Norfolk Southern Earnings Call: Safety Up, Revenue Pressured

Norfolk Southern Corp ((NSC)) has held its Q4 earnings call. Read on for the main highlights of the call.

Norfolk Southern Earnings Call Highlights Safety Gains Amid Revenue Headwinds

Norfolk Southern’s latest earnings call struck a cautiously positive tone, with management emphasizing substantial progress in safety, productivity, cost control and cash generation, even as revenue came under pressure from softer volumes, weak coal pricing and intermodal share losses tied to merger-related competitive responses. Executives framed the quarter and full year as operationally strong but top-line constrained, arguing that the company’s stronger safety record, efficiency gains and free cash flow leave it better positioned to navigate regulatory setbacks and a cloudy macro backdrop.

Safety Milestones: A Breakthrough Year on the Mainline

Norfolk Southern placed safety at the center of the discussion, highlighting zero reportable mainline derailments in the fourth quarter and a mainline accident rate of 0.13, a 71% year-over-year improvement. For the full year, the mainline derailment ratio was 0.43, and the railroad reported its best train accident performance in more than a decade. Worker safety also improved, with the FRA reportable injury ratio down 15% to 1.0 and reportable accidents down 31% to 2.19. Management framed these results as structural, not temporary, arguing that the safety gains both protect the franchise and underpin long-term cost discipline.

Productivity and Operational Efficiency: More Freight with Fewer People

Operational efficiency was another standout. The railroad moved 3% more gross ton-miles (GTMs) with 4% fewer employees, effectively delivering about 7% productivity. Train load increased 4%, horsepower per ton fell around 10%, and GTMs per crew start rose 2.5%—all signs that assets and crews are being used more intensively. Unscheduled stops were cut by 31%, locomotive productivity improved roughly 10%, train-and-engine (T&E) productivity rose about 9%, recrews were reduced 21%, and fuel efficiency improved roughly 4–5% for the year. Management pitched these metrics as evidence that the network is running tighter and more reliably, laying a foundation for better margins when volume returns.

Cost Takeouts and Savings: Raising the Bar for 2026

On costs, Norfolk Southern beat its own targets and then raised the bar. The company delivered $216 million in full-year cost savings, surpassing its increased $200 million goal. Looking ahead, it lifted its 2026 cost-takeout commitment from $100 million to $150 million, bringing the three-year cumulative cost reduction target to roughly $650 million. Management portrayed this as a blend of structural efficiency and disciplined overhead cuts rather than one-off actions, suggesting that operating leverage should improve once revenue pressure eases.

Capital Execution and Cash Generation: CapEx Cut, Free Cash Flow Up

Capital allocation and cash generation were clear bright spots. Norfolk Southern completed its $2.2 billion 2025 capital program on time and on budget, marking a 7.5% reduction versus 2024. It also trimmed planned 2026 capital spending to about $1.9 billion, a roughly 14% cut from the prior envelope. Free cash flow in 2025 reached $2.2 billion, up almost $500 million year over year and the strongest conversion since 2021. Management argued that this combination of lower CapEx and rising free cash flow gives the company flexibility to invest selectively, support the balance sheet and return capital to shareholders while still funding safety and productivity initiatives.

Merchandise & Automotive Strength: Core Franchises Set Records

Despite broader freight softness, Norfolk Southern’s merchandise and automotive segments were relative outperformers. Merchandise revenue excluding fuel grew about $287 million, or roughly 4% year over year, with record annual revenue and record ex-fuel revenue across the underlying merchandise groups. The automotive business delivered record total revenue and revenue less fuel, supported by roughly 4% improvement in equipment cycle times, which helped the railroad fill more car orders. These franchises provided a stabilizing base for the portfolio and partially offset weakness in more cyclical segments.

Profitability and Financial Results: Solid EPS, Aided by Land Sale

On the bottom line, Norfolk Southern reported adjusted Q4 EPS of $3.22 and an adjusted operating ratio (OR) of 65.3 after adjustments. Net income grew about 5% year over year, but management acknowledged that results benefited from a sizable land sale, which reduced operating expenses by roughly $85 million in the quarter. The company characterized underlying profitability as resilient in the face of volume and pricing headwinds, while conceding that the OR remains pressured by revenue softness and mix.

Technology and Asset Risk Detection: Digital Tools Show Their Value

Management also underscored the role of technology in boosting safety and reliability. The digital train inspection program now scans more than 75% of monthly traffic, using wayside cameras and analytics to flag issues before they become failures. A new wheel integrity system recently detected a supplier casting defect that led to the identification of seven additional faulty wheel sets and helped drive an industry-wide recall. Executives held up this incident as proof that digital investments are not just theoretical—at scale, they can materially reduce risk and avoid costly incidents.

Q4 Volume and Revenue Softness: Top Line Falls Short of Expectations

Underneath the operational improvements, the top line was weaker than management had anticipated. Overall Q4 volume fell about 4% year over year, and total revenue declined around 2%. Executives cited softer-than-expected demand in the quarter and noted that these volume and pricing pressures eroded the operating ratio despite disciplined expense control. The message to investors was that the cost side is largely doing its job, but there is only so much that can be done when revenue growth is missing.

Intermodal Weakness and Share Losses: Merger Fallout Bites

Intermodal was a clear soft spot. Q4 intermodal volume declined 7%, with revenue down roughly 6%, and full-year intermodal revenue was essentially flat. Management attributed second-half share losses to competitors’ reactions to Norfolk Southern’s proposed merger, citing business shifts such as certain J.B. Hunt volumes moving to a rival railroad. Looking ahead, the company expects intermodal to remain constrained by tariff uncertainty, an oversupplied trucking market and expanding warehousing capacity, suggesting limited near-term relief for this important growth segment.

Coal Pricing Pressure: Volume Up, Revenue Down

Coal results illustrated the impact of weak pricing. While Q4 coal volume was up about 1%, coal revenue fell roughly 11% as revenue per unit (RPU) less fuel dropped around 12%. For the full year, seaborne coal market weakness drove a revenue decline of about $108 million versus the prior year. Management described seaborne prices as persistently soft with an uncertain near-term recovery path, implying that even if tonnage holds up, coal will remain a drag on revenue and mix.

Merger Regulatory Setback and Competitive Reaction: A Strategic Speed Bump

The company also addressed regulatory challenges surrounding its merger efforts. The Surface Transportation Board returned its merger application as incomplete, requiring an augmented filing and raising the prospect of a more extended approval process. Norfolk Southern recorded $65 million in merger-related costs during the year, mainly legal, professional services and retention expenses. Meanwhile, competitors have seized on the uncertainty to aggressively pursue customers, creating what management estimates as roughly a 1% revenue headwind and contributing to volume shifts out of its network. While executives remain committed to the strategic rationale, they acknowledged the near-term earnings drag.

Inflationary and Expense Pressures: Tailwinds from Costs Have Limits

Even with strong productivity, Norfolk Southern is not immune to inflation. Management highlighted an ongoing ~4% inflation impact, including a 4% wage increase implemented last July, health and welfare cost increases of more than 12%, and insurance premiums that have climbed around 25%. Materials and depreciation are also trending higher. Additionally, the company cautioned that land sale proceeds—which provided an outsized ~$150 million benefit in 2025—are expected to normalize to a $30–$40 million run rate, removing a one-time tailwind to operating expenses.

Uncertain Macro and Demand Outlook: Revenue the “Wild Card”

Executives struck a guarded tone on the macro environment. They flagged continued uncertainty around tariffs and noted that second-half demand softened, with little visibility into when freight growth might reaccelerate. Norfolk Southern expects potential softness in the first half of 2026 and emphasized that unpredictable freight demand makes revenue growth the key wild card for further operating ratio improvement. The company’s message: it can control costs, safety and efficiency, but cannot fully offset a weak demand backdrop if it persists.

Operating Ratio Degradation: Revenue-Driven Pressure Despite Discipline

Management made clear that the deterioration in operating ratio was predominantly a top-line story. The Q4 adjusted OR of 65.3 represented year-over-year degradation driven by segment volume declines, fuel surcharge volatility and depressed seaborne coal pricing. These factors outweighed the benefits of cost control and one-time land sale gains. While executives highlighted the structural nature of cost savings, they acknowledged that better OR progression will require at least some relief on volumes and pricing.

Guidance and Outlook: Leaner Cost Base, Flexible to Volume Scenarios

Looking ahead, Norfolk Southern guided 2026 operating costs to a range of $8.2–$8.4 billion and confirmed 2026 CapEx of roughly $1.9 billion, part of a two-year $450 million capital reduction versus prior plans. The company raised its 2026 cost-takeout target from $100 million to $150 million, lifting the three-year cumulative goal to around $650 million. Management said the network can accommodate a range of volume scenarios—absorbing about a 1 percentage-point revenue headwind from intensified competition while still handling potential growth of several percentage points with strong incremental margins. They pointed to 2025’s performance—$2.2 billion in free cash flow, a 7.5% CapEx reduction year over year, and approximately 7% headcount productivity—as validation of the plan, while cautioning that ~4% inflation, higher wages, double-digit health & welfare increases and sharply higher insurance costs will remain headwinds.

In closing, Norfolk Southern’s earnings call painted a picture of a railroad that is operationally stronger and financially more disciplined, yet still wrestling with weak freight markets, coal and intermodal headwinds, and regulatory friction around its merger strategy. Safety and productivity metrics have rarely looked better, and free cash flow is on the rise, but revenue softness and competitive pressure are keeping the operating ratio from fully reflecting those improvements. For investors, the story is a balancing act: a leaner, safer franchise set up to benefit when demand and pricing turn, but one that must first navigate a choppy macro and regulatory environment.