Norfolk Southern Q2 2024 Earnings Report

Norfolk Southern EPS Results

• Actual EPS: $3.06
• Consensus EPS: $2.86
• Beat/Miss: Beat by +$0.20
• One Year Ago EPS: $2.95

Norfolk Southern Revenue Results

• Actual Revenue: $3.04 billion
• Expected Revenue: $3.04 billion
• Beat/Miss: Beat by +$5.35 million
• YoY Revenue Growth: +2.10%

Norfolk Southern Announcement Details

• Quarter: Q2 2024
• Date: 7/25/2024
• Time: After Market Closes
• Conference Call Date: Thursday, July 25, 2024
• Conference Call Time: 4:30PM ET

Norfolk Southern (NYSE:NSC) is a major U.S. freight railroad company that provides rail transportation and related logistics services. As a Class I carrier, the company operates an extensive network across the eastern United States and offers scheduled freight service for a broad range of industries. Its core operations include long-haul and regional rail freight transportation, intermodal services that move containers and trailers between rail and other modes, and terminal and switching services that support efficient rail shipments for industrial and port customers.

The company transports a variety of commodities, serving sectors such as coal and energy, automotive and automotive parts, chemicals, agriculture, metals and construction materials, and consumer goods. Norfolk Southern’s service offering is oriented toward shippers and supply-chain partners, combining rail haulage with routing, scheduling and terminal operations to move bulk and unitized freight. Intermodal operations are a significant component of the business, linking inland markets with East Coast and Gulf ports and facilitating cross-border flows through interchange with other North American railways.

Norfolk Southern traces its lineage to several historic railroads that developed freight corridors across the southeastern and mid-Atlantic United States, and it expanded through a series of mergers and network acquisitions in the late 20th century, including participation in the division of Conrail assets in 1999. Today the company’s network connects many major industrial regions, ports and metropolitan markets in the eastern U.S. and integrates with the broader North American rail system via interchange with other carriers. Norfolk Southern is governed by a corporate board and senior management team responsible for operations, safety, regulatory compliance and strategic planning.

Norfolk Southern Q2 2024 Earnings Call Transcript

Key Takeaways

• Strong Q2 financials with $1.1B adjusted operating income, $694M net income and $3.06 diluted EPS, while achieving a 65.1% adjusted operating ratio and beating first-half guidance.
• Operational productivity gains eliminated over 700 daily car handlings, reduced unscheduled train stops by 18%, cut crew starts by 4% and boosted car velocity and horsepower GTMs by 6%, driving substantial cost savings.
• Revenue rose 2% to ~$3B on a 5% volume increase, but RPU fell 3% due to mix and intermodal challenges, prompting a full-year revenue growth outlook cut to around 1%.
• Reaffirmed second-half adjusted operating ratio target of 64%–65% despite weaker revenue, underpinned by ongoing productivity initiatives and a $250M cost-takeout plan.
• Secured a 5M-ton met-coal mine contract to start in 2025 and is investing in Alabama infrastructure, reflecting targeted growth and customer confidence in its service network.

Presentation

[Operator]

This call is being recorded on Thursday, July 25th, 2024. I would now like to turn the conference over to Luke Nichols, Senior Director of Investor Relations. Luke, please go ahead.

[Luke Nichols, Senior Director of Investor Relations at Norfolk Southern Corporation]

Thank you, and good afternoon, 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 full disclosure of those risks and uncertainties we view as most important. Our presentation slides are available at norfolksouthern.com in the Investor section, along with our reconciliation of any non-GAAP measures used today to the comparable GAAP measures, including adjusted or non-GAAP operating ratio. Please note that all references to our prospective operating ratio during today's call are being provided on an adjusted basis as referenced in our earnings release.

[Luke Nichols, Senior Director of Investor Relations at Norfolk Southern Corporation]

Turning to slide 3, it's now my pleasure to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Thank you, Luke, and thank you, everyone, for joining us. Here with me today are John Orr, our Chief Operating Officer, Ed Elkins, our Chief Marketing Officer, and Mark George, our Chief Financial Officer. Earlier, we reported our second quarter financial results, including adjusted operating income of $1.1 billion, net income of $694 million, and diluted earnings per share of $3.06. Notably, we delivered 480 basis points, a sequential margin improvement, on our adjusted operating ratio. OR was 65.1% in the second quarter, with a first-half OR of 67.5%, making good on our commitment to our shareholders to a first-half operating ratio in the range of 67%-68%. Our strong progress over this quarter demonstrates our ability to close the gap to our peers by executing our balanced strategy of service, productivity, and growth, with safety at its core.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

The Thoroughbred team delivered significant margin improvement in the quarter, despite revenue headwinds, by accelerating productivity initiatives. As you will hear from John, Ed, and Mark, we were able to overcome market weakness through increasingly strong progress on our six key operational metrics, by responding to market opportunities and growing volume, and remaining laser-focused on controlling costs. We also take seriously our commitment to being the gold standard of safety in the industry and continue to make progress on improving our safety culture and metrics. This is the strength of our strategy, driving operational excellence and discipline that will deliver and will continue to deliver productivity gains and create the foundation to onboard significant growth when the market returns. This is the flywheel effect that is delivering tangible benefits for customers and shareholders.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Efficient operations with a compelling service product allowed our teams to gain share in service-sensitive markets such as auto and intermodal, while participating in spot opportunities in coal and agriculture. As a result, we posted record performance in several key merchandise measures. While our work continues, our second quarter results represent an encouraging inflection point in our operating performance. We have plenty of runway in front of us. I'm excited for Norfolk Southern's opportunities ahead. We're committed to our strategy and delivering the results with pace and urgency that demonstrate the power of a better way for our employees, customers, communities, and shareholders. I'll now turn it over to John to further discuss our operational progress.

[John Orr, COO at Norfolk Southern Corporation]

Thank you, Alan. It's a pleasure to provide an update on our progress. Turning to slide 5, at NS, safety enables performance, and our commitment to safety is unwavering. During the quarter, we leveraged our NS leadership framework to strengthen our field safety. We continued our efforts to focus on mainline accident reductions, and we commissioned 3 additional inspection portals and added field sensors. These have contributed to our best-in-class mainline accident rate. We also conducted 2 cross-functional leadership safety summits, strengthening our capabilities and reinforcing safety from the ballast to the boardroom. Turning to slide 6, our metrics improved across all of our core network performance indices. Our balanced approach proved safety, service, and cost improvements work best together. Year to date, we have reduced our active online motive power fleet by 320 locomotives and have targeted an additional 100 reductions in the second half.

[John Orr, COO at Norfolk Southern Corporation]

As we store locomotives, we use reliability metrics to remove the worst performers, driving up overall fleet reliability and driving down maintenance, materials, and fuel expense. Quarter-over-quarter, we increased our GTMs for available horsepower by 6% and our car velocity by 6%. Both improvements are the result of design processes that drive out time and cost, both in terminals and over the road. Our strategy includes structural improvements in fuel procurement, materials management, purchase service optimization, crew cost efficiency, and productivity enhancements. So let's take a look at a few of the initiatives in the pipeline that are closing the gap as we track for the $250 million cost takeout commitment. Turning to slide seven, we have delivered a 6% improvement in car velocity by reducing handlings, extending train schedules, and improving connection performance. Car velocity is something I monitor closely.

[John Orr, COO at Norfolk Southern Corporation]

It captures improvements in our operating plan, terminal execution, and over-the-road performance. For example, during the quarter, we eliminated over 700 unnecessary car handlings per day. Driving car velocity in response to overall train speed improvements includes working with our customers to right-size the inventory in their pipelines. As train speed and car velocity improve, fewer cars are required to service the current volume. In the quarter, we delivered a reduction of 3% of cars online. We are improving safety, train speed, and service reliability by addressing unscheduled train stops and dispatching practices. For example, our mechanical war room's root cause analysis of every unscheduled train stop has resulted in an 18% reduction of these unscheduled stops in Q2. We have a new network operations watchdog team bringing extreme discipline to planned adherence. They challenge the root cause for every extra train.

[John Orr, COO at Norfolk Southern Corporation]

This has instilled network-wide visibility and accountability to execution and planning. I'm really encouraged that this has increased connections and train yield and has driven out extra train starts from 200 in March to just 50 in June. These improvements to our operating plan and terminal discipline have resulted in a 4% reduction in crew starts. The combination of crew and overtime reductions has dropped our crew expense per KGTM by 8% compared to Q1. As operational effectiveness grows, we are recalibrating our standards and sweating the network resources even further. This is the path to at least 7%-10% improvement in car velocity. Yard and local redesigns are underway. We are driving out waste and rework in the first-mile and last-mile operations. We are unlocking the capacity to take on additional work within the same footprint.

[John Orr, COO at Norfolk Southern Corporation]

Efficiency in this space is really important to me since we allocate approximately 50% of crew starts here. Over the next 24 months, we will continue to improve fuel productivity. We will continue to push locomotives, leverage Trip Optimizer to assertively manage horsepower per ton, turn power more quickly, improve fuel distribution and vendor accountability, and increase train size. We are targeting locomotive productivity improvements of an additional 8%. One of my personal objectives is to develop the next generation of skilled PSR railroaders and to build the bench strength to sustain the improvements that I'm leading. We are structuring the organization to drive the daily and strategic outcomes, and I am proud and encouraged by the engagement of the people in every department and across the entire organization. The team is working collaboratively and with confidence.

[John Orr, COO at Norfolk Southern Corporation]

Our team is energized and motivated to build upon the strength of the quarter and deliver the next wave of initiatives that will yield savings in all P&L categories beyond just Comp and Ben, but in materials, rents, and purchased services. Success breeds success. I want to close out my remarks on slide 8 and 9 with two flywheel examples of balancing service and cost. In automotive, our car velocity increased by 16%, creating the platform for growth as our car loads increased by 7%. Within intermodal, shipments and service performance simultaneously increased by 8%, this following the 15% lane rationalization we discussed earlier this quarter. And what's really important to me is that we are launching our NS Intermodal Reservation System in September. This smooths train demand, reduces rents and expenses, and creates service certainty. Our customers are enjoying some of the best sustained service ever.

[John Orr, COO at Norfolk Southern Corporation]

At the same time, we have consolidated train starts, streamlined our service plan, reduced handling complexity, and have driven out cost. We are unlocking tremendous value within our franchise, adding new capability, urgently eliminating waste, and driving to a sub-60 OR. Now I'll turn it over to Ed.

[Ed Elkins, CMO at Norfolk Southern Corporation]

Hey, thank you, John, and good afternoon to everyone on the call. Let's go to Slide 11, and I'll review our commercial results for the second quarter. Overall results were driven by a notably more fluid network that delivered a better service product to our customers. Revenues came in just above $3 billion, a 2% increase versus last year. Volumes rose 5%, led by an 8% increase in intermodal, while RPU fell 3%, driven by unfavorable impacts from intermodal mix. Merchandise revenue improved 4%, while volumes increased 2% and RPU rose 3%. RPU less fuel increased 4% versus last year, which once again set an all-time record alongside a new all-time record for revenue less fuel. This marks the 36th out of the prior 37 quarters where merchandise RPU less fuel grew year-over-year. In intermodal, revenue was flat. Volume increased 8% and RPU declined 8%.

[Ed Elkins, CMO at Norfolk Southern Corporation]

In coal, revenue declined 3% on a 2% volume decrease. Now, these were impacted by the outage of the Francis Scott Key Bridge in Baltimore. I do want to take a second here to reflect on coal's performance in the face of extraordinary challenges around the unprecedented closure of the Baltimore port complex in April. We and our customers demonstrated extraordinary operational agility and creativity to keep global supply chains intact via Lamberts Point, Virginia, until service was restored in Baltimore. I'll note that propelling our record, merchandise less fuel in the quarter was our automotive book, which set a record for total revenue and RPU less fuel. Metals, which achieved an all-time quarterly record in revenue less fuel, and chemicals, which marked an all-time record for RPU less fuel. Intermodal revenue was flat in the quarter.

[Ed Elkins, CMO at Norfolk Southern Corporation]

However, if we exclude pressure from fuel and storage charges, revenues grew by 2% despite the mix and price headwinds. All of these superlatives are supported by the strong service product that John and his team are delivering. Let's turn to slide 12 and review our outlook for the rest of 2024. We're lowering our expectations for full-year revenue growth to around 1% based on continuing market cross-currents, and we expect overall adverse mix headwinds to continue. In merchandise, new industrial activity may be constrained by higher interest rates and borrowing costs, but we expect to see continued benefits from ongoing infrastructure and manufacturing projects underway. Our improved network fluidity will also deliver growth and unlock shareholder value.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Intermodal volumes remain a driver of overall volume growth as international shipments rise through import and export demand, while excess capacity and weak truck prices are expected to remain headwinds to domestic volumes. And finally, in coal, we foresee a challenged environment within the utility space continuing, while export markets see some momentum from the reopening of the Baltimore Channel and new production. All right, let's finish up on slide 13. I'm going to take a minute to highlight a recent win-win with a large met coal producer in the U.S. Set to be developed in 2025, our rail lines will link this new coal production facility with the global market. This mine will produce nearly 5 million short tons of premium-grade met coal annually when it reaches full production.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

This new partnership is a concrete example of our strategy to grow high-quality carload revenue, close the gap to peers in key markets, and significantly enhance our met coal portfolio for years and years to come. This win also demonstrates our customers' confidence in Norfolk Southern, in our service, and our commitment to our strategy. We're grateful to be chosen for this project, and we're excited for the future of this opportunity. Investing strategic capital to support regions of our network with economic growth is also in motion. The state of Alabama is an example where our investments include terminal and mainline infrastructure projects that support customers as they invest and expand their businesses. These investments are a key part of our balanced approach to deliver top-tier revenue growth over the long term. Finally, I just want to thank our customers for their partnership and for their business.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

I'll now turn it over to Mark to cover our financial results.

[Mark George, CFO at Norfolk Southern Corporation]

Thanks, Ed, and good afternoon, everyone. Let's start on slide 15 with a quick reconciliation of GAAP results on the left and the adjusted results on the right. You'll see that the Eastern Ohio incident column is actually income in the quarter of $65 million, as our $156 million of insurance recoveries exceeded the additional costs that were accrued. In the restructuring column, you will also see income as we booked a favorable true-up to our Q1 separation cost accruals, but also realized an associated favorable post-retirement curtailment adjustment within our other income line item. We also highlight under the advisory cost column expenses incurred in Q2 associated with the proxy contest. Adjusted results, including a 65.1% OR, was in line with our guidance range. EPS of $3.06 was aided by $0.05 below the line from a favorable state income tax adjustment.

[Mark George, CFO at Norfolk Southern Corporation]

On the next chart, slide 16, I'll go through the year-over-year and sequential variances compared to the adjusted results. Our second quarter performance was a function of a dose of revenue lift combined with the team making excellent progress on network performance and providing strong service that enabled us to remove costs from our structure. Year-over-year revenue was up $64 million, or 2%, with volumes up 5%, but RPU was down 3%. As Ed discussed, adverse mix remained a headwind to RPU in the quarter. Operating expenses were down $7 million year-over-year despite inflation headwinds, reflecting strong momentum on cost takeout, which drove 160 basis points of OR improvement.

[Mark George, CFO at Norfolk Southern Corporation]

The cost reduction momentum is especially evident when looking at the sequential decline of $119 million, or 6%, on $40 million more revenue combining to drive up the large 480 basis point sequential reduction in our operating ratio, and will most certainly result in a sharp narrowing of the OR gap with the industry. Drilling into the revenue change on slide 17, focusing here on the sequential increase in revenue from Q1 of $40 million, that was driven by merchandise volume growth. Yet, despite what appears as a favorable mix shift at the high level with a 2% rise in merchandise volume, RPU to Q1 was only flat, and that's because mix within each business line was adverse, as you'll see illustrated in the gray box, where volume growth of below-average RPU business lines exceeded volume growth in the above-average business lines.

[Mark George, CFO at Norfolk Southern Corporation]

Shifting to a sequential look at operating expense on slide 18, I'll start by saying it's nice to see all green on this chart. OPEX is down $119 million versus the first quarter. The dramatic acceleration in our network velocity has allowed us to drive out the remaining service mitigation costs in the quarter, which shows up in several categories, including Comp and Ben, most notably overtime, but also in equipment rents, purchased services, as well as other. The ops team did a terrific job speeding up the network and improving service to deliver on these cost savings, as well as fuel efficiency improvements. You'll also see savings in the Comp and Ben from lower employee levels, largely driven from the previously announced downsizing actions that we took in our management ranks, but also sequential attrition of nearly 2% of our T&E workforce.

[Mark George, CFO at Norfolk Southern Corporation]

Property gains in the second quarter totaled $25 million compared to zero in Q1, so the first half is pretty much on a normal annual run rate. Real estate transactions are lumpy, and some of you may say that the $25 million in the quarter was 2x a theoretically smoothed amount, but either way you choose to evaluate our results, our OR performance in the quarter was in line with our commitment. So we are very encouraged at what is clearly an inflection point in our cost structure, allowing us to meet the commitment we made on OR despite a weaker volume environment than we had been planning for, demonstrating organizational agility. As we look to the second half, there are various headwinds and tailwinds to consider. Ed noted that the revenue will be softer than we previously expected, with some sequential volume improvement, but adverse mix.

[Mark George, CFO at Norfolk Southern Corporation]

The industry's next contractual wage increase that took effect on July 1 creates a $25 million step-up in Comp and Ben here in the third quarter. However, John talked about our actions and momentum on productivity side within operations, and that will help neutralize the wage impact. All that said, the key message I want to leave you with today is that despite softer macro conditions, we are reaffirming our guidance for the second half operating ratio in the 64%-65% range. Before I hand to Alan, I'll make a comment on capital. Many of you have seen that with PSR, there is often a liberation of excess capital assets. That boosts efficiency and creates incremental cash flow streams, adding to shareholder returns.

[Mark George, CFO at Norfolk Southern Corporation]

We've had some of those in the past several years with some larger asset sales, and we continue to evaluate opportunities and have a robust list of properties for which we are pursuing sales that will simplify our network and generate cash over the next several quarters. Alan?

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Thanks, Mark. Let's turn to slide 20. As you heard from Ed, we lowered our full-year revenue guidance from approximately 3% to approximately 1% growth. You heard from John and Mark that we're overcoming the revenue drop with a focus on the significant productivity opportunities in front of us, which gives us the confidence in reaffirming our full-year OR guidance despite the lower revenue outlook. The momentum demonstrated in the second quarter is a testament to the strength of our strategy. I want to thank all 20,000 of my Norfolk Southern teammates for all they have done and are doing every single day to deliver on our shareholder commitments and accelerate our operational improvements.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

John, Ed, and Mark have identified specific actions and outcomes to deliver improved results in workforce, T&E, fuel, mechanical, purchase services and rents, and capital productivity, as well as smart growth in merchandise, intermodal, and coal. We have a clear line of sight on multiple initiatives and a roadmap for margin gains in several key areas over the next 18 months as we close the OR gap. I'm proud of our progress in the second quarter, encouraged by our trajectory, and confident in our team's ability to execute and deliver results in the quarters ahead. We will now open the call to questions. Operator?

[Operator]

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. Out of consideration to other callers on the line, we ask that you please limit yourself to one question. First caller we have is Tom Wadewitz from UBS. Tom, go ahead.

[Tom Wadewitz, Senior Equity Research Analyst at UBS]

Yeah, good afternoon. Ed, you highlighted a number of the yield ex-fuel records and the performance in merchandise. I wanted to ask you about intermodal yield. Are we seeing intermodal yields at a bottom, or are there potential drivers that they go down further? And how do you think about the opportunity and the timing to see stronger pricing and revenue per unit in the intermodal business?

[Ed Elkins, CMO at Norfolk Southern Corporation]

Thank you, man. Let me walk you through really the price and mix story in intermodal. Mix and price make up around six of the seven points in weakness that you saw there. That mix is really driven in the premium segment where lower parcel counts are really pressuring our carriers to keep their unionized road fleets employed. The other mix piece is we're seeing a lot of empty shipments. On the intermodal side, we're seeing them and have seen them really all year long in the intermodal segment, or excuse me, in the international segment, where carriers are really trying to push empties back offshore. We're also starting to see a lot more domestic empty repositioning moves back to the West Coast. We think that's in anticipation of possible ILA action on the East Coast ports there.

[Ed Elkins, CMO at Norfolk Southern Corporation]

And then the second part of your question is, really, when do the highway rates get better, and when do we start to see some of the capacity drop out from the highway carriers that are putting a lot of pressure on rates? I think we're around the bottom. I really do. From what I see, from what I read, and from what I hear from our customers, we're kind of bouncing right along the bottom. And I think we're getting closer and closer to an inflection point. Talking to one of our biggest customers today, they noted that they're expecting a real peak season this year for the first time in a few years. And I think that bodes well both for our international customers as well as for our domestic customers.

[Tom Wadewitz, Senior Equity Research Analyst at UBS]

It sounds like maybe stability in second half looked at 25 for maybe some growth in revenue per unit. Is that a reasonable way to think about it?

[Ed Elkins, CMO at Norfolk Southern Corporation]

Yeah, I think RPU on the domestic side is moving sideways.

[Luke Nichols, Senior Director of Investor Relations at Norfolk Southern Corporation]

Thanks, Tom.

[Tom Wadewitz, Senior Equity Research Analyst at UBS]

Great. Thank you.

[Operator]

The next question will be coming from Scott Group from Wolfe Research. Scott.

[Chris Wetherbee, Senior Analyst at Wells Fargo]

Hey, thanks. Good afternoon. So Mark, maybe just some help on the cost side. $25 million we get from the wage increase in Q3, but obviously there was some good sequential cost progress. So any way to just help us think about the overall cost ex fuel trend and OR in Q3? And then maybe just separately add that the mix chart the last couple of quarters is really helpful. Do you think this is a cyclical phenomenon of negative mix, or is there something that's maybe more structural about where the growth is coming from?

[Mark George, CFO at Norfolk Southern Corporation]

Thanks, Scott. For the question, I'll ask Ed to help tag team on that second part of the question on the mix. But you want to go first with that?

[Ed Elkins, CMO at Norfolk Southern Corporation]

Sure, I can do that.

[Ed Elkins, CMO at Norfolk Southern Corporation]

All right. I've already talked about some of the mixed challenges that we're seeing in intermodal. I will tell you, we see the same story that's been playing out in the second quarter going forward into the really third and fourth. We're seeing significant volume growth in some of our lower-rated merchandise commodities like aggregates and finished vehicles. Both of those move at kind of the lower end of that RPU spectrum. We are focused a lot on earning back merchandise share, and the additional volume that we are seeing is really attributable to the better velocity and car supply that we're seeing out there. I mean, think about what happened in the automotive market where we actually used less equipment to handle a record amount of revenue. It's a real sea change from where we've been.

[Mark George, CFO at Norfolk Southern Corporation]

Ed, you've got the same thing going on in intermodal, right?

[Ed Elkins, CMO at Norfolk Southern Corporation]

That's right.

[Mark George, CFO at Norfolk Southern Corporation]

We're leveraging the most powerful intermodal franchise in the East. We rationalized 15% of our lanes. John's providing the best service product we've provided in years and volumes up 8%.

[John Orr, COO at Norfolk Southern Corporation]

And it gets right down to the basics, right? We sweat the asset efficiencies, moving the most car miles per day that we can, driving the efficiencies of our locomotives, and creating resiliency at a really low cost by eliminating waste, creating more capacity so we can onboard more customers and lengthen our trains, and really drive out the service reliability through our war rooms and our drill down.

[Ed Elkins, CMO at Norfolk Southern Corporation]

That transitions into the first part of the question. We're going to see more incremental volume growth here in the third quarter. That's one of the tailwinds for sure. Even though we'll probably have some mix erode the benefit from that, adverse mix, I guess. I'd say another tailwind is, as you touched on, Scott, we've got really good momentum here on the productivity side. I expect we're going to see continued reductions in crew starts and overtime despite higher volumes. I think fuel efficiency should continue to improve. Look, we're attacking. We're in the very, very early innings attacking purchased services. We've got some broad-based initiatives there. We're going to see some really good tailwinds here, I think, in the third quarter. As you touched upon, headwinds are there. We've got that 4.5% agreement wage increase that takes effect in July 1.

[Ed Elkins, CMO at Norfolk Southern Corporation]

On day one of the third quarter, a $25 million step-up in Comp and Ben comes from that. That's 80 basis points of sequential OR headwind. On top of that, fuel, the way we're modeling it, it seems like fuel is going to be probably 50-60 basis points of sequential OR headwind as well. We'll see how it all shakes out here, but ultimately, we're really happy with our position going into the third quarter.

[Mark George, CFO at Norfolk Southern Corporation]

Yeah, look, we're really confident in our guidance for an OR in the second half of the year at 64%-65% despite revenue headwinds. It's because of this flywheel effect that we're seeing in productivity, where a faster network is generating a lot of opportunities for John and his team to unlock savings.

[Chris Wetherbee, Senior Analyst at Wells Fargo]

Okay.

[Operator]

The next question will be coming from Ken Hoexter from Bank of America. Ken, go ahead.

[Tom Wadewitz, Senior Equity Research Analyst at UBS]

Hey, great. Good afternoon. I know that was recorded, but Ed, that seemed like you were on super speed. It was pretty good. Just talking, I guess, following on Scott's question there with the sequential performance, it seems like the five-year would suggest it doesn't move much in OR. But you're looking at 64-65 from a 65 or 65.9 if you exclude the real estate. And I get what you just ran over with Scott, but it seems like given the steps you're taking, Alan, you kind of said you're really confident in those savings. Shouldn't we be taking, I guess, bigger steps down with some of the things you're doing? Maybe just talk then, what is the upside downside to that target, right?

[Tom Wadewitz, Senior Equity Research Analyst at UBS]

If you're confident in that 64, 65, what do you need to happen on John's side to maybe get you a little bigger step up versus the counter cost you have?

[Ed Elkins, CMO at Norfolk Southern Corporation]

Well, look, Ken, again, you're right that sequentially Q2-Q3, when we look historically, you have some years where you have improvement in the OR. You have other years where you have some level of degradation. I think on average, it's probably slight degradation in this year, which is somewhat of a unique period of time. And this is if you exclude 2020. But in this year, if you look at this period of time, we're expecting sequential volume improvement. So that's really going to help us. And the gravy on top of that is continued momentum in what John is doing in face of all the headwinds that I laid out. So that's where the confidence is coming from. I don't know.

[John Orr, COO at Norfolk Southern Corporation]

I would say, Ken, my confidence comes from the power of the people and the engagement that we're delivering in the field. In the early days of my onboarding, I would go into major terminals and see opportunities, engage the team, inspire them to lead change. And now, as we build the team and reframe how our management structure is in the field, really focused on the day-to-day as well as strategic intent, we're doing that to scale. More people seeing more things. We're creating the flywheel to finders and increase capability. Just today, I signed off on a service design that eliminates 42 starts a week. And that's the result of four or five people just being out in the field doing safety blitzes, seeing other things happening, and finding ways to improve safety, synthesize train starts, elongate trains, and create more capability in the field.

[John Orr, COO at Norfolk Southern Corporation]

This is the power of the flywheel. We're doing it based on safety and service sustainability. I'm very confident as we build people and structure, we're going to keep delivering.

[Ed Elkins, CMO at Norfolk Southern Corporation]

Just getting also to the essence of your question on why not better, I'm just going to repeat what I said to Scott. There is some headwind here in the third quarter from the second quarter related to the wage increase of 80 basis points. Also the way we see the fuel curve playing out, there's probably another 60 basis points of headwind. We're talking about overcoming that. Those are big hurdles. Maybe fuel doesn't end up being as bad. That could be some upside. But honestly, we got to see where volume shakes out too.

[John Orr, COO at Norfolk Southern Corporation]

I think it's going to be a lot of hard work to overcome what we're doing to meet our guidance. And it's going to be sweat equity all the way.

[Ed Elkins, CMO at Norfolk Southern Corporation]

I agree. And we're targeting more revenue. I mean, we know the macro environment's challenge. But look, let me give you two examples of recent wins that are only possible because of higher velocity and better car supply. We converted a coil lane from the highway with our largest metals customer between Indiana and Ohio. And that's in a challenged metals market. So we grew inorganically off the highway. We also converted a large highway lane to rail in the state of Georgia with our largest aggregate shipper, all because we're able to handle more tonnage with less equipment.

[Operator]

The next question will be coming from Jeff Kauffman from Vertical Research Partners. Jeff, go ahead.

[Tom Wadewitz, Senior Equity Research Analyst at UBS]

Thank you very much. Congratulations on a tough environment. I just kind of want to get your big picture view on some of the changes with the STB and the hearings that they're having and how that may or may not impact the rail.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

The STB's got a hearing coming up about growth. That's part of our balanced strategy. The STB's focused on service. So are we. We're delivering, right? We are improving service. We're reducing costs. We're growing revenue. We're enhancing safety. We got a good story to tell here. We're aligned.

[John Orr, COO at Norfolk Southern Corporation]

Just to add, Alan, when we were in Washington a few weeks ago meeting with the STB commissioners, they were really reinforcing our business plan and resiliency as being an enabler of service and driving the U.S. economy. They were right in lockstep with our vision. I think it's always going to challenge the sector when the commercial regulator wants to talk to the sector. When we're out leading in front of all of that, I think it serves us well to continue what we're doing.

[Operator]

The next question will come from Chris Wetherbee from Wells Fargo. Chris, go ahead.

[Chris Wetherbee, Senior Analyst at Wells Fargo]

Hey, hey. Thanks. Good afternoon, guys. I guess as we're thinking about the progress that you're making, John, in particular, as we move through in the back half of the year, I guess, how do we think about headcount? What resources are sort of required given the progress that you're making here? I guess, in other words, should we be able to see further reductions in heads as we move sequentially through the rest of the year?

[John Orr, COO at Norfolk Southern Corporation]

Well, I can tell you this. While it's true there are fewer T&E headcounts, this is not a headcount reduction exercise. This is right-sizing the service and aligning the asset efficiencies with the customer and the customer requirements. So sequentially, we did show a 2% improvement on T&E. We've frozen hiring except where there's a really substantial reason or an acute skill that we need to bring on. But it really is working with labor to address outliers, right-size the organization, and where we're long on people, getting the flexibility to move them where they need to be. And I really watch our expense and the cost for T&A or sorry, T&E headcount in our KGTMs.

[John Orr, COO at Norfolk Southern Corporation]

I made that clear in my opening remarks that despite the fact that we're improving service, providing some of the best operating efficiencies in the network, we're doing it at a lower cost overall. That's what I really focus on, eliminating the waste associated with overtime, taxis, hotels, those sorts of things that don't give you any value. That's what I think you can look forward to seeing more of.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

And Chris, I would tell you we are on track to be down 2% like we had guided previously by the time we get to the end of the year versus the end of last year. And that's on carrying a little bit more volume, right? Thank you.

[Operator]

The next question will come from Brian Ossenbeck from JPMorgan. Brian, go ahead.

[Brian Ossenbeck, Managing Director at JPMorgan]

Hey, good afternoon. Thanks for taking the question. So Mark, just to maybe come back to that sequential headwind of about 140 basis points into Q3 from Q2, does that really imply that there's more of a fourth quarter-weighted impact to get to the target, or are there some other sort of big-ticket items you're counting on coming through the next quarter? And I guess to that point, Ed gave us a couple of examples, but the volume environment has been tough to call. It's been a little softer than expected. So what gives you the confidence that some of that's going to come through, especially sequentially, to help you hit that target in Q3?

[Mark George, CFO at Norfolk Southern Corporation]

Yeah, I think that actually the profile in the back half, you have a typical challenge in the fourth quarter being a lighter one where you see the OR float up. I actually think because of the momentum we're making, there'll be continuous productivity that we get throughout the year. So while we might get a little bit more volume in the third quarter and a little bit less as you typically would expect in the fourth quarter, the productivity is going to help us sail through. And I would imagine that both third and fourth quarter are going to look somewhat similar here.

[Operator]

The next question will be coming from Jon Chappell of Evercore ISI. Jon, go ahead.

[Jon Chappell, Senior Managing Director at Evercore ISI]

Thank you. Good afternoon. Ed, past and future. First, on the past, is there any way to quantify, if there was any, any potential volume impact from the distraction, if you will, of the last several months? Any customers who maybe had some negative muscle memory from cutting to bone and putting in contingency plans ahead of final certainty? And then the second part of it would be for the future. You mentioned some of the wins that you've had from these new service metrics that you're putting up. Do you feel that you have a long list of customers who've been resistant to moving to the rail given past service who are now a little bit more open to switching back to the rail network given some of these vast improvements you've made?

[Jon Chappell, Senior Managing Director at Evercore ISI]

Yeah. I'm trying to remember the first part of your question.

[Jon Chappell, Senior Managing Director at Evercore ISI]

If there was any volume.

[Ed Elkins, CMO at Norfolk Southern Corporation]

Yeah. Look, our customers, and I think you guys know this, our customers were one of the most supportive groups of our strategy out there as we moved through this whole first half of the year. They were rooting for us, and they were behind us, and they are helping us unlock additional value for the supply chain right now. Moving forward, look, we got a lot of confidence in growing our volumes across the board. But really, we're focused on one area in particular where we know that we have a lost share that's in our merchandise markets. I would say it is not customers that are resistant to coming back to us. It is customers that we have to earn back because they had to find a different supply chain solution, which probably cost them more money.

[Ed Elkins, CMO at Norfolk Southern Corporation]

We're working really hard every single day to earn those customers back. That's what we're focused on.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Look, our service product sells in this market, right? Our two most service-sensitive markets, automotive and intermodal, grew 7% and 8% respectively because of the great product that John Orr and his team are putting together. And because of the alignment between marketing and operations, they're looking for every opportunity to secure additional revenue and additional margin. And we were able to pick up spot opportunities in weak coal markets and in weak agriculture markets because of the great product we're delivering and the capacity dividend that John has created.

[Ed Elkins, CMO at Norfolk Southern Corporation]

The relationships that we've built over a long period of time with our customers who, like I said, supported us through this whole thing.

[Jon Chappell, Senior Managing Director at Evercore ISI]

Great point.

[Operator]

The next question will be coming from Brandon Oglenski from Barclays. Brandon, go ahead.

[Brandon Oglenski, Director and Senior Equity Analyst at Barclays]

Hey, good afternoon. And thanks for taking my question. Ed, maybe just on a very quick point of clarification, are you still expecting coal yields to decline in the back half, especially on export? Because I think that was the prior expectation. And then Mark, I think in your recorded remarks, you ended your statement talking about, "Hey, look, we had prior big land sale transactions. We think we've identified a few more." I think that's what I heard. So should we be contemplating that in the forward OR outlook? I think that's maybe where you were going. And you also made a comment that I think you should expect about $12.5 million a quarter. So should we be thinking annualized $50 million gains, or are you saying there's potentially bigger sales coming? Thank you.

[Ed Elkins, CMO at Norfolk Southern Corporation]

Actually, I'll answer that second part first. So the large land gains that I was referring to would be things that we would typically call out and refer to as kind of probably more on the non-GAAP side. And that's really in terms of trying to augment our balance sheet. So no, they are not in any way part of the path on the OR going forward. It was really more of a conversation on capital and restoring our balance sheet. Typically, we guide to $30 million-$40 million a year on real estate gains in the normal course that we absorb within the OR. And there are years where that's $20 million. There are years where that's $50 million. But it's kind of in that $30 million-$40 million range.

[Ed Elkins, CMO at Norfolk Southern Corporation]

So I was making a more general smoothing commentary talking about, call it 50, but it could be in that neighborhood, $40 million-$50 million range this year. Okay. And then you'd asked about coal pricing as well. There were a few global supply chain disruptions during the quarter that caused a slight lift in prices. But those gains have mostly eroded away. And the expectation is that rates are going to continue to drift slightly lower. The experts that we talked to, and there are several of them, are really expecting those seaborne prices to stay north of $200. But we'll see. We'll see what happens.

[Operator]

The next question will come from Ravi Shanker from Morgan Stanley. Ravi, go ahead.

[Ravi Shanker, Managing Director at Morgan Stanley]

Thank you. Good evening, everyone. I think you said earlier that there's something around the East Coast port actions and some customer behavior there. Can you unpack that a little bit more and give us a little more detail there? What are you seeing already? What's some of the timeline for this and kind of where can it go before that sort of stuff?

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Sure. I'll take that one. I think everyone knows the ILA hasn't done a lot since September 30th to reach agreement with the port operators. We are talking to all of our steamship line customers as well as our domestic intermodal partners. And shippers are starting to hedge their bets a little bit. We see a lot of West Coast activity on the rise for a number of reasons. That includes what's going on in the Red Sea. But as that happens, customers, the BCOs, have to get their freight to market. So they're deploying freight to the West Coast as well as the East.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

I really believe, and this is just me observing the market, I think with the shortage of containers, seaborne containers that are out there because of the elongated supply chains, what you're going to see is steamship lines will not want their boxes coming inland off the West Coast. And so there's going to be a lot of demand for domestic intermodal off the West Coast. That's the way I think this thing evolves.

[Operator]

The next question will be coming from Elliot Alper from TD Cowen. Elliot, go ahead.

[Elliot Alper, VP at TD Cowen]

Thank you. This is Elliot Alper, Jason Seidl. You brought up the next lever for margin will be some of the broad-based initiatives and purchase services. Hoping you could elaborate on that. You talked about some of the OpEx items that will be headwinds through the back half of the year. Maybe, how should we think about the cadence of purchase services as we progress through the year?

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Hey, thanks for the question, Elliot. Yeah. I mean, obviously, it's a big spend amount that's gone up a lot from technology in the past handful of years, largely subscription-based or cloud-based services. So you see a lot more software costs showing up now in purchase services as opposed to in capital. But at the same time, probably about a third is related to the volume variable costs associated with intermodal activity. So intermodal grew 8% year-over-year, but we actually limited the purchase services increase to around 3%. And actually, sequentially, it was down slightly. So this is an area that we've spent a lot of time, John and I, in the past couple of months talking about.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

We're going to be focused pretty aggressively on trying to find opportunities to bring this down in certainly a lot of the other areas of purchased services outside of the volume variable pieces. John, you want to jump in?

[John Orr, COO at Norfolk Southern Corporation]

Yeah. We just take fuel, for example. We're really driving hard to pull locomotives out, reduce our exposure there. But at the same time, looking at our fuel distribution process, we've been able to streamline that, reduce some DTL trucks and reliance on that. Similar to how we're pruning the intermodal franchise, we're pruning some of the more expensive fuel and fuel distribution. And at the same time, then looking at how do we create more vendor accountability and visibility. So we've got some really short-term, mid-term, and long-term views on fuel. And even putting locomotives down cascades into our materials and the services associated with maintaining locomotives that we're able to put down.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Yeah. And one other point on purchased services, because you did ask about how it will look the balance of the year, I would tell you it is going to be no worse than what you see in the first half. I would expect it to be down year-over-year in the back half.

[Mark George, CFO at Norfolk Southern Corporation]

We've got a broad-based focus on productivity. Purchased services is a big part of that. But we got a clear line of sight and a roadmap to drive productivity and workforce and then fuel and purchased services and equipment rents. And at the same time, really focus on leveraging this great service product to drive more merchandise revenue and then leveraging our powerful intermodal franchise as the truck market responds to drive more revenue there as well.

[Elliot Alper, VP at TD Cowen]

What do you think about one of the biggest crew costs? Recruits. And how much that drives services and.

[Mark George, CFO at Norfolk Southern Corporation]

What a great point, John. You've done of reducing that and overtime?

[John Orr, COO at Norfolk Southern Corporation]

We're knocking recruits out, reducing our exposure to overtime, reducing our exposure to taxi cabs, hotels, all the associated costs with that. That is just a winning proposition because as you reduce recruits, you're creating service stability. That flies in the wheelhouse of Ed and being able to sell. That's the power of the resiliency that we're creating at the lowest cost possible and the flywheel of mobility.

[Operator]

The next question will be coming from Daniel Imbro from Stephens Incorporated. Daniel, go ahead.

[Daniel Imbro, Managing Director and Senior Equity Research Analyst at Stephens Incorporated]

Yeah. Thanks. Good evening, guys. I wanted to circle back to winning some of that merchandise business back from the disruption earlier this year. It sounds like service is in a good place. The flywheel's turning, and you have the ability to absorb that volume. So I guess, what do you think it takes to catalyze and start winning back some more of that more profitable merchandise volume? And then on the guide, does it include some pace of market share win back or volume win back that's embedded in that volume outlook for the back half? Thanks.

[Mark George, CFO at Norfolk Southern Corporation]

Yeah. A lot of it is just leveraging that improved service product and also the capacity that we have to bear. As we increase the utilization of our equipment and our customers' equipment, we can put more capacity up against the market. And frankly, even in this freight environment, customers want to save money. And rail has a cost advantage relative to truck.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Exactly. And look, let's be clear. The erosion in our merchandise volume didn't happen in the first half of this year. It's happened over a fairly extended period of time, right, as we've worked really hard to get to where we are right now. So there are varying levers we're going to pull with various customers. But the first one that we're going to pull with every customer is giving them exactly what they want, which is a conveyor belt that runs at the same speed all the time. And that's fundamentally what our customers need, first of all. And we're out there right now demonstrating it and proving it to them.

[John Orr, COO at Norfolk Southern Corporation]

I think that's why our approach, customer service facing, is better. We're still getting productivity, reducing resources, creating capacity without impacting service.

[Operator]

The next question will come from Jordan Alliger from Goldman Sachs. Jordan, go ahead.

[Jordan Alliger, VP and Equity Research Analyst at Goldman Sachs]

Yeah. Hi. Afternoon. Just sort of a question. Sort of from an operational standpoint, a whole bunch of operational initiatives that you talked about to close the margin gap. I'm just sort of curious, as we think about all of them, how much of the plan this year and as we flow into next year is what you would consider, for lack of a better word, basic blocking and tackling, fine-tuning versus major sea changes, just trying to assess the difficulty of execution as we go along from here? Thanks.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Well, there is no secret. I mean, it's hard work, and it's running an efficient, effective railroad every single day. And that stability lends itself to opportunity, whether it's in asset utilization, crew utilization, fuel efficiency, all of those things. I've made a solid commitment on the path to taking out overall our $450 million to make this happen. And that's a series of small wins, bigger wins. But we've got line of sight to a big pipeline of opportunities that will just grind through, and they'll come at different points. Today is what we would consider an inflection point. And as we move through that, create stability and drive forward, it'll always be there. So I would say it's a blend of those things. And we're going to drive hard.

[Mark George, CFO at Norfolk Southern Corporation]

Look, it's leadership. It's plan. It's discipline of execution. And what John and his team are producing, the acceleration of our operational improvements allows us to have the confidence to reaffirm our guidance and overcome the market weakness for the second half of the year.

[Operator]

The next question will come from Walter Spracklin from RBC Capital Markets. Walter.

[Walter Spracklin, Managing Director and Senior Equity Research Analyst at RBC Capital Markets]

Yeah. Thanks very much, operator. Good afternoon, everyone. I'd like to turn that market opportunity focus to one that hasn't been in your wheelhouse before, and that's Mexico. Union Pacific haven't mentioned it on their call several times. Obviously, the big focus for CPKC, nearshoring and onshoring being a big trend. I know when you gave access to CPKC, gave Meridian Speedway access to the CPKC, it may have been a little bit contentious at the time during the debate. But I think, correct me if I'm wrong, I mean, what they're saying is that this now opens up a route or a new destination for Mexico product into the Southeast via CPKC and into your network and CSX's network, and that the opportunity it presented has never been there before. Is that valid? Is that true? Do you see that as an opportunity?

[Walter Spracklin, Managing Director and Senior Equity Research Analyst at RBC Capital Markets]

Could this be a new source of business for you, getting Mexico product into the Southeast via your routes as described, or would you put more of a challenge on that?

[Ed Elkins, CMO at Norfolk Southern Corporation]

Well, look, here's what I would say. We know that nearshoring or onshoring, however you want to describe that, is occurring. There's two kinds of manufacturing that I think is going to come back to North America: advanced manufacturing, which is high value add and probably is very automated. I think that's going to come back to the U.S. But basic manufacturing is probably going to a place in North America that is Mexico. So we're talking really every week with a group of Mexico as well as the CPKC on opportunities. One of those opportunities is connecting Mexico to the Southeast via the Meridian Speedway. That's for sure. There are other opportunities that will emerge in the near future that I think will be very exciting opportunities and products for various segments of U.S. manufacturing.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

You know, Ed, we just had General Motors in the office yesterday talking about some of the supply chains. It wasn't lost on me that Mexico was part of that conversation. It's going to be a part of the conversation. I've just spent the last three years in that part of the world and really understand where the connection opportunities are. You're right. We've got a great opportunity with both major railways in Mexico as well as the short sea. So I think that's a real opportunity in the immediate and near term.

[Ed Elkins, CMO at Norfolk Southern Corporation]

Yeah. I would say stand by for future developments.

[Operator]

The last question from this call will come from Stephanie Moore from Jefferies. Stephanie, go ahead.

[Stephanie Moore, SVP of Equity Research at Jefferies]

Hi. Good afternoon. Thank you. I wanted to touch on just the increased productivity that you're seeing this year. Does this kind of load the spring, so to speak, going forward for even better OR improvements in the years ahead, a.k.a. kind of maintaining the OR guide this year, even though lower revenues? If we roll that forward to 2025 and 2026, hopefully, a more constructive freight background or backdrop, does that mean kind of the accelerating OR expansion in the years ahead? Love to get your thoughts. Thanks.

[Mark George, CFO at Norfolk Southern Corporation]

Stephanie, at the beginning of this year, we set out pretty aggressive long-term OR targets. We are doing everything we said we would do. We are delivering despite a weak freight environment. We are in the first year of a multi-year plan to reduce OR to a sub-60 rate. Then we'll keep going. But we're executing. We're improving service. We're reducing costs. We're growing revenue in a tough freight environment. We're enhancing our safety. We've laid out a roadmap, and we're delivering on it.

[Mark George, CFO at Norfolk Southern Corporation]

I think if you see outsized top-line opportunities on the horizon, I think you know in this industry, it usually generates outsized drop-through opportunities, and maybe you end up getting there faster. Thank you very much, everyone.

[Operator]

There are no further questions at this time. I'd now like to turn the call back over to Alan Shaw, President and CEO, for the final comments.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Thanks for your interest in Norfolk Southern. We'll look forward to continuing the conversations over the next couple of months.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Participants

Executives

• Alan Shaw, President and CEO
• Ed Elkins, CMO
• John Orr, COO
• Luke Nichols, Senior Director of Investor Relations
• Mark George, CFO

Analysts

• Brandon Oglenski, Director and Senior Equity Analyst at Barclays
• Brian Ossenbeck, Managing Director at JPMorgan
• Chris Wetherbee, Senior Analyst at Wells Fargo
• Daniel Imbro, Managing Director and Senior Equity Research Analyst at Stephens Incorporated
• Elliot Alper, VP at TD Cowen
• Jon Chappell, Senior Managing Director at Evercore ISI
• Jordan Alliger, VP and Equity Research Analyst at Goldman Sachs
• Ravi Shanker, Managing Director at Morgan Stanley
• Stephanie Moore, SVP of Equity Research at Jefferies
• Tom Wadewitz, Senior Equity Research Analyst at UBS
• Walter Spracklin, Managing Director and Senior Equity Research Analyst at RBC Capital Markets