Welcome, everyone, to the 13th Annual Laguna Conference. I'm your producer and alumni. I'm producer and alumni. I'm Ravi Sharker-Moggessan, Eastern Conspiration Airlines Analyst. For the next three days, you guys are going to hear from the capstone industry across all industrial verticals. Obviously, very important trends, themes going on, both macro and idiosyncratic. We are very pleased and excited to jump right into it with probably the hottest story, the hottest talk, definitely in con sports right now, maybe in all cyclicals, Norfolk Southern. I'm very happy to have with us CEO Mark George and CCO Ed Elkins. Gentlemen, thanks so much for being here. Thank you. Before we start, I should point out that for disclaimer here to Morgan Stanley's relationships, please read our latest research on go to morganstanley.com/researchdisclosures. With that, Mark, it was at Laguna last year that you became CEO. Congratulations on your one-year anniversary. I'm sure it's been a really quiet and boring 12 months. Like, is anything in particular going on? It's been a very busy 12 months, and it's been a very busy 50 days since we announced the proposed merger with Union Pacific. We're really excited by this, and we're really proud of this combination. I think, you know, when you look at it, this will go down. When you look back five years from now, when the deal is closed, integration is largely complete, this will be as transformative as what Eisenhower did in the 1950s when he built the interstate highway system when it comes to freight transportation. Ever since then, when that highway system was built, I think freight has started to navigate toward the highway, and it's been hard for rail to recapture share. This is our opportunity to redefine rail's role in freight transportation. I'm really excited by that. We've spent the past 50 days meeting with various constituencies, and we'll continue to do that, whether it's shippers, labor unions, people in the political world. Honestly, there's just a lot of optimism and positivity toward what we're doing, and we're really excited by that. In parallel, we're working on a lot of things that are due, a lot of deliverables. We've got to get the S-4 files and go through our shareholder voting process. We're working on that real time. At the same time, we're working on our STB application. That needs to be filed within three to six months. We're working as fast as we can because we want to move this along as quick as possible. At the end of the day, windows opened up. We got, I think, a pretty good STB, going from, you look back to November last year, and there was a big change in the STB after the election. We think that the members are pragmatists, and they'll be open and receptive. I think when you look at what's going on just in the past week with a lot of announcements, just the mere idea of having a transcontinental railroad has already enhanced competition in this space. I think that's a very, very important point. Our argument is being made for us. Got it. We are really excited. That's a great overview. A few follow-ups on that. Before that, a little bit of a sidebar. I'm watching the TV show, The Gilded Age, right now. Obviously, it's about a railroad baron who's trying to buy the Illinois Central and trying to build a transcontinental railroad. They're telling him it's going to be impossible, literally 100 years ago. It's amazing how the more things change, the more they stay the same. Maybe if you can give us, that's a very good overview, maybe a little more color around the genesis behind this, how it came together, what triggered that opportunity for you when there's been a lot of talk about Graylem and A over the last several years, like not happening over the last several years. Maybe why now? I think I joined the industry just under six years ago. I've been told for six years, you know, that it's just impossible. Right. Can't happen. Because you always look at it and you say, this is ridiculous when you look at the way the rail networks are partitioned in our country. You know, you got a couple in the East, you got a couple in the West, you got a couple in Canada who are transcontinental, by the way. They dip down into the U.S. into Mexico. Into Mexico. The way that the whole network has evolved after the decades of consolidation that happened in the 1980s and 1990s, you put a hard freeze on it for understandable reasons. There were all sorts of integration challenges. The Surface Transportation Board was freaking out at the time and said, all right, no more to protect shippers. I get that. I do. It was a real inopportune time to put a freeze. Maybe it was appropriate at that time. With the passage of 25 years, I think sentiment has changed. I think you bring in new thinking to say, why not? Tell me why not. Nobody will tell me that it doesn't make sense. They just tell you that the hurdles are too great to get there. I get that too. My single biggest concern, and when I started to talk to Jim about this, was what do we do for two years if it takes two years to get this thing through? How do we continue to run our business without disruption for two years when, at Norfolk Southern, we're going to have employees, human beings who are uncertain? You'll have that even on the Union Pacific side, people who are uncertain about their future, right? That was one of the considerations for sure. We had to make sure that we addressed that, and we did. Ultimately, why not now? I do think that something happened in November with the Surface Transportation Board following the election. I think it's worth giving it a try. That's a good way to frame it. It's sort of why now? It's a question of why not now. Right. You touched upon this in your opening remarks, but can you remind us again what the next catalyst path is and what the timeline looks like? The timeline is simple. I mean, we've got to get the S-4 filed, and we've got to go through, kind of, I think of it as we've got three paths right now. We've got to get the S-4 filed and pursue shareholder approval. I believe that that will all happen depending on the SEC's interest in review. It should happen by the end of the year if the shareholder votes. In parallel, we're well along that way. In parallel, we're working on the STB application. That's a monster, you know, but we've got a lot of people involved in that. We've got great Gantt charts and good planning. I'm really proud of the collaboration between the NS team and the UP team. We are working extremely well and extremely close. It speaks to why I think the combination of UP and NS makes the most sense. There's a cultural fit. We have very similar value systems, a very similar culture. We're working really well together, just the way Jim and I worked very well together since we started this conversation to now our teams. That process is playing out. Again, the application is a monster. It's a bear. We want to make sure that it's comprehensive because you don't want to submit something that is missing things, and you have to kind of restart. That extends the whole duration. That said, we want to be fulsome, but we want to move fast. I'm not going to put timelines out just yet, but I can say that we're pushing the team to be on the earlier side of the three to six-month window. We'll see where that goes. The third stream, process stream, really is kind of integration planning. The good news, if there's any good news about having this longer review process with an STB as opposed to an FTC-DOJ process, is that it gives us time to plan. As I mentioned before, I mean, we cannot have integration issues. Jim and I are aligned on that. We're going to do everything possible to ensure that we have a seamless integration. We're going to learn from the mistakes of the past. If it takes a little longer to make sure that it's smooth from a systems perspective, then it will take a little bit longer. We can start the planning now to some degree without crossing lines or boundaries. I think what we're going to do, particularly on the system side, is just start benchmarking. What systems do you have? What systems do we have? We start thinking about where we would end up migrating to and start building plans for that. We do the same thing on the operations side. Again, we got to do it in a very measured way. Right now, that is not the focus. Right now, it's about we don't want anything to get in the way of getting the application in. Got it. Last question on this topic, at least for me. You touched on this in your opening remarks. In the few weeks you've had since the announcement, any surprises, positive or negative, with either the process or the feedback you've got from various constituents, or any surprise? Yeah, the feedback has been good, especially as I talk to customers, as I talk to members of the administration as well. The feedback has been good. People see the value that we're creating for America. As we rebuild and reindustrialize America, they understand and see it. I'm favorably surprised that we don't have to do a lot of convincing. It's intuitive to everybody. That's a good surprise. I think the other good surprise is just that everybody is making the case now that this is enhancing competition. We're seeing announcements from other roads. I think that's great. Got it. Let's move on to fundamentals then. With the market environment, Amy, we can get you in here. Can you just update us on kind of recent demand trends? I think 3Q looks like it's setting up to be a little bit better than 2Q was. There's a lot of focus on the handoff between 2Q and 3Q. How are you seeing the volume environment right now? You know, we actually have two or three different things going on in that macro economy. I'm guessing, based on our discussion beforehand, people in this room are going to fall on maybe one side or the other, no one in the middle in terms of. It's very polarized out there. In terms of outlook, the industrial economy for us, that is our industrial products, our merchandise business, is generally on track with what we expected, which is a pretty good growth trajectory on those commodities. There are some tariff distortions, I'd put it that way. We can set that aside for a second. We're seeing a real, I was talking to Mark earlier, there are a couple of stories out there that are maybe getting covered up by tariffs. The first one is this demand for energy going forward. We're seeing a lot of inventory replenishment on the utility side for our coal-burning customers in the U.S. That is being overshadowed to a degree by the weak export markets, whether it's commodity pricing or actual demand for the export product. You look at our industrial fundamentals, frac sand and NGLs are two of the real bright spots for us right now. There is clearly, I would call it, a developing story when it comes to long-term energy demand inside this country. Now let's go back to tariffs and probably intermodal. Talk about automotive segments, too. Yeah, that's true. Before I leave the merchandise space, we've had multiple monthly records so far this year in our automotive segments. That's really, you know, we're the number one railroad in terms of originating autos. What I would call our success is really defined by our service product, which is allowing us to deliver the capacity that our customers need right now. That really comes down to enhancing the velocity of the fleet so that we can make those cycles happen. Really and truly, we're feeling really good about that. Our automotive customers are also feeling really, really good about our capability to deliver value for them in that space. We're taking share from the highway because of that service product, right? That's right. Right. Share that over the years has gone back to the highway because they couldn't trust the rail industry to deliver that capacity. On the merchandise side, feeling pretty good. On the coal side, it's sort of a two-edged sword. Exports weak, but domestic utility quite strong. On the intermodal side, I think one thing that probably everyone in this room would agree with, and maybe everyone in the U.S., is we probably underestimated as an industry how much pull-ahead inventory there was earlier in the year ahead of the whole tariff story. What that has caused is a number of distortions in the economic environment. I think we're still actually burning off some of that inventory buildup that happened in the year earlier. That's manifested itself as pretty weak volumes, both on the import side, but also on the domestic transload, which for us is sort of an idiosyncratic story in and of itself in that we have some great partnerships on the transcontinental side for domestic product. We've seen that show up in terms of weakness on the domestic side as well. We're in, what, the fourth year of a great recession in the U.S. for trucking. Certainly, we haven't seen prices get weaker on the truck side, but they're sort of bouncing right along the bottom. Our service product is what is allowing us to be as successful as we are right now because our channel partners can go out and deliver that value to their customers, be very confident in it. I think we're, I've said it before, we're setting up as sort of a coiled spring when it comes to that demand on the intermodal side. We're going to be really well positioned to take advantage of it when that demand comes back. Eventually, it will. Absolutely. Thanks for that overview. Just a couple of follow-ups there. You mentioned kind of we may have underestimated the pull forward. Do you have a sense of the magnitude of that pull forward? Is it going to take a couple more months to burn it off, quarters? Obviously, not years, but kind of how long does that take to normalize, you think? I think it's, you know, like everything else, it depends. On the consumer side, I think we're probably, I think the trajectory we're on now is sort of normal for a peak season, right? We didn't see that anticipated import surge that was supposed to happen in July and August. I think that is a testament to that inventory pull-ahead, which, you know, let the consumer continue to consume even without that big surge. On the industrial side, I've talked to a number of customers, and some of them are actually now at the very end of those inventory buildups that they had, whether it's in commodities like steel or aluminum or copper, et cetera, et cetera. We'll see what plays out there. Again, we're seeing some of that strength and some of those distortions in those markets like metals, where intuitively we would say, there must be a whole bunch of demand out there. Auto's doing great, and prices are up. Yep. Right. There's a whole lot of puts and takes. I call those really tariff distortions, which will settle themselves out over time as the economy, to use Secretary Bessette's words, realigns. That'll happen, I think. It's a different story based on different commodities, but all in all, I think we'll settle out this year. Got it. Just on that note, you guys put in place early and forward-looking demurrage going into July, kind of almost expecting kind of a big surge, right? Can you just talk about the reasons behind that decision? I think is it fair to say that that was like not triggered kind of with the volume environment that we saw? Yeah, look, we know what a good running network looks like. We have one, so we really wanted to protect it. We've seen in the post-COVID era a number of instances where that unexpected demand sort of knocks the whole world off-kilter. Before you know it, all the railroads are running poorly because of that bullwhip effect of inventory distortions. We didn't want to jeopardize the good service that we're producing out there, whether it's on the intermodal side or on the carload side. We preemptively sort of looked at what the economy was telling us, what our port partners were telling us, what our steamship line customers were telling us. Everyone was really anticipating this big surge of imports in July and in August. You know, we drank our own Kool-Aid and put some rules in place to protect the network. It turns out we really didn't need to do that. What we've done is rolled those back off again. Yep. What we want to make sure that we're always doing is being, number one, highly protective of the service products that we're able to deliver. Number two, that we're responding to the market at the same time. Got it. Just on that note, obviously, as you said, we're in the fourth year of a freight recession. There was this expected improvement, and you guys put in place demurrage and surcharges. Is there any risk or concern that if we do see this prolonged upcycle kick in at some point, it may strain the network or put at risk that service priority of build out? How do you make sure that is sustained through the upcycle without having to put in place these fees? I think our service product right now is as good as it's ever been. With John Orr, what he's done and the team he brought in, what they're doing, we've never seen it. Certainly in my six years, because it's just been crisis after crisis, service crisis after service crisis. I think Ed will tell you that we go back to 2019 levels, which were kind of considered our benchmark. We're driving incredible productivity while providing as good, if not better, service than we were back then at that benchmark. The reality is we have got a real lot of capacity to move volumes, a real lot of capacity to move volumes. We are not worried. The mindset, fortunately, that John has is bring it on. He wants volume. He understands an entire P&L. He's not just focused on trying to keep his network running smooth with light volumes, and then he stays out of trouble. That's not John. Bring it on. I want the challenge. It's actually fairly easy in the sense that we've got all this capacity. We've moved more than double digit in the past, higher volumes than we are now. What we have right now, truly, is a volume revenue problem. Yep. We've done great things on the cost side. It is about volume, and we're not worried about it, you know, potential disruption of our service product. Probably the most important thing that we're doing right now, and we do it every single day, pretty much, is John's team and my team every morning at 8:00 A.M. get together, talk about what's going on. That sort of a dynamic, ongoing conversation is really what protects the network, number one, but then allows us to resource up in those very specific places where we have opportunities. Right. We're not really responding to what the market is giving us, but we're not responding in a way that I would say is too late. Yeah. It is a pretty dynamic process, but we're very, very dedicated to it in terms of making sure that we're capturing every single opportunity and we're protecting the network and service. Got it. To put a bow on this, when you look at this kind of mixed volume environment, how is it tracking relative to expectations for both your 3Q revenue commentary, which you said might be slightly pressured, and also the full year guide, which you said was plus 2 to 3%? Yeah, look, we're behind the curve. You know, year to date now, including through the early part of September, we're only up, you know, about a point in volume. That translates to revenue that's behind the curve, too. We had put guidance out there of 2% to 3%. Yep. In order to get there, we're going to need kind of a real bounce-back scenario in the balance of the year to get there, something like 5% growth in the last three and a half months of the year. Probably unlikely that we're going to see that, but it is possible because this has been a very unpredictable environment and very polarized based on people's projections. I think it definitely puts that at risk. Got it. The next question would be, you guys obviously have shown tremendous improvement with the OR, a lot of it on the cost side with John Orr's initiatives on the network and the service. You just said, which we also believe, that you probably have a revenue issue now, not a cost issue because of the progress you've made. When you think of that 100, 150 basis point improvement in OR, how much of that could potentially be at risk because of these volume issues as well versus how much internal initiatives do you still have? Yeah, look, I think we've got this temporary challenge right now. You know, you can't really respond that quickly. We've already taken out a real lot of expense. John is a year ahead of schedule, pretty much on the multi-year cost takeout, and we're actually beating our cost targets. The OR is a simple equation, and we're kind of on target, ahead of target on the cost part of that equation. When revenue is off by that much, it's going to have a mathematical effect on the OR that's going to be meaningful. Got it. Maybe just one more from me before I turn it over to the audience to see if there are any questions. Just given all your extensive experience in this industry and talking to basically everybody in the economy, what in your view is the bottleneck? Do you think rate cuts might help unlock this four-year down cycle? Do we just need more tariff clarity? What happens from here? I think it's a combination of a few things. I'll let Ed, our amateur economist, apply it as well. We all are closet economists. Certainly, there's a strong correlation in the rail space with housing. Seeing housing come back with starts will be helpful because that drives a lot of other moves, including people wanting to fill their houses with new stuff that comes on the intermodal side. It's not just the lumber and other things. Housing, it would be, you know, rate cuts obviously will prompt that. We would be certainly encouraged by that. I think ending this four-year freight recession, which is the end has been imminent for a couple of years now, and it remains imminent. Will rate cuts help that? Potentially. It's hard to predict. Certainly, that's a big one for us. I think export coal is another thing where we've seen dramatic reduction in export coal prices that have certainly hurt our top line. If we see some normalization in the overall trade environment, clarity on tariffs that start to rebalance the demand for some of our exports, it's going to help us in multiple ways. Those are what I think we're waiting to see. Does a quarter or half a point cut start to trigger things? I think certainly that will be helpful. I think clarity on trade will also be enormously helpful, just finality. Yep. People who were frozen, they don't know how to act, can just start to plan now. Right now, I think it's just because we're still in a period of uncertainty, there's some paralysis in the market that's causing some of the volume pressures we have. Ultimately, I also think just share recapture from the highway is partly in our own control. I think we're making good progress there. I think the proposed transcontinental network, over the long term, is going to dramatically help that. Go ahead, Ed. Economist view. I think, you know, if mortgage rates follow interest rates down, that's going to be a really important phenomenon. I think at one point in the past, we had estimated that every new house construction start is worth seven or eight truckloads. I might be dated on that, but it's more than zero. Sure. What we have is we still have a, what I would call a U.S. freight environment, particularly when it comes to truck, that is oversupplied really as a lingering distortion of the post-COVID environment where sort of everybody and their brother jumped into the trucking industry. There was just a whole bunch of capacity added, which has still not come out, quite frankly. You look at the CAS freight index, which is something I kind of paid attention to. It's negative year over year. There's still a headwind when it comes to total freight demand in this country with an oversupply of trucks. It's just going to, we have to get further and further away from COVID for that to sort of normalize itself. An interest rate cut, which then manifests itself as a lower interest rate for mortgages, will certainly help that. I truly believe that. I'm very bullish overall on the U.S. economy writ large, which really our transaction is about. It's about bullishness in the outlook for the U.S. economy in the long term. I think as this country reindustrializes, we're going to see more and more opportunities. Yep. Whether it's in our industrial development pipeline or in our business levels, what we're going to see, I really believe, is more demand for high-quality transportation, not only of truckload replacement business in intermodal, but also in the carload business. When I think about things like the demand for energy in this country, I think I feel very good about some of our prospects and where we're positioned in those markets. Got it. Any questions from the audience? Anyone back there? Hi. Guilherme from Tarpon here. I'd like to hear your thoughts from a broader looking back. Why do you think the industry as a whole failed to capture volume growth, whether there was too much focus on pricing perhaps or not? What structurally the industry needs to do to have more volume? I will start and say that when we look back, I think our industry has been too volatile with the service product that we offer, unreliable, with service crises that have really disrupted our ability to deliver reliable and consistent service to our customers. Over time, customers have built out alternatives with trucking. Even though maybe it's more expensive than rail, at least it was more reliable. We went through a decade where service crises, more than a decade, where service crises happened every couple of years. The whole industry, not just. For the whole industry, I'm talking about, right? That has conditioned the customer base, the shipper base, to be prepared with alternatives. Frankly, we've just come out of one as an industry post-COVID only a short while ago. I think there is, as an industry as a whole now, an acknowledgment that we've got to stop that. We've got to stop being short-term focused and induce these service crises. You know, I'm really happy to see that overall right now, the network is running really well. We care about that. We're not competing on somebody else's misfortunes or crises because it creates a problem for all of us. You know, we have to interchange with each other. Half of our freight interchanges with another carrier. If they're not running well, it impacts our service too. We want everybody to be running good. Right now, everybody is. I think the biggest impediment in the past, which was service crises at one or more railroads, doesn't exist today. I think this is good for the industry. I'm hopeful that all of us collectively in North America can start taking share back from the highway. Yeah, I 100% agree. I think the equation for growth is pretty simple. Deliver service that you can count on from people that you can trust. That's what we're really working on every single day. It's not good enough to just deliver good service yesterday. You have to have a track record of it. You have to have really a runway of good service so that customers can make those adjustments in their supply chain to get themselves unwound from those higher cost and more expensive options and really reap the benefits of using rail transportation over time. That's what we're focused on. That's why we're so protective of the network and the service that. You go back several decades, and I'll give you one industry, paper, right? There's no product that's more tailor-made to move on trains than paper. Very heavy, very bulky. Frankly, rail had largely 100% share in the paper industry. Fast forward today through various crises over time, going back to the 1970s, 1980s, 1990s, 2000s, they all have built out trucking shipping docks out of their factories and facilities. Over time, our share has shifted dramatically toward, you know, more like the 40%, 50% range because they have to have options, right? If we were more consistent delivering service as an integrated freight rail network, that's an area where you can see significant share recapture from the highway. It's not just paper. There's plenty of other examples like that. Yes. Just a quick follow-up. What were the root causes of the service problems? Is it the PSR implementation? I would say this. I think over time, and I'm looking at the rail industry writ large, right? Generally, crises in service emanate from a couple of different places. Usually, it's a mismatch of resources and demand somewhere. That starts to ripple through the economy. I can't lay it at the feet of PSR per se. It's a networked business. We just have to be very responsive to what's going on in the environment and make sure that we're resourced appropriately. That's what I know Mark and Jim Squires have both talked about. We have to have a buffer of resources so that we can absorb those supply chain shocks that are inevitable. You want to talk about that? Yeah, no, that's exactly right. You'll hear Jim talk about it. We have the same philosophy, right? You have to have, to combat this mismatch of resources, you have to make sure you have a buffer. Oftentimes, the trigger to these crises might be weather, right? What does weather do? It slows you down. It creates an imbalance in your network that you can only dig yourself out of if you have appropriate resources in place. That's kind of the buffer. When you're too thin on resources, you can't respond. It takes you not just months, it takes you quarters to catch up and to rebalance yourself. You have to make sure that you have the buffers in place. Some people might say weather was the cause of that service crisis, or some other network change was a cause. It's usually a mismatch of resources. You don't have enough locomotives or people as a buffer to help dig you out quickly and avoid a prolonged crisis. I think it's hard to point to PSR and say, oh, it's PSR. That is certainly a narrative I've heard in the past. PSR is the most logical approach to railroading there is. It's the application of it that has maybe been a challenge in the past, where maybe we've gone a little bit too far or too aggressive in trimming resources, leaving yourself no buffer. When one of these external influences happen, you can't respond or you can't react. You need to be less aggressive on margins and financial management and more focused on operations going forward as an industry, I mean. I think we need to be financially focused, too, and financially responsible, too. I think you can do it all in a well-balanced way. I think the industry is doing it right now. I'm really proud of where we are. Any other questions? Thank you. Thank you. Anyone else? Maybe just to wrap, obviously, a lot going on, right? Yeah. I hope you can use the next 24 hours, that you're going to relax a little bit and get some sleep. What can we look forward to? How much are you spending? What's management time split like between fundamentals versus the deal and kind of where your resource is going? I think we're allocating management time and resources. I've got certain key members that are disproportionately allocated toward fulfilling our deal-related obligations. Yep. While trying not to distract the remainder of management who’s focused on running the business. That’s part of my job, to make sure that Ed is not distracted. Yep. Ed Elkins' team is not distracted. They've got to try to find volume and be creative in responding to some of the new competitive threats that are out there. The same thing with John Orr and the operating team. We have to focus. We cannot have a service setback at all during this application period or forever, frankly. We don't want that team distracted. We've got core leaders, Jason Zampi and Jason Morris, who are heavily focused on making sure that we fulfill our deal-related obligations. It's a delicate balance, but it's very much top of mind. Great. Thank you for bringing a really interesting story to the transportation space at a time when we're still waiting for the cycle. Mark, Ed, thanks so much for being here. I wish you all the best. Ravi, thank you very much. Thank you. Take care.