Norfolk Southern Corporation (NYSE:NSC) Q4 2023 Earnings Call Transcript

Norfolk Southern Corporation (NYSE:NSC) Q4 2023 Earnings Call Transcript January 26, 2024

Norfolk Southern Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Norfolk Southern Corporation Fourth 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, Investor Relations. Thank you. Mr. Nichols, you may begin.

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

Alan Shaw: Good morning, everyone, and thank you for joining Norfolk Southern’s fourth quarter 2023 earnings call. Here with me today are Mark George, our Chief Financial Officer; Paul Duncan, our Chief Operating Officer; and Ed Elkins, our Chief Marketing Officer. Last year was historically challenging, with a major derailment to start off the year, followed by network disruptions and compounded by a stubbornly weak freight market. The Eastern Ohio incident tested our resolve. I’m proud that our team responded decisively and responsibly to protect this great franchise and our shareholders, and to address the community’s concerns. With an unwavering commitment, we have strengthened our safety and service. We have kept and will continue to keep our promises to make things right in Ohio, to improve our service to our customers, and to make a safe railroad even safer.

A crisis allows you to accelerate change, and we acted. This includes a number of positive changes to how we design the network and assemble trains with measurable results. As we show on Slide 4, our improvement in safety is already being highlighted by a dramatic 42% reduction in our mainline accident rate in 2023. 2023 was also historically important for Norfolk Southern because we began to implement and advance our new strategy to position our business for sustainable growth and success. The Intermodal Service Composite chart on the right side of Slide 4 tells an important story that speaks to the clear gains we have made in both resiliency and service, following significant strides in service in 2022. With our investments in resiliency through leadership plan and resources, we demonstrated the ability to execute our strategy to run a safer railroad that delivers a compelling service product to our customers and handles increased business, a balanced approach to safely delivering service, productivity and growth.

We overcame multiple significant network disruptions in 2023, and exited the year with the best intermodal service we have delivered in over three years, all while intermodal volume grew 5%. Entering 2024 with a safer and more fluid network that is attracting growth, we have the platform to narrow our focus to specific areas to drive increased productivity, and we are building positive momentum by executing on our strategic vision. Part of that strategic vision is our commitment to industry-competitive margins, and we are determined to deliver on that promise just as we have delivered our promises on service and safety as volumes grew. We will leverage our PSR operating plan with our current resource base to meaningfully improve velocity and resilience within our merchandise network, which accounts for two-thirds of our train starts.

As we achieve a high degree of compliance to the plan and merchandise, we will reduce variability, complexity and costs. We are driving that forward now with the results already seen in December and January. It will drive asset velocity that will lead to productivity gains and cost savings. And in 2024, we are targeting a double-digit percentage improvement in terminal dwell, which is a good barometer of the health of our and fluidity of our merchandise network. Paul will go into more detail about how we are planning to build on our success in intermodal, deploying changes to accelerate our merchandise network, which I have noted will be a major source of productivity for Norfolk Southern in 2024 and beyond. To further describe what we are doing to improve profitability and drive smart growth in 2024, Ed will talk about how his team is winning business and pushing hard to negotiate price in excess of inflation.

Importantly, we are streamlining our cost structure and eliminating inefficiencies. We invested in 2023 to enhance safety and service. We will see the benefits of this in our cost structure in 2024. We’ll take actions this year to reduce costs in other areas. This includes a program to reduce management headcount by roughly 7% to help offset increases in critical operating areas. Our groundbreaking transformation will take time. We recognize the necessary investments in resiliency and service have temporarily increased our cost structure, particularly visible during the trough in this freight cycle. On Slide 5, you’ll see we laid out the scenario where during a down cycle, we may modestly underperform in order to be coiled to secure volume and incremental margin when the freight cycle recovers.

While we didn’t expect 2023 to be a continuation of a soft freight market, coupled with numerous disruptions, we are optimistic that recovery is on the horizon and our investments will yield returns. We will deliver near-term margin improvement as we implement our strategic vision, a balance between safe service, productivity and smart growth. We are on the path to achieve that balance. In the aftermath of the derailment and network disruptions, we have improved safety and service in a responsible manner and are in securing new business. With a stabilized network and a high degree of compliance to the plan, we will continue to iterate the plan, reducing complexity and enhancing executability and balance. All of this will unlock productivity and fluidity, which, in-line with our strategy, will allow us to attract more volume at accretive incremental margins and deliver top-tier revenue and earnings growth at industry-competitive margins.

With strong franchise advantages that will serve us well as we move through this economic cycle, we are poised for a bright future as we balance safe service, productivity and growth. I’ll turn it over to Mark and the rest of the team, who will add some context around the timing and magnitude of our planned improvements in performance and profitability.

Mark George: Thank you, Alan, and good morning, everyone. I’ll start on Slide 7 with an update on our costs related to the Eastern Ohio derailment. During the fourth quarter, we reached a significant milestone with the bulk of the soil remediation being completed. It’s an encouraging achievement, however, as you’ll note, we incurred $137 million charge in the quarter, which related to an extension the timeline for ongoing testing as well as additional work that will be completed in nearby streams. There was another $89 million incurred in legal costs and other fees. But of note, we received $76 million of insurance recoveries, bringing the total recoveries in 2023 to just over $100 million. From a cash perspective, the net outflow in 2023 was $652 million after the insurance recoveries.

While we’re pleased with our remediation accomplishments, we currently expect ongoing monitoring efforts and cleanup efforts will continue through 2024. There will be additional costs in the future related to legal settlements and fees, although the amounts and timing cannot currently be estimated. Moving to Slide 8, where we illustrate the impact of these fourth quarter results on our results. Our GAAP results are in the first row, while on row two we isolate the accounting to our Q4 financials related to the incident. At the bottom of the chart, you’ll note the comparisons of the adjusted results to prior year. I’ll be talking about our adjusted results for the remainder of the discussion. Revenues were down nearly 5%, while adjusted operating expense was 3% higher.

The adjusted operating ratio for Q4 2023 was 68.8%, which represented a year-over-year deterioration, but notably was a 30 basis point sequential improvement from our third quarter performance. The sequential improvement is encouraging, but we fell short of our expectations as service-related costs did not come down as we anticipated. While our recovery efforts related to the IT outages in late Q3 restored service quickly for our customers and allowed us to handle more business, it costs more money in the form of crew-related expenses that persisted well into the fourth quarter. On an adjusted basis, operating income was down 19% year-over-year. Net income and EPS were down 19% and 17%, respectively. Turning now to Slide 9, adjusted operating expense for the quarter was up $59 million.

The increase excluding fuel decline was up $123 million. The largest drivers of the increase were employment growth as well as inflation across all categories. In comp and ben, looking to ’24, we plan to keep overall headcount levels flat versus the year end 2023 exit rate with some additional mechanical craft hiring to be offset by upcoming reductions in the non-agreement category that Alan discussed. Purchased services was up due to higher costs associated with technology spend, as well as increased mechanical services, including repairs around our auto fleet as we prepare for growth opportunities in 2024. The increase in rents was driven by short-term locomotive resources and increased car supply for our auto fleet. We expect quarterly rents in 2024 to remain slightly above these fourth quarter levels due to more adverse TTX equity costs and volumetric-related increases, partially offset by benefits coming from improved velocity.

The increase in materials relates to locomotive and freight car repairs. Claims were lower year-over-year. Recall that in Q4 2022, we had a large adverse adjustment. The other component is unfavorable, driven mainly by fewer real estate gains. Moving now to Slide 10. Last quarter, we introduced this slide to help investors think about our service costs and resiliency investments, which are two components of our current cost structure. On the left side, we see costs that should not be part of our cost structure and have grown out of service that has not met planned levels, mainly related to recrews and overtime. These costs did not step down as expected in Q4 due to the crew-related costs we incurred to accelerate service recovery for our customers after the IT outages.

So, while service has been at strong levels exiting the year, Q1 costs will remain somewhat elevated in part from the cold weather we are seeing here in January. Overall service costs should meaningfully unwind in Q2. On the right hand, we show costs tied to our investments in resiliency, mainly related to additional T&E crews that we have added in locations where we were understaffed, as we position Norfolk Southern to realize outsized growth in revenue and margin in a growing volume environment. Our total T&E headcount is now on an appropriate level that will allow us to absorb volume growth in ’24 and beyond. There will be some additional hiring in mechanical crafts that will be offset by reductions in non-agreement positions. The additional craft hires mean that resiliency costs will settle in roughly in the $55 million per quarter range in 2024.

Adding those resources will drive benefits over time of being an even safer and higher velocity operation. Moving to Slide 11 and results below operating income, other income of $38 million was up $4 million in the quarter, driven by higher interest income on the extra cash we are carrying ahead of the CSR closing. The adjusted effective tax rate was 19.2% due to a rate adjustment on our deferred state income taxes and tax-free gains on favorable company-owned life insurance. For 2024, we expect our tax rate to be in the usual 23% to 24% range. Turning to Slide 12 and recapping our full-year results. We started the year planning for modest top-line growth that would afford a level of expense growth to help drive our strategic track toward resiliency.

The disruptive events of the year and an adverse macro environment upended this. Revenue declined 5%, which was meaningfully affected by about 6 points of pressure from lower fuel surcharge revenue and a sharp year-over-year decline in storage fees. At the same time, OpEx rose 5%, fueled by inflation and investments in our business. As a result, operating income fell 18%, with the operating ratio rising to 67.4%. Favorable below-the-line items and benefits from share repurchases held the EPS decline to 15%. In 2023, free cash flow was $1.4 billion lower than the prior year, representing the impact of the $650 million derailment-related outlays, as well as the lower operating income, coupled with higher CapEx. Shareholder distributions in ’23 were $1.8 billion, with two-thirds being driven by our rock solid dividend and the remainder from share repurchase activity.

I’ll mention that we did issue debt in November and built up our cash balance to $1.6 billion at year-end, as we prepare to fund the strategic CSR purchase that is scheduled to close on March 15. As a result, we will see higher interest expense in 2024 and we will temporarily suspend share repurchases while we absorb the asset and bring our credit metrics back into our target range. It’s important to remember that CSR is a highly strategic critical artery in our network, for which we had a rare window to secure and guarantee control of the asset forever. This also enables us to control longer-term costs that could have begun to escalate sharply with the upcoming lease renewal. I’ll now hand over to Paul, who can provide an update on our operations.

Paul Duncan: Thank you, Mark, and good morning. Turning to Slide 15 to begin our operations discussion with safety. We made progress in enhancing safety in 2023. We finished the year with our second best injury rate in eight years, but we are striving for better. We enhanced our conductor training program and continue to leverage our partnership with Atkins Nuclear, a foremost expert in safety across all industries. We also closed 2023 with a 42% reduction in our mainline accident rate and the fewest mainline accidents since 1999. Thank you to all of our craft colleagues and leaders for enhancing safety at Norfolk Southern this last year. While these are very noteworthy accomplishments, we must become even safer. When the major incident in Eastern Ohio happened in early 2023, we were already in the process of reviewing and adjusting our train makeup rules and it was a high priority of mine.

We ended up accelerating that work by a lot. What we produced was an even better product than we already had, which helped us make such progress in mainline accidents and we are striving to become even safer. This is the platform for which we can now lever up our train plan to deliver productivity and growth. Though the change in our operating rules was implemented on an accelerated timeline and caused network disruption, we know it was the right move for the long term and we kept our promises to restore fluidity and service levels in the second half of 2023. The future of our operation is very bright and I am proud of the work we did in 2023 on this front to keep our promises. Moving to Slide 16 for further discussion on service levels. We took a modest step backwards to begin the quarter related to the system outages that we experienced, but quickly regained footing and continued our glide path of improvement in November and December.

It is important to note that we deliberately chose to deploy additional resources so that we could balance restoring fluidity, while delivering peak volume. We were successful on that front. We delivered a very strong service for our intermodal customers during peak season and pushed overall volumes to their highest levels in over two-and-a-half years as you will hear more about from Ed. But as you heard from Mark, it did result in higher-than-planned service recovery costs in the quarter. We remain sharply focused on reducing those and have actively been unwinding more T&E crew expense in recent weeks in areas such as temporary deployments, overtime, recrews and other crew-related expenses. This has included reducing our intensity of Go Team members deployed on the network.

Now that we have made this next step function improvement in intermodal service, we expect to remain there as we transition to leveraging our resources to drive greater productivity and growth. Turning to Slide 17 for a discussion on productivity. We’ve improved 4% sequentially within workforce productivity and expect an improving glide path to continue. We are driving this in four ways: one, by improving fluidity; two, by maintaining strict discipline and accountabilities to plan compliance in our operation; three, through discrete productivity initiatives that we’ll discuss in a moment; and finally, through converting trainees to productive employees. As promised last quarter, we ended the year with 600 conductor trainees. We are now confident with the overall size of our T&E workforce to efficiently serve the growth that is on the horizon.

On the locomotive front, referencing our service commentary, miles per day remained lower as we kept additional power and service to jumpstart the network with peak volume. This is an area that will benefit significantly from further improvements in velocity as faster train speeds allow us to drive our locomotives in the terminals on time and send them back out on their scheduled connections. And lastly, fuel efficiency finished flat despite the additional locomotives online, thanks to our initiatives, and this is an area we are intensely focused on improving in 2024. Moving to Slide 18, the next phase of our operational improvement will be marked by enhancing the velocity and resilience within our merchandise network. Recall that our TOP|SPG operating plan, which we launched in 2022, brought further PSR principles to our intermodal network, driving enhancements to container velocity and resilience within intermodal.

That successful evolution enabled intermodal service to remain strong throughout 2023, particularly in Q4, where we delivered the best intermodal service in over three years, while delivering on peak season. Now we are building on that success with further enhancements in our merchandise network. First, we are improving our execution and discipline to run with a higher level of planned compliance. We’re tying together the improvements we’ve made around our operational strategy, leadership accountabilities and resource allocation by sweating our assets further and strict execution to the plan. Next, we are leveraging precision train building processes embedded into our terminals to optimize connections and depart trains on time. We’re already seeing the benefits that arise from success in driving scheduled network velocity.

Our success will be demonstrated by making sustained improvement in terminal dwell, whereas Alan mentioned in his opening remarks, we expect to drive a low-double-digit percentage improvement in 2024 versus 2023. Investors can also track our progress in the AAR train speed, particularly the subset of manifest train speed, which has an outsized impact on our cost structure as well as merchandise trip plan compliance and car velocity, the outcomes of improving speed, dwell and disciplined execution of plan. Of course, there is always week-to-week noise in these measures, so we would look for improvements in trends on a rolling 12-week basis. On Slide 19, I’d like to provide more detail on how sustaining these velocity improvements will drive down our cost structure.

First, we will see reductions in various buckets of T&E-related expense, and that will also help to lower our headcount intensity. Next, as we spin up the flywheel, we’ll get cars moving faster, a critical element to scheduled railroading and overall productivity. Having our yards and mainlines more fluid will indicate that cars are flowing unimpeded through the network. This will drive a capacity and productivity dividend within our fleets in our yards and on our mainlines. That in turn will allow us to bring on growth at low incremental cost, lifting overall workforce and locomotive productivity and achieving service resilience that will allow us to take further share from truck. Driving these benefits in our operation by improving the velocity and resilience of the merchandise network will be a key aspect of delivering progress in 2024.

Thank you, and I’ll now turn the call over to Ed.

Ed Elkins: Thanks, Paul, and good morning to everybody on the call. Beginning on Slide 21, let’s cover our commercial results for the fourth quarter. Overall volume improved 3%, led by growth in intermodal and our automotive markets. Now, despite volume growth, total revenue and revenue per unit declined for the quarter due to lower revenue from fuel surcharge and intermodal storage and fees, along with negative shipment mix within the portfolio continuing from last quarter, as well as headwinds from a weak truck price environment due to the persistent overabundance of capacity. Looking at merchandise, volume was flat compared to the prior period and revenue was challenged by lower revenue from fuel surcharge compared to that prior period.

RPU less fuel increased 1% as price gains more than offset the impacts from negative mix. This increase set a new quarterly record for Norfolk Southern and marks the 34 of the last 35 consecutive quarters of year-over-year growth in merchandise RPU less fuel. We’re committed to driving value through price, and this commitment is demonstrated through quarterly records set in our automotive market for revenue, revenue less fuel, revenue per unit and revenue per unit less fuel. Let’s move to intermodal. Volume in the quarter increased 5% year-over-year with gains in both our domestic and international lines of business. Revenue for intermodal was down 13% year-over-year, primarily driven by significantly lower revenue from storage and fees in the prior period.

Also lower fuel prices and an excess supply of available trucks as well as negative mix within our international business impacted revenue per unit negatively. Excluding the impacts of fuel and elevated storage and fees, which are related to supply chain congestion, intermodal RPU declined 1% in the quarter. We’re confident our domestic franchise is a coiled spring, positioned to yield strong incremental value as the truck market recovers. Turning to coal. Overall volume increased slightly with strong demand for export more than offsetting declines in our utility coal franchise. The market for utility confronted persistently high stockpiles and low natural gas prices. Coal revenue was down 4% year-over-year with lower commodity prices and lower revenue from fuel surcharge negatively impacting RPU.

Now, let’s turn to Slide 22 and review results for the full year. Total volume came in at 6.7 million units, a 1% decrease from 2022. Volume declines were most significant in intermodal and our energy-related chemical commodities. On the positive side, lower ocean freight rates, advanced demand for international intermodal and rising vehicle production activity drove growth in our automotive franchise, both of which contributed meaningfully to offsetting larger declines. Revenue for the year was $12.2 billion, down 5%, or $590 million from 2022, driven by lower revenue from fuel surcharge and storage fees, as well as lower volume. I do think it’s important to point out, however, that if we exclude the $650 million revenue hit from fuel and storage fees, which is essentially a post-pandemic normalization of those items, underlying revenue was actually positive, even with volume down 1%, which speaks to our commitment to core pricing smart growth.

RPU, excluding fuel, intermodal storage and fees, increased 2% as we realized above budget price results in merchandise and in coal. In fact, we set annual records for merchandise revenue, revenue less fuel and RPU less fuel. Objectively, the freight environment in 2023 was soft, with weak demand for goods, lower levels of manufacturing activity, and generally less freight coming in from overseas. These conditions amplified the excess capacity in transportation, pressuring margins and growth opportunities. Our focus throughout the year was creating value with a resilient network to drive growth. In the fourth quarter, we saw that growth materialize with improved volume, and that volume will bolster our revenue performance in the coming year as we execute our pricing strategy to grow core revenue per unit.

Let’s look ahead to 2024 on Slide 23. Our market outlook is for modest volume growth. In merchandise markets, overall volume growth is expected to be driven by gains in steel shipments. Automotive will grow on continued strength in vehicle production, including new EV business. Improved fluidity and increased network velocity will lift our effective capacity in both of these markets. Shifting to intermodal, we are optimistic that increasing levels of international trade will boost demand for both our domestic and international services. There’s still uncertainty around how quickly capacity in the truck market right-sizes. Additionally, the strength of the consumer could pressure growth if the economy softens. Lastly, our coal outlook is for relatively flat volume levels compared to last year.

Demand for export coal is forecasted to be high, but some of this demand will be met via a shift of historically domestic coal to export markets. Utility demand will be driven by stockpile levels, which are forecast to remain elevated in 2024, aside from extreme weather events. Looking at price, we expect strong pricing conditions in our merchandise markets, aided by our improved service product. However, as mentioned, a persistently weak truck market will mute the opportunity for intermodal price, with contract truck rates expected to trend roughly sideways from their current levels throughout 2024. We also faced some headwinds on coal pricing this year related to difficult comparisons for seaborne coal prices, with additional pressure from high stockpiles and weak natural gas prices.

All said, we still expect to generate pricing above rail inflation in 2024. When we take all this together, we are reasonably confident that overall market fundamentals will create opportunities for us to bring on new freight and further the volume trend we achieved in the fourth quarter of 2023, while delivering incremental top-line revenue growth through core pricing gains, as we price into the value of our enhanced service product. Finally, let’s turn to Slide 24. I’d like to give you some examples of how our customer-centric approach is yielding smart and sustainable growth. Last February, our team met with FedEx Ground with the intent to enhance Norfolk Southern service for their transportation network. We listened to their business forecast and made strategic adjustments that we knew would set us up to better serve this valued customer.

We charted a better way forward for both of our organizations. As a result, we were able to significantly increase our volume for FedEx Ground during peak season, and we look forward to continuing that growth into the future. We also landed a new plastic recycling plant in Ohio with our new customer Pure Cycle, which is expected to launch this quarter. This is a great example of the circular loop that is possible within the plastic supply chain and how Norfolk Southern can deliver that resin in a carbon-friendly manner. Finally, 2023 was another successful year for the Norfolk Southern Industrial Development team. We partnered with 62 customers to facilitate the completion of strategic industrial development projects in 2023. Collectively, these projects represent $3.1 billion in customer investment and the creation of more than 4,150 new jobs along Norfolk Southern lines.

As we look into 2024, we’re encouraged by the continued robust pipeline of customers that are looking to locate facilities along our lines. These successes in 2023 are indicative of the success that we expect in ’24 and demonstrates our strategy to deliver a better way forward for our customers, our communities and for our shareholders. With that, I’ll turn it back over to Alan.

Alan Shaw: We overcame a number of challenges in 2023 and we are moving forward with confidence. Our resolve to deliver on all aspects of our strategy has never been stronger. We restored service and improved safety in a responsible manner to protect our franchise and long-term shareholder value. We ended 2023 with the best intermodal service we’ve seen in years and with an encouraging 5% increase in intermodal volume. Now, we enter 2024 with a fluid network, which will drive productivity gains and further growth this year. Turning to our outlook. We anticipate roughly 3 points of revenue growth in 2024. This growth, combined with our productivity initiatives, will yield strong accretive incremental margins, with operating income growing in excess of revenues.

Net income and EPS growth will be suppressed in 2024 versus 2023, owing to higher interest expense from the highly strategic acquisition of CSR, along with the temporary suspension of our share repurchase program. As for the progression through the year, typical seasonality suggests that second quarter and third quarter should be our strongest in terms of margin performance. Obviously, the first quarter will have some industry-wide impact from widespread cold weather in January, and our first quarter still has year-over-year headwinds from storage fees, fuel revenue and export coal price. In-line with the Investor Day guidance, over the midterm horizon, we anticipate delivering strong incremental margins, presuming a normal freight cycle and mix, and 3 points to 4 points of revenue growth.

A combination of volume absorption, productivity initiatives and a commitment to cost control will be key drivers. We aren’t going to give you a specific margin target, but it should result in between 100 basis points to 150 basis points of margin improvement annually, on the pathway to narrow the margin gap with peers and deliver industry-competitive margins. You’ll start to see progress along those lines in 2024, once we lap some of the revenue compared challenges in the first half. We see a path to outsize gains on the upcycle, leveraging volume growth within existing resources, ample productivity runway, and strong core pricing that can outpace inflation pressures. As we narrow our margin gap over time, the secular growth prospects of our powerful franchise will deliver shareholder value through earnings momentum and free cash flow generation.

And with that, let’s open the call for questions.

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

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Q&A Session

Chris Wetherbee: Yeah, hi. Thanks. Good morning. I wanted to think a little bit about the bigger picture here, Alan. You talked about the 100 basis points to 150 basis points of OR opportunity per year over a three-year period. As we kind of think about you guys relative to some of your closer peers, that’s about half of the gap that exists today. So, I guess as you think over, is there more opportunity beyond that? It just takes time to get there? Do you think that there is the potential for a structural gap between you and your closest geographic peer? I just want to get a sense of how you think about the opportunity maybe beyond that three years and how it might play out.

Alan Shaw: Chris, we’ve committed to industry-competitive margins. And in ’23, we overcame a lot. We made a lot of progress on our strategic plan. We enhanced safety, we improved service, we attracted new business, we overcame challenges. As we look into ’24, it’s really a focus on productivity, and we feel like we’re going to be on that pathway of 100 basis points to 150 basis points a year, particularly as we get into the second half of the year and lap some of these revenue comps. But we gave a three-year outlook, but that’s not an endpoint. We have talked about continuous productivity improvement as one of the three components of our balanced strategy of safe service, continuous productivity improvement, and smart growth.

Chris Wetherbee: Okay. Thanks for the time. Appreciate it.

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

Ken Hoexter: Hey, great. Good morning. I guess I’m still surprised by that timeframe, right. Should seem like there’s still moves that would get you that leverage a bit quicker, I guess, just compared to some moves we’ve seen some other rails. So, maybe just was the impetus for some of these changes the headcount, the three-year OR targets? There’s been some activist chatter in the market. Is that something that’s edging you behind in terms of making some of these changes? And then, I guess ultimately the question is, is pricing accretive to margins in ’24? Thanks.

Alan Shaw: Hey, Ken, with us entering the third year of a freight recession and with the investments that we’ve made in safety and service that are delivering meaningful results, it’s clear that our cost structure is too high for our revenue base entering 2024. And so, we addressed service, we addressed safety, we addressed growth in ’23. We did it in a responsible manner to protect our franchise and our shareholders. Now, as we enter 2024, we’ve got a much more fluid network, much safer network and network that is attracting growth, and it’s a focus on productivity. And so, yeah, we’re looking at every cost out there. And we’re looking at discretionary costs, we’re looking at management costs, and we’re focused on productivity, because it is a balanced plan. I’ll let Ed talk about price.

Ed Elkins: Yeah. We were successful in ’23 on price. And in ’24, we have a good price plan that’s strong and really is going to produce value every quarter of this year. So, we feel good about where we are with price. And there’s a couple of things that I’ll add to that. We’re feeling really good about where we are with our service trajectory at this point. We’re hearing from customers that they appreciate the value that we’re providing for them, and we’re doing it at the facility level, going out and talking to customers, focused on that first and final mile and how we add value, and that’s going to produce value for us and for our shareholders all year long.

Ken Hoexter: Thanks. I appreciate it. And I know one question, but I’m just trying to understand, are you saying then we get better margins in ’24? Is that pricing outpacing that cost? Sorry, just trying to understand the answer there.

Mark George: That’s part of the equation. Yeah, that is part of the equation, for sure.

Ken Hoexter: Thanks, Mark. Thanks, guys.

Alan Shaw: Thank you.

Operator: Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

Scott Group: Hey, thanks. Good morning, guys. So, Alan, you’ve been telling us for a little while now that maybe we’ll see weaker decrementals at the trough, but then we’ll see better incremental on the way back up. I think about Q4, where we started to see the way back up. We saw some pretty good volume growth, and the incremental margins were still really muted even with a nice fuel lag tailwind. So, how do I think about why we didn’t see it this quarter? And then, maybe just going-forward, you just said the cost structure is too high. I don’t know that I heard that you’re telling us that costs come down from here maybe I misheard. Or do cost come down from here? And then, I don’t know, just to put it all together, Mark, sometimes you just give us some color on near-term OpEx and margin. How to think about Q1? That would be helpful. Thank you.

Alan Shaw: Yeah, Scott, we had to overcome a lot in ’23, And we made investments in a prudent manner to enhance safety, enhance service and attract growth, particularly in our most service-sensitive markets. And so, we’re putting — with respect we’re putting proof points up on the Board. As we move through into the fourth quarter, we were still wrestling with a service product that was off plan, which adds complexity, adds variability and adds cost. We’re operating in a really tough freight environment and we were dealing with pretty healthy year-over-year inflation, and we’re still lapping some difficult comps with respect to the fuel surcharge revenue and with respect to storage revenue, right?

Mark George: And mix.

Alan Shaw: And mix. And so, as we move into ’24, those things are going to start to unwind themselves, right? We’ve got a much more fluid network. We’re operating on plan. That will drive out our service recovery costs. And then, after that, we’re going to continue to iterate to our plan. That’s going to help drive productivity, and we’re going to attract new business. And as you noted, our strategy is all about outperforming during an upmarket. I don’t see that in the next six months. When the economy does recover, it always does, when the freight market does recover and it always does, we’re going to be called for growth.