing Officer. I want to begin by thanking my Norfolk Southern colleagues for working safely, serving our customers, and driving our strategic plan forward. When we charted a new course in the industry, we understood unlocking the full potential of our powerful franchise would require an enhanced focus on resilience and operational excellence across every aspect of our business. Our transformation into a more customer-centric, operations-driven service organization reveals opportunities to strengthen our franchise. We saw some of that in the third quarter with two technology outages.

The first, on August 28, was caused by a defect in a vendor’s software. The second, on September 29, involved a firmware maintenance issue. These incidents were unrelated and were not cybersecurity issues. We are taking measures to prevent a reoccurrence, and importantly, we are not stopping there. We have launched a top-to-bottom review of our technology infrastructure with the assistance of leading third-party experts. Operations driven means pursuing operational excellence in every aspect of our business and that includes IT. Demonstrating our progress in building resiliency, our strengthened operations leadership, enhanced operating plan and greater crew capacity enabled us to manage the technology incidents with limited disruption to our customers and grow volume through the service recovery.

Throughout the third quarter, we continued to do exactly what we said we’d do when we announced our strategy. We are making smart investments and safe, reliable and resilient service. Although the macroeconomic environment of abnormally low volumes is an unwelcome headwind, it has not changed our approach or diminished our confidence that our strategy is a better way forward. The market will recover and we will be poised and leveraged to capture growth with strong incremental margins. Mark will provide detail on other cost drivers in the quarter including fuel prices and higher labor costs as a result of last year’s historic wage increase for our craft colleagues. These costs combined with investments in our strategy and the backdrop of historically low volumes in the quarter contributed to significant pressure on our operating ratio, which deteriorated year-over-year and sequentially.

We are clearly not satisfied with these results. We will recover from these short-term impacts to our operating ratio. As we articulated when we launched our strategy, continuous productivity improvement is a core element of our balanced approach. We are committed to achieving and maintaining industry competitive margins over the long term. Our focus on productivity is unrelenting. Under the strong leadership of Paul and his team in operations, we have an increasingly stable network with a high degree of plan compliance allowing us to iterate the plan for service and productivity and as Paul will describe, we are reducing our pipeline of conductor trainees through year-end to more normal levels among other steps. Balanced against the challenges of the quarter, there were several encouraging developments that demonstrate progress on our strategy and point to growth and profit improvement in the quarters ahead.

Notably, service in the third quarter improved both year-over-year and sequentially, allowing us to onboard more business. Volume improved as well and appears to have turned a corner with each of the last four weeks running above 136,000 carloads. That’s a level we haven’t seen consistently since the second quarter of 2022. In part, this was a function of customers awarding us new business. Our customers see the commitment we are making to deliver more consistent, reliable service and our marketing team is creating innovative solutions to amplify the value of that service, even in a weak freight environment. Ed will talk more about this later. In addition to service and volume gains, we delivered improvements in safety as well. Our mainline train accident rate is down more than 40% year-over-year as we strengthen our safety culture and performance.

In East Palestine and the surrounding communities, we continue to deliver on our commitments. Mark will provide an update on costs associated with our ongoing efforts to make things right. I visit regularly as we make significant progress cleaning the site and investing in the community’s future. I’ll now turn it over to Mark.

Mark George: Thank you, Alan, and good morning, everyone. I’ll start on Slide 5 with an update on our accruals related to the Eastern Ohio derailment. We are pleased to report that we will be completing soil removal from the derailment site shortly, but expect that there will be ongoing testing efforts to ensure continued safety of the air, soil and water through April of 2024. And as such, we accrued $118 million in Q3 to account for this timeline extension. Additionally, we recorded another $70 million for legal and other costs incurred in the quarter. Of note, we did file our initial claim for reimbursement with our insurers during the third quarter and will continue to file claims as costs accumulate. We did receive notification of our first reimbursement under our policy of $25 million and accordingly recognize this as an offset to the costs incurred in the third quarter.

The cash was actually received last week. While we were encouraged by the speed of this initial reimbursement, there are dozens of parties sharing exposure at 10 layers in the insurance tower. So we expect this cost recovery process to be protracted. Also, of the $966 million recorded as expense thus far, just more than half has been paid through September 30. Of the remaining $450 million, I’d expect roughly half to be spent in the fourth quarter and the rest to be spent in 2024. I will remind you that this situation remains fluid and we will continue working through these issues for many quarters to come. We expect that there will be additional costs that have not yet been incurred related to future settlements, fines and penalties, as well as legal fees, and we cannot predict the amounts at this time.

Moving to Slide 6, where we illustrate the impact of these third quarter costs on our results; our GAAP results are in the first row, while on row 2, we isolate the accounting to our Q3 financials related to the incident and our response. At the bottom of the chart, you’ll note the comparisons of the adjusted financial results to the prior year. I’ll be talking about our adjusted results for the remainder of the discussion. Revenues were down 11%, adjusted operating expense was down modestly, the adjusted operating ratio for Q3 was 69.1%, which notably includes 270 basis points of headwind from net fuel price impacts. On an adjusted basis, operating income was down 28%, net income and EPS were down 37% and 35% respectively, but recall last year, we enjoyed a benefit from a state income tax change of $136 million, distorting the year-over-year comparison.

Let’s turn to Slide 7 for an overview of our operating revenues; and it’s a quick look at the drivers of the revenue change from last year in advance of Ed getting into the market details. The biggest driver in the year-over-year revenue decline is the meaningful reduction in fuel surcharge revenue. Volumes were down 2%, which equates to a $74 million revenue decline and we are highlighting here the reduction in intramodal storage revenue of $71 million, as we are now back to more normal levels and will continue to have tough compares through Q1 of 2024. Ed will talk later about the traction we have on pricing as well as mix dynamics in the quarter that collectively inform the positive $27 million of rate mix and other. On Slide 8, let’s drill into the operating expenses.

Adjusted operating expenses for the quarter were down $19 million, or 1%, on a year-over-year basis. Fuel expense was down $94 million, or 25%, driven mainly by lower fuel prices. Comp and ben was down $20 million, or 3% year-over-year, as higher pay rates and employee levels were offset by a favorable comparison with Q3 last year from the $85 million charge we took related to the retroactive wage accruals. Depreciation expense was up in line with our earlier guidance. Purchase services was up due to higher costs associated with engineering activities on our network, as well as technology spend. The increase in materials and other was up $42 million and driven primarily by an adverse comp on a favorable legal settlement last year, as well as higher consumption of materials for locomotive repairs.

Property sales were also lower this quarter. Moving to Slide 9, while we expect costs related to the past service issues to begin unwinding in the third quarter, additional service challenges in the quarter resulted in a delay with only moderate easing. We expect the unwind to accelerate here in the fourth quarter. Now, offsetting these fourth-quarter savings will be an increase in incremental costs related to building resiliency in a couple key areas that will pay dividends in the years ahead. Firstly, there are investments in the continuation of our hiring and locomotives in order to support both future growth and faster recoveries. Second are the investments in our craft workforce, including the quality of life enhancements like paid sick leave.

These investments overall should allow for the accommodation of higher volumes that will help cover these costs along with more productivity. And on Slide 10, let’s talk to a couple P&L items below operating income. Other income was up $42 million in the quarter, driven by favorable returns from our company-owned life insurance. The adjusted effective tax rate was 22.7% in line with what we normally guide. And turning to free cash flow and shareholder distribution on Slide 11, through the first nine months, free cash flow was $1.1 billion lower than prior year, with half due to derailment-related expenditures and the remainder from a combination of lower core operating results and higher CapEx. Shareholder distributions over the same nine months were $1.4 billion, thanks to our solid dividend and continued share repurchase activity.

I will remind that the citizen vote in Cincinnati to approve the proposed $1.6 billion purchase of the CSR asset will take place in November. So we are reserving capital capacity for that potential transaction, which would close in mid-March of 2024. I’ll now hand off to Paul to provide an update on our operations.

Paul Duncan: Thank you, Mark, and good morning, everyone. At Norfolk Southern, everything starts with safety, so let’s turn to Slide 13 for an update. In the quarter, we have made significant strides. Our injury rate is up slightly versus last year, but it has improved 30% from where we were just three years ago. Our accident rate is trending down from where we have been the past two years, and we also continue to maintain a significant reduction in our mainline accident rate through the many efforts and initiatives we have put forth, including the enhancements to our train-maker rules implemented earlier this year. While those enhancements required a significant period of operational adjustment earlier this year, they are now paying off in terms of our mainline accident rate improvement.

We also remain very focused on reducing exposures and improving outcomes in our yard and terminal operations. We have made further investments in our people, including enhancements to our training and PPE programs, as well as leadership development. On all of these fronts, the results are encouraging, but we are not satisfied and will continue to drive towards our goal of being the industry leader in safety. Turning to Slide 14 for an update on service; this is another area where we have made sustained progress this last quarter. Train speeds have resumed the improving trajectory they were on before our challenging second quarter. We have also pushed to reduce dwell and improve schedule rigor in our terminals, which well now improved to its best level in two years.

We’re sustaining this progress in October while bringing weekly car loadings up to their highest level since Q2 2022, and while developing new service offerings that Ed will outline. As part of our scheduled railroad model though, we will drive further progress. We have to continue to minimize car dwell, maximize velocity across the railroad, sustain safe, reliable and resilient service and drive productivity. On the next two slides, we will cover how we plan to accomplish this. Turning to Slide 15, our locomotive velocity was flat year-over-year. Now that we are seeing improvements in train velocity and terminal dwell, this is an opportunity we are focused on driving further velocity and productivity in. As our terminal discipline initiatives take further hold and as network velocity takes the next step above 21 miles per hour, we expect to see this metric improve along with fuel efficiency as we bring additional tonnage onto the network.

We now have a qualified teeny workforce that is sized appropriately in aggregate, although we are still investing to get them all in the right locations. We’re on track to have our conductor training pipeline below 600 by yearend as indicated last quarter. As our initiatives take hold and as GTMs increase, this measure of productivity will improve from here. Moving to Slide 16 to discuss how we are driving service improvement aligned with our scheduled railroad model and how it will translate it into additional gains in resilience, productivity and ultimately growth. First is disciplined terminal execution. This starts with strict adherence to the operating plan to ensure trains are arriving on plan to balance terminal flows in both our merchandise yards and intermodal facilities.

We’re minimizing dwell by switching cars within six hours of arrival. At our intermodal facilities, it’s ensuring we’re driving precision execution to the trip plan of containers and leveraging our high frequency intermodal model. It involves maximizing connection performance, getting the right cars on the right train and departing our trains on time. The second bullet point, we are driving a culture of strict compliance to the operating plan, both at the train, car, and intermodal unit level and expect that this will drive further reductions in dwell and even greater consistency in our terminals. Next, we’re investing in our people and modernizing our workforce to become more resilient and productive. For example, 250 conductors are receiving locomotive engineer training this year.

This gives us resilience and flexibility to fill assignments whether the need is an engineer or a conductor or protecting future growth with an investment today. We are moving forward with the first phase of extra board consolidations, cross training 260 employees at seven key terminals across the network. Let me explain what this is. As railroads and labor agreements evolved and merged over the decades, territorial boundaries remained that prevented certain employees from working assignments that were within their geography. At many of these locations we’ve worked collaboratively with labor to remove those boundaries but have yet to get folks qualified to work all potential assignments. With our new focus on resilience, we’re investing in our craft employees and getting them qualified to hold more assignments, providing them with greater work opportunities and offering Norfolk Southern enhanced operational flexibility and efficiency.

To complement these labor modernization efforts, we are implementing predictable work scheduling, a groundbreaking work-life balance initiative negotiated with our craft colleagues, which will also streamline our back office crew management functions and drive further productivity. Lastly we are kicking off a system-wide initiative that will drive productivity and enhance our first mile last mile service. This is a substantial initiative aligned with delivering reliable service, productivity and most importantly driving additional growth of the network. To close, running a safe reliable and resilient scheduled railroad using these principles is going to improve service consistency, generate greater productivity and create capacity for growth.

I’ll now turn the call over to Ed.

Ed Elkins: Thanks Paul and good morning to everybody on the call. Now before we get into the numbers, I want to call out the collaboration between our teams and marketing and operations as we improve service and innovate solutions to deliver value for our shareholders and for our customers. I’ll talk about it more as we move along here, but I think it’s important to recognize the steady progress that we’re seeing deep in these organizations that’s starting to pay off. Let’s start on Slide 18 and review our results for the third quarter. Norfolk Southern volumes and revenue was down 2% and 11% respectively year-over-year in the third quarter. Revenue declines, outpaced volume due to lower fuel surcharge and intermediate storage revenue compared to the prior period.

Within merchandise, weakness in several energy markets was the leading driver of a 3% decline in total volume. Crude oil shipments were challenged by unfavorable fuel price differentials that discouraged crude by rail to East Coast refineries that we serve. Also, low natural gas prices negatively impacted shipments of sand and NGLs. Helping to offset those declines in energy markets was strength in automotive where volume increased 7% year-over-year in the third quarter. Growth was driven by continued strength and demand for finished vehicles as well as high shippable ground counts. Merchandise revenue was down 7% due to lower revenue from fuel surcharge and lower volume. However, revenue per unit excluding fuel set a new record as it improved 3% showing sustained price and mix improvement.

This quarter marks 33 quarters out of the last 34 consecutive quarters where we’ve been able to achieve year-over-year growth in merchandise revenue per unit excluding fuel. Moving on to intermodal, volume was down slightly compared with last year as growth in international intermodal largely offset declines in domestic. On the domestic side, persistently abundant truck capacity and weak freight demand challenged volume. While on the international side, volume improved as customers continued to return freight to IPI service. Intermodal revenue was down 22% as revenue per unit excluding fuel declined 15%. Lower intermodal storage fees represented more than two-thirds of this decline, followed by adverse mix effects from strong international volumes and the impact of persistent competitive pressure in a loose trucking environment.

We’re also seeing negative mix effects within the international business. First, shippers are returning to lower yielding short haul lanes that shifted to the highway during the pandemic and second, growth in lower yielding empty shipments is also outpacing loaded shipments. Intermodal storage has returned to a normal level and we expect a lap this headwind in the second quarter of next year. Lastly, within coal, volume dropped 9% year-over-year with weak conditions in our utility markets, which more than offset strength in our export markets. Utility coal volume was down roughly 26% from prior year levels driven by high stock piles and low natural gas prices and prolonged customer and producer outages. Export volume increased year-over-year driven by strong Asian demand.

Coal revenue declined 8% primarily due to lower volume. Revenue per unit excluding fuel set a new record and revenue per unit also increased as positive mix and stronger than expected seawarm coal pricing and modest liquidated damages more than offset a decline in fuel surcharge revenue. Turning to slide 19, for the fourth quarter, we expect to see slow volume recovery amid uncertain economic conditions. September presented us with some encouraging data that the contraction in manufacturing is slowing and onshoring to the US is on the rise. However, we remain cautious in our optimism as uncertainty surrounding future Fed actions, strike outcomes and geopolitical tension is very pronounced. Although the macro environment is unclear, we are steadfast in our business development initiatives and I’ll talk about those in a few minutes.

Our merchandised markets have upside potential in the automotive and metals markets. We expect growth in automotive as we continue to work through the backlog of shippable vehicles, improve our cycle times and grow our fleet size. We also still see unmet demand in our metals market, which we should realize as improving service should drive year-over-year growth. Offsetting anticipated growth in the fourth quarter will be sustained, soft conditions in energy markets as the headwinds that pressured crude, NGL and sand volumes in the third quarter are expected to continue through the remainder of the year. Automotive production is a key driver for many of our merchandised markets beyond automotive, so the duration and scope of the ongoing UAW strike is a downside risk to our overall merchandise volumes.

Our marketing and operations teams are collaborating to deliver incremental business wins across the portfolio of carload markets that we serve by identifying and solving business challenges for our customers at an accelerating pace. This innovation and collaboration will be a driver of future growth for NS. Intermodal volume is expected to improve year-over-year in the fourth quarter from sustained service recovery and improving market conditions. We’re encouraged by the momentum that we’re seeing in our domestic market. Our customers are seeing improvements in bid compliance and demand, which has us trending positively in October, but we continue to see a relatively muted peak season which will temper overall volumes. International markets will benefit from strong East Coast import demand and favorable ocean rates driving demand for IPI.

We expect the negative mix effects from the shift back to short haul lanes to persist in the fourth quarter, and we continue to experiment and develop new services for our intermodal customers, and I’ll talk about that in just a minute. Coal volumes should be stable in the fourth quarter with upside potential in export markets as new production comes online. In addition, recent trends in seaborne coal prices suggest higher prices throughout the remainder of the year due to supply constraints out of Australia as well as continued strong demand out of China and India. Domestic coal shipments should improve sequentially in the fourth quarter on improved service and fewer outages, but headwinds from low natural gas prices will continue to be a limiting factor and while uncertainty in the economy continues to persist, we’re confident in our ability to collaborate with our customers to drive incremental volume and to continue providing value in a manner that drives growth in the future.

Now before I turn it back to Alan, I would like to expand briefly on how we’re providing value in ways that drive growth in an unfavorable market. Slide 20 features key examples of new service offerings we developed this quarter aimed at making Norfolk Southern the preferred option for freight transportation and driving modal conversion. It’s important to recognize that collaboration and teamwork invested by both marketing and operations to bring these projects to life. In October, we partnered with CN to expand intermodal service and connect customers in Atlanta and Kansas City with markets on the CN in Canada. We also partnered with Florida East Coast Railway to expand both domestic and international intermodal services in Florida. These new services are designed to give our customers flexibility, expand the reach of the NS intermodal network into key growth markets, and give more ways for our customers to reduce their supply chain greenhouse gas emissions.

Early in September, we also announced an investment in DrayNow, a company focused on modernizing technology solutions for intermodal. DrayNow is revolutionizing intermodals’ first and final mile journey through an app that provides customers with real-time shipment tracking and document capture of drayage shipments. Norfolk Southern is the operator of the most extensive intermodal network in the Eastern US and together with DrayNow and our best-in-class customers, we will drive more transparency into a fragmented supply chain and increase the ability to best serve our intermodal customers. And lastly, our persistent industrial development efforts paid off as both new and expanded industries turned on additional volume in the third quarter, including a new cement transload, an ethanol terminal, and a container board warehouse, as well as expanded rail operations and an established grain elevator.

We’d like to thank our customers for locating on our network and allowing NS to serve their market needs. Together, these diverse projects will generate over 7,800 new car loads annually at full production. We’re aggressively pursuing project-oriented growth to enhance the NS network in a fragile freight environment. We’re not sitting back and waiting for car loads to come to us, but rather we are proactively making enhancements to our service portfolio to become a preferred service provider for our customers and drive sustainable and smart growth in the future. And concluding on Slide 21, let’s look at our 2023 outlook. Based on lower Q3 revenue, which included significantly lower fuel surcharge, we’re now expecting 2023 revenue to be down closer to 4% year over year.

With that, I’ll turn it back over to Alan to bring us home.

Alan Shaw: Closing on Slide 22, although this year has presented a number of challenges, we are emerging a stronger company due to our response and our decisive action to effect necessary improvements. I’m more confident than ever that our innovative strategy is a better way forward. We are already seeing the benefits from leadership changes, plan refinements and resource investments as we drive towards our strategy. We are achieving wins with our customer base, and we are incorporating operational discipline that drives consistency and enables productivity enhancements in the quarters ahead. I am extremely optimistic about our future. We will now open the call to questions. Operator?

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Q&A Session

Operator: Thank you. We’ll now be conducting a question and answer session. [Operator instructions] And our first question comes from Chris Wetherbee with Citigroup.

Chris Wetherbee: Hey, thanks. Good morning, guys. I guess maybe we want to start on Slide 9. Mark, you laid out some of the temporary service costs and the incremental resiliency investments that you’re making. I guess I want to make sure I understand how to think about that as we move into the fourth quarter, and then also really more 2024. I guess, are you able to absorb these costs and generate sequential OR improvement in the fourth quarter? And then as you look out to next year, how much of this cost kind of sticks around? How much of it actually will go away and any thoughts around the cadence of that? So thanks for that.

Mark George: Okay, thanks, Chris. Yeah, so if you start first on the service costs, we saw a slight reduction here in the third quarter. We were hoping for a little bit more, but obviously we had some disruptions to the network that delayed that. We do expect the reduction to continue here in the fourth quarter, and eventually this should unwind over the next couple quarters. As fluidity on the network improves, as we qualify more of our T&Es in the right critical locations as well, and we start to build some solid processes around delivering service as opposed to putting the band-aids on, like we are today with overtime, etcetera. So those will start to unwind here in the next couple quarters. The right-hand part of that slide, those are — I think you need to think about those as structural cost increases.

And those are really around developing and building resiliency. That’s the whole point. A lot of this is related to the T&E ramp-up that we’ve seen as well as the investments in our locomotives. There are also costs related to the quality of life improvements that we’ve announced with our craft workforce and I’d say that of these costs, 75% of those will probably reside in the comp and band line, and then after that you’ll see costs sitting in purchase services and also in some materials. But in terms of cadence as we go into Q4, like I said, service costs will start to come down, but that will be offset by another increase there in the structural resiliency costs.by another increase there in the structural resiliency cost. And then I think at that point, we should probably be moderating going forward into ’24, but we’ll give you more ’24 guidance when we reconvene in January.

Alan Shaw: And Chris, one way to look at this is, our investments in resiliency are investments in the elimination of the service recovery costs and it’s also an investment in top-tier growth and in industry competitive margins. That’s our vision for the future and that’s what we said we were going to do when we laid this out in December of last year.

Mark George: Yeah. Ultimately, these are going to get paid for by the elimination of those temporary service costs, but also by accommodating more volume than we typically would be able to, as well as, pricing and productivity. So it’s exaggerated here because we’re in a down cycle.

Chris Wetherbee: And does this give you the ability to improve OR in fourth quarter still?

Mark George: Yeah, I think we’re at a trough. I think we’re at a trough right here.

Operator: Our next question is from the line of Amit Mehrotra with Deutsche Bank. Pleased proceed with your question.

Amit Mehrotra: Thanks, operator. Hi, guys. Maybe first question, can you just give us the liquidated damages in coal and where we think coal yields can trend from the high 3Q levels? And, Alan, just a bigger picture question, every rail right now has a cyclical challenge. Everybody has a fuel headwind. You guys are still reporting margins that are 600 basis points, 700 basis points worse than your direct competitor and just generally industry. I look at that as an opportunity because obviously with top SPG you’ve fixed the network, you’re improving the service, the volumes are coming. So there’s obviously progress made there, but is there an opportunity to look deeper inside the cost structure of the organization to say, listen, we’re dealing with all these headwinds just like all our competitors are, but we’re still our cost structure is still seemingly very, very high and what’s the opportunity there if you’re looking at it and how you’re going about addressing those differences?

Thank you.

Alan Shaw: Amit, thank you for that question. Why don’t I address the second part of your one question first and then turn it over to Ed and talk about coal yields. Look, we’re committed to industry competitive margins. We said that from the get-go. We’ve also said that returns follow the investment. We’re investing over the long term and we’re not going to chase short-term OR targets. We illustrated very clearly, Mark had a chart, I believe, at Investor Day that showed during a economic trough, right, our margins would get a little worse as we invested over the long term, but as you evaluate this through an economic cycle, this is the better way forward for Norfolk Southern to invest in long-term growth, deliver top-tier growth, industry competitive margins, and drive long-term shareholder value.

We’re not happy with our cost structure right now. As we drive operational discipline into our network, as we refresh our operations team, as we drive a high degree of plan compliance, it allows us to continue to iterate the plan for productivity and service and that’s exactly what we’re doing right now. Ed, you want to talk about gold yields?

Ed Elkins: Sure. Yeah. I think you asked about LDs in the quarter and I think I said in the prepared remarks, these are episodic. We don’t expect them to continue. Its high single digits in terms of millions of dollars and when we look out into the fourth quarter, and again, restating what I said in the prepared remarks, we’re forecasting prices to be sideways through the end of the quarter and the year and that’s really predicated off the continuation of strong demand out of India and China for next quarter.

Amit Mehrotra: Thank you very much.

Operator: Our next question is from the line of Ken Hoexter with Bank of America. Please proceed with your question.

Ken Hoexter: Hey, great. Good morning and Ed, solid job on the new lanes. Interesting stuff. Alan, I just want to follow up on that question maybe a little bit more, right? So you have a lot of temporary costs and restructuring costs. Do you think you need to bring in PSR expertise to handle some of that network resiliency? That seems to be the thing that PSR does, right? It allows the quick snapback, at least for some of the peers that have implemented that process. And I’m a little confused on the resiliency investments. It sounded like when Mark went through some of them, is it paid sick leave or is there more on the resiliency expenditures? I just want to understand what’s outside of agreements or costs that you’ve already implemented on the resiliency side. Thanks.

Alan Shaw: Yeah. Well, thank you, Ken. Look, I’ve been CEO for a year and a half. We’ve been kinetic here. We’ve refreshed our operations leadership. We’ve implemented a new operating plan. We’ve launched a brand new strategy, something that’s never been done in this industry. We’ve revamped the marketing organization. We brought in a number of outsiders and leadership roles; outsiders to the rail industry, outsiders to Norfolk Southern. I believe we’ve got the right team going forward. We will continue to look for opportunities to improve our strategic talent base. With respect to the resiliency costs, some of that has to do with predictable work schedules. Some of that has to do with the historic wage increase that the rail industry and labor came to agreement on last year.

Some of it has to do with hiring or investing in additional resources and as a result of that, what you’re seeing is third quarter service is better year over year and better sequentially. Our safety figures improved in the third quarter and our volume growth right now, our volumes the last four weeks are at levels that we haven’t seen in the last, say, second quarter of last year. So we are making progress. We’re doing exactly what we said we’re going to do. This is the better way forward for Norfolk Southern to drive long-term shareholder value.