Q2 2020 Norfolk Southern Corp Earnings Call
[music].
Greetings and welcome to know for kind of Corporation second quarter 2020 earnings call. At this time, all participants are in listen only mode.
Brief question and answer session will follow in the form presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce Pete Sharable director of Investor Relations. Thank you Mr. shovel you may now begin.
Thank you and good morning, everyone. Please note that during today's call. We may make certain forward looking statements, 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 FCC for a full discussion of those risks and uncertainties, we view as most important.
Our presentation slides are available at Norfolk, Southern Dot Com any investor section along with our non-GAAP reconciliation.
Additionally, a transcript and download will be posted after the call.
It's now my pleasure to introduce Norfolk, Southern's, Chairman, President and CEO, Jim Squires.
Good morning, everyone and welcome to Norfolk, Southern second quarter 2020 earnings call.
Joining me today, our Allen Shah Chief Marketing Officer, Mark George Chief Financial Officer, and Mike Wheeler, Chief operating Officer.
As we announced earlier this week, Mike will retire from Norfolk Southern on October Onest. After a 35 year career of distinguished achievement. He will be greatly missed and we wish him well.
When we began the search for our next Chief operating Officer, we looked for an experienced executive who could lead our day to day operations and build on our successful implementation of precision scheduled railroading.
We are proud to welcome Cindy Sanborn, one of our industry's leading operations experts to the Norfolk Southern team.
We look forward to Cindy joining the company on September Onest.
With that let's proceed to a review of our second quarter performance.
Im into global pandemic and ensuing economic disruption in the markets and communities we serve.
The men and women of Norfolk, Southern demonstrated their resilience in the second quarter.
Our customers in virtually every segment shipped significantly lower volumes with many changing their shipping patterns as they work to keep the supply lines open.
The automotive industry was particularly volatile experiencing a rapid and almost total shutdown and then a subsequent restart and push to restock inventory all within the same quarter.
Norfolk Southern's business reflected that disruption.
Revenues decreased 29%, leading to a decline of 43% in earnings per share.
Our team rose to the challenge.
We quickly adjusted network plans and resources in the short term, while advancing our long term strategy to deliver shareholder value with several important achievements.
First Norfolk Southern employees are serving our customers and our country with excellence during a pandemic.
The successful implementation of our top 21 strategic plan and precision scheduled railroading combined with the hard work and commitment of our employees is producing results.
We achieved record train performance train speed terminal dwell and shipment consistency.
Many other service metrics were near all time best levels.
Second we manage our operations efficiently as shipping volumes bottomed out while ensuring we have strong operating leverage as business recovers.
Year over year in the second quarter, our force levels declined by 20%, that's nearly 5000 positions while train size increased and fuel efficiency improved.
These achievements enabled and operating expense reduction of 21% against a 26% decline in volume we are a fast fluid railroad ready to take advantage when volumes return.
Third and perhaps most important we kept our eye on our strategic objectives by attacking structural costs.
We reduced our hump yard footprint in the quarter by idling two additional humps, bringing the total to for that have been idled over the past year.
These actions create direct cost savings over the coming quarters and demonstrate our success improving our top 21 train planned to be nimble and adaptive to changing freight demand with fewer more efficient major terminals.
Throughout all of this we are taking comprehensive steps to protect the health and wellbeing of our people.
All employees, who can work remotely continued to do so for employees, whose responsibilities require them to work on site. We are following CDC guidelines.
I opened by launching our teams resilience, while each one of these actions and achievements on its own has merit when taken together and in the face of the unique disruptions of the second quarter. They demonstrate the determination of this team to forge ahead and take on any challenges necessary to create value for our shareholders.
I'll now turn the call over to Alan and the team to provide further details and commentary.
Alan.
Thank you Jim and good morning, everyone.
Second quarter volume was greatly influenced by the dual shocks of covert 19, and large declines at our energy markets.
We remain committed to executing our strategic plan of long term revenue and margin growth based on our excellent service product and market approach both valued by our customers.
Our productivity service and collaborative focus was most evident in our automotive franchise, where weekly volumes declined over 90% early in the quarter, we quickly pulled down our automotive train service and as automotive production resumed rapidly ramped up operations.
Effectively and efficiently serve our customers.
Our dynamic planning process and proactive collaboration with our customers produced this rapid restructuring of plan and assets.
Our team remains committed to both maximizing profitable growth and improving our service offering as we emerge from the challenge of the pandemic.
Moving to slide six second quarter revenue declined 29% year over year. These declines were affected by volume impacts of coded and low energy prices, the latter of which also impacted fuel surcharge revenue.
The first half of the quarter had dramatically different results than the second and which we saw an 8% sequential improvement in volume as the economy started to reopen.
Our continued focus on yield is evident with all three business groups improving revenue per unit, excluding fuel a year over year gain we have delivered for 10 consecutive quarters.
Declining fuel surcharge revenue and a changing business mix.
Opposed of a greater percentage of intermodal volume lowered overall revenue per unit.
Merchandise volume declines were most pronounced and the automotive franchise as automotive volumes declined more than 60% quarterly a mid April and may production stoppages throughout the industry.
Decreases in this market rippled to adjacent products, such as steel and plastics.
Nearly every market was hurt by pandemic shutdowns energy prices consumption decreases or.
A combination combination of these items.
Food products are greatly influenced by closed restaurants and other points of sale.
Low energy prices drove declines in all of our energy markets, including utility coal Frac sand crude oil natural gas products and scrubber staff.
Intermodal revenue fell 19% in the second quarter, driven by lower levels of consumer demand in response to the pandemic.
As the economy reopened intermodal volume improved as demand for our services grew and truck rates increased.
Domestic volumes rebounded as the quarter progressed due to the need to quickly rebuild inventory while international remain pressured.
The increased use of ecommerce and essential goods led to more transloads and domestic equipment.
Our coal franchise continued to face pressure this quarter with revenue declining 55% year over year, a result of sustained low energy prices and the global pandemic.
Utility volumes declined 67% as load in the industrial and commercial markets deteriorated and coal generation faced intense competition from low natural gas prices.
The overall coal decline with slightly offset with an ARPU gain of 3%, reflecting volume shortfalls and changing mix.
Moving to our outlook on slide seven we believe the recent volume growth trajectory will moderate with future gains at a slow and uneven pace from June levels, a high degree of uncertainty exists.
State and local government reaction to increase KOVA cases, we'll have a major influence on the speed and shape of the economic recovery.
The growing number of such cases and fiscal policy will impact our outlook to the extent that both influenced the strength of consumer demand and labor availability.
With the latter having an effect on production.
The consumer is active with high retail sales figures reported for June and durable goods spending close the pre pandemic levels, increasing the need for transportation services.
And the trucking sector spot rates of return to pre coded levels and are currently at the highest point of the year. During this inventory replenishment cycle, a positive near term signal for intermodal and truck competitive merchandise markets.
These markets rely heavily on the consumer where the impact of government stimulus potential shutdowns and unemployment will be key drivers and the continued recovery.
Intermodal will benefit from new product development, such as the recently announced newer services.
Strengthen the link with our best in class Channel partners enhance our airline service offerings and allow Norfolk southern to secure even more business moving from the southeast to the northeast.
These products create value for our customers, while utilizing the capacity dividend generated by our efficient and faster network.
Although the manufacturing economy is lagging the consumer we're seeing a solid rebound in automotive where volumes quickly started improving at the end of May with continued strength through the third quarter as inventories rebuilt.
We expect energy to remain depressed.
Continued low natural gas prices and unfavorable crude oil spreads are creating additional headwinds across all of our energy markets.
Export coal is expected to continue to be negatively impacted by the worldwide pandemic and geopolitical tensions.
Our expectations are tempered with the ever present uncertainty surrounding cobot 19 in fiscal policy.
This quarter was marked with a sharp difference between the first six weeks in the last.
We understand that our volumes will fluctuate as our customers and their customers are impacted by potential future state and local restrictions in response to increasing cobot infectious.
Despite these convert conditions our strategy is clear.
We will continue to improve our revenue quality and service product.
Delivering services that allow our customers to compete and succeed.
While utilizing fewer resources I will now turn it over to Mike for an update on operations.
Thank you Alan and thank you Jim for those kind words.
The second quarter saw an unprecedented amount of operating change as we ceased hump operations at two yards and responded to major volume shifts with the kenai towards making many of our crew start reductions permanent.
We continued to execute at a high level, what pressing forward with our transformation and managing through the challenges of the pandemic.
Moving on to slide nine, which again shows continued improvement in train speed and terminal dwell setting or tying all time records for us this quarter.
Our operation benefited from the network fluidity that came with dramatically lower volumes.
We were able to adjust our operation in line with our customers again, setting records and train performance shipment consistency and plan adherence.
These milestones came as we further reduced assets and employment, while taking advantage of the lower volume environment to reconfigure our network operations.
Moving on Slide 10 is the update to our service and productivity metrics for the year, which you have seen in previous quarters.
All of our metrics are showing improvement on a year to date basis.
Reflecting both our continued progress and the effect of the pandemic.
Our service delivery index measures shipment on time performance index to 2018.
We were already at our 2021 goal in the first quarter and continue to improve in the second quarter, which will enable us to meet or exceed our goals over the rest of the year.
We continue to provide a service product that meets or exceeds our customers' expectations.
Extreme volumes swings challenged both teeny and locomotive productivity during the quarter.
We reduced both TNT employment and active locomotives during the quarter to the lowest numbers on record, but those changes slightly lag the reduction in volumes.
We improved our year over year train weight like closely matching the train plan to volume changes and being careful about when and where we added additional service as business returned.
Train length grew even more than train weight.
Matching the plan to volumes helped us realize an increase in fuel efficiency to a second quarter record by maximizing the returns on the investment in energy management and PTC technology.
Finally, we easily surpassed our cars online goal setting new records in the quarter that were driven down in part directly by lower volumes and in part by a record train speed and dwell metrics that kept cars moving towards destination.
As in past quarters. This includes cars that were both active and stored awaiting upturns in business.
Moving on to Slide 11. This is our sixth consecutive quarter of accelerated crew start reductions.
I'm exceptionally proud that our operating team was able to respond so quickly to the sudden and severe pandemic induced volume drops.
We will continue to use both tactical and structural changes to keep our cost structure controlled and flexible as volume changes.
Prior to the pandemic, we advanced through phase three of the top 21 program.
We are continuing to optimize our training network and rationalize our yard network.
Even while setting the stage for positive operating leverage as volumes rise.
Implementing top 21 enabled us to cease hump operations at Lin Wood and Bellevue.
Continued progress comes through long term structural changes in our asset base improve service levels and rising productivity metrics following proven PSR principles.
Moving to slide 12, we seized the opportunity to use the second quarter business dropped to craft a better plan for when traffic returned.
As this graph shows we reduce crew starts in line with business reductions.
But as traffic comes back we are fully optimizing our train capacity based on our current business mix instead of simply just restoring previous train starts.
Slide 13 shows how well in Norfolk Southern is positioned.
In the second quarter, we closed one of our two locomotive heavy repair shops and ceased hump operations at two of our large yards Lin wood and Bellevue, making a total of four hump yards eliminated in the years time.
Our structural network changes, our emblematic of our willingness to transform the way we operate in the pursuit of efficiency.
We aggressively continue to look for additional opportunities to reduce our terminal footprint.
We can and will do more to reduce our resource and investment needs.
But we are also capitalizing on the return of traffic from historic lows by adding back trains more slowly than returning traffic.
As traffic does come back we are much more willing to mix traffic types on whatever trains have capacity and can meet service standards.
Generating this kind of operating leverage during a rise in traffic is very powerful and we are committed to maintaining that leverage.
Now I will turn it over to Mark who will cover the financial results.
Thank you Mike good morning, everyone.
On slide 15.
You see the key financial measures as Alan shared while RPU ex fuel for each commodity was favorable.
Adverse mix and declining fuel surcharge revenue.
Created headwinds leading to overall revenue being down 29% on volume being down 26%.
Operating expenses were down 21% in the quarter with each cost component driven lower led by fuel as well as employment related costs.
And as we signaled in May we weren't able to completely mitigate the sudden and dramatic volume declines with dollar for dollar expense reductions.
And this led to operating income being down $455 million, while the operating ratio increased 710 basis points.
Despite the 43% decline in operating income.
Free cash flow for the quarter declined by half that rate or 22%.
So it remain more durable and contributed to a record free cash flow during the first half of the year of over $1 billion.
On slide 16.
You will see that the quarter was free of any significant unusual items, although the EPS compare versus last year does benefit from the absence of a nonoperating impairment charge that was recorded in Q2 2019.
So while the reported EPS eroded by $1.17 the contraction from core operations is actually $1.25.
Moving to slide 17, and operating expenses, you will see they were driven down by $385 million or 21%.
Certainly fuel savings were a large contributor with roughly half of that savings driven by the sharply lower prices.
74 million of the reduction was from lower consumption due to the decline in Gtlds, but also another solid quarter of fuel efficiency gains, which was 3% this quarter and is now 4% year to date.
We drove CCOP and bend down $126 million or 18% as employment was reduced by nearly 20% or 5000 year over year and down 5% versus one Q.
It's important to note that as we pressed forward with structural resource reductions in the quarter. We did maintain forces on extra board status that would be required to serve in the event of a sudden surgeon volume.
Which is exactly what happened in June where volume sequentially increased 12% from the may level with no adverse service disruption.
As Mike touched upon we prioritize this approach as complementary to our strategic plans focus on best in class service without the cyclical variability in reliability that has played the industry historically.
You will know $20 million in savings from managing tightly our overtime as well as recruits which were down 50%.
In line with what I had signal during the quarter.
CCOP and Ben per employee was sequentially down by a modest amount.
Moving over to purchase services and rents this was down 11% with purchase services itself down, 13% driven by lower intermodal and automotive facility costs associated with the volume decline.
Material costs are down $20 million. Thanks in large part to reduce maintenance costs associated with our mechanical realignment as well as initiatives surrounding the locomotive and railcar fleet rationalization.
The lower other costs of 11 million benefits from our constraint of travel and other discretionary items.
[noise] gains from the sales of operating properties. This quarter was negligible similar to last year.
You will recall last quarter I provided a window into how you should think about these expense categories.
From a volume variability perspective, given the onset of what we knew would be a volume shock here in Q2 I.
I indicated that we would be able to reduce roughly 50% to 60% of our costs with volume.
In Q2, the 21% reduction in costs or 16%, if you exclude the anomalous fuel price benefit.
Was exactly in line with that 50% to 60% guidance I had given.
On slide 18, we look at the full personnel and here, you'll see that other income net of $49 million is 27 million better than prior year.
This favorability is driven by the absence of last years 28 million dollar asset impairment charge.
Along with a $25 million year over year increase in coli returns.
This favorable return was partially offset by headwinds from lower non operating property games.
As well as transaction costs associated with the debt exchange that we completed during the quarter.
Lastly, the modestly lower effective tax rate in the quarter of 22.1%.
It was driven by the coli returns I, just mentioned, which are not subject to income tax.
Moving to slide 19.
For the six month ended June 2020, our free cash flow was a record at $1.023 billion aided in large part by fewer capital additions and timing of income tax payments.
Property additions in the first half were $735 million 244 million below 2019 levels.
And we're on a run rate to be at our target of 1.5 billion for the year, which will be a 25% reduction from 2019 spend levels.
With our cash generation and liquidity profile, we were able to continue to distribute cash to shareholders, maintaining our dividend, while moderating share repurchase activity.
In the quarter, we repurchased 1.3 million shares roughly $200 million.
As of now we have over $1 billion of cash on hand, with less than $100 million of debt maturities in the next year.
So we are in a comfortable place in case, the recent market stabilization that we are enjoying falters.
I'll just wrapped with a comment on the outlook.
While we can't be certain of volume shape in the back half.
As you heard from Mike we are taking this opportunity to make significant structural changes to our network. While also driving further efficiencies into the train plan.
These actions to ensure that we are well positioned to leverage the volume recovery.
And that in any scenario, we are moving forward with transforming our cost structure.
Jim.
Thank you Mark.
In summary, we are committed to driving our operating ratio down and still have a goal of 60.
We have a full court press on productivity initiatives to ensure that our cost structure improves while also capitalizing on the operating leverage that we are achieving.
Thank you for your attention and we'll now open the line for Q and a operator.
Thank you will now be conducting a question and answer session. If you like to ask your question. Please press star one on your telephone keypad and a confirmation tonal indicate your line is in the question Q.
You mean press Star too few later move your question from the Q.
For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith.
Due to a number of analysts joining us on the call today will be limiting everyone to onetime rate question and one follow up question to accommodate is many participants as possible.
Thank you and our first question is from the line of Chris Wetherbee with Citi.
Hey, Thanks, and good morning, guys.
Jim I, just want to pick up where you left off so you mentioned the goal of 60 from an EMR perspective, and obviously there is some structural changes that you made during the quarter. Some of those might have been pulled forward from future plans because of the pandemic, but when you think about sort of the hump yard opportunities in some of the other structural network changes that you've made.
How do you sort of see that potentially impacting that longer term 60 goal that there's an opportunity beyond 60 can you just put some numbers around it.
Good morning, Chris Good good question, Anda, and really shines a light on what is our our main focus right now which is to continue driving productivity and efficiency gains.
In the in the current.
Economic environment, and we took action in that regard in the second quarter through the conversion of one hump yard and the closure of another.
We also.
Took off line one of two major back shop locomotive maintenance facilities.
So we we demonstrated our commitment to driving productivity.
In the in the midst of the volume challenges in the second quarter, and we will continue to push hard on that as we move through the rest of the year and beyond Mike Let me turn it over you for some.
Additional comments, yes, well, we're we're not letting off the gas we've got several things. We continue to look at that are in the hopper and we'll.
I will rollout as as appropriate based on the volumes in the business.
But like I like I've said before.
We are going to continue to push ourselves to to find.
Find ways to reduce our structural cost out there in the terminals that we can do without while still providing the service product that we've committed to so we still have things, we're working on and you'll see those.
See those rollout in the future.
Okay. That's helpful. I appreciate that and then maybe Allen one for you on the yield up strategy. Obviously, you put up I think 10 consecutive quarters of yield growth ARPU growth less fuel when you think about the potential for and improving truckload cycles, our rate environment getting better potentially next year how quickly does.
That translate down into the business say into the merchandise or intermodal business can you capitalize on that at the back half of the years is something we need to see potentially rolling out into 2021 could just give us some comments on that.
Yes, Chris it depends upon how quickly moves up and whether those spot rates that were seeing right now translate into contract rates, but yes, we generally touch 50, 55% of our revenue every year and we've got a great service product and we've got confidence in the quality of that product and we're pricing.
Certainly.
Okay. All right appreciate the time thank you.
The next question is from the line of Tom Wadewitz with yes.
Yes. Good morning, So maybe I can start off with one for you Jim just in terms of the Chief operating officer transition so.
Yeah, Mike Congratulations on the retirement.
And.
Although progress on PSR in top 21.
Hey, Jim how do you think about the search process and.
Given the success with the top 21, the decision to go external as opposed to going internal.
Sure Tom.
Well I too want to.
To thank Mike again for his many contributions over the years, we deeply appreciate your service Mike.
Let me let me describe briefly the the process that the board of directors went through in selecting Cindy as our next Chief operating officer. It was a comprehensive search process. It began buying by defining the experiences and qualities. We were looking for as a board of directors in our next COO and these were things like demonstrate.
Did experience with with operations at a very high level at a leadership level.
A commitment to safety in operations as Paramount.
Qualities like.
Success in working with with regulators and other other stakeholders commitment to service great service for our customers.
And so we we began with a.
A large field of candidates, we say, we steadily narrowed it down and we ended up with with Cindy and.
She brings to us all of the qualities and experiences that I just outlined and in addition, she brings experience with the PSR models, specifically, having having worked at both Union Pacific and CSX.
Which like Ns are in the midst of implementing PSR. So.
We're delighted to welcome her to our team starting September 1st.
Okay, Great and then for the follow up question.
Just wanted to see if you could offer some broader thoughts in how we think about the the move.
The next year or war.
[laughter] plus or minus.
Moving the operating ratio is this.
Primarily a volume driven operating leverage type of the framework is that the way, we sit and look at it in terms of really focusing on volume.
Or is there really.
A lot to goes still on the kind of pure cost productivity top 21 framework I'm sure it to make the both but just trying to get a sense of which which would be more important looking forward are looking to 2021. Thank you.
Let me, let me start by acknowledging that the operating ratio in the second quarter is not where we needed to be and not where the operating ratio will be going forward. We believe.
It was a tough quarter, particularly the first part of it with revenue down as much as it was particularly in key areas. So we struggled and in the first couple of months in the quarter now now things things began to turn around in June and we saw the volume pick up and naturally we saw the operating leverage kick in in the month of June and that has continued.
Thus far in July as well.
Who knows what the rest of the year may hold it.
As you heard from Alan It's a mixed outlook, we're feeling pretty bullish about about the current volume levels.
Relative to where they were in the second quarter, but we'll see.
Looking out.
If the question is whether growth counts whether growth matters for further operating ratio improvement absolutely. It helps than it would be a significant tailwind. If the question is whether our strategy for our improvement is dependent on growth. The answer is no. We intend to drive the operating ratio lower and to get to our six.
The goal under whatever conditions, we experience. We believe we have a strategy that has adaptable enough and we have enough opportunities in other areas, while pursuing strategies that we believe will grow the topline as well.
Great. That's very helpful. Thank you.
Our next question comes from the line of a meat entre with Deutsche Bank.
Thanks, Operator, hi, everybody just a quick question Jim do you think Oh are can be flat to down this year I mean, it seems like to 70 71 Omar this quarter, it's really a fraction of unprecedented volume decline and to be fair, but the cost performance.
Was actually pretty good, but there's a certain point where.
You can't you can react with 30% decline in revenue from an or perspective, which is which is an output.
But obviously, there's a lot of revenue incremental revenue coming in the third and fourth quarter relative to the second quarter that could drive to step function improvement in award given the cost that you've done so I'm sure I'm trying to understand you know.
Can you hold the line on a war on a year over year basis. This year, even despite the volume challenges you on the first half given that it's getting a lot better in the second half so far.
If the if the comparison is to the volume Prof. What we hope will will prove to be the trough in in April and May. Then then then yes, we have seen a significant impact and as that uptick and as I said that has has translated into operating leverage.
In the latter part of the of the second quarter and in the third quarter and we would expect that to continue given current volume levels and and the productivity measures we've undertaken.
But there's so much uncertainty in the macro outlook not only for the remainder of this year, but but but going forward as well and let me turn it over to Alan He made a few comments in prepared remarks on this but Alan why don't you talk a little bit about our macro outlook for the rest of this year and and into next year maintenance as Jim noted, we're pretty optimistic about that.
Third quarter, you saw a strong sequential improvement in June over our trough in April and May.
Volumes are increasing again sequentially in July which goes against normal seasonality, where you you typically have a little bit of a downturn in July.
So we see retail activity was up 7.5% Jan we saw durable goods orders were up 7.3% housing starts were up 17.3%.
Spot rates are up and upper teens and truck tonnage increase at the fastest paced and eight and a half years.
The auto restart has certainly helped and Thats reverberated through the supply chain. So as we talked to our customers. There's a lot in near term demand the risk that we see going forward our.
Increasing cases of of Covance and kind of the unsettled situation with fiscal policy in the stimulus and the impact that that could potentially have on fourth quarter volume and revenue.
Right. So if I if I am here you guys correctly.
Nobody knows the future, but if the current trends hold you think you can keep a war flat to even better on year over year basis. This year is that am I reading that correctly.
We're not we're not.
Willing to give guidance on on or just given the overall uncertainty we will continue to push hard on cost and and we have a we have measures in the pipeline and we demonstrated our commitment to cost control in the second quarter as well well keep doing that it's just the macroeconomic the macroeconomic outlook is so uncertain right now.
Fair enough and then Mark just a follow up on the Capex year to date is running lower than the 16% to 18% in sales, which is actually making free cash conversion look pretty good I'm wondering if there's a potential to see kind of capex come down relative to sort of that guidance, you've kind of talked about in the past, but I'm just wondering.
If there's any more update you can give there because the company's free cash conversion is lagging most of the peers. That's obviously going away on the multiple of the company devaluation of the company Im just wondering if there's any opportunity to bring down the capex generally improving free cash conversion.
Yes, thanks for the question on it.
We Didnt guide to really to 16% to 18% after the last call. We actually just gave a fixed guidance number on capex, where we brought it down to 1.5 billion.
And.
Really the first half number were that is our run rate. So we are we're going to.
We are going to finish the year at or about 1.5 billion.
Regardless of revenue so I think hopefully it means that as a percentage it could actually be lower than the 16% to 18% range. So we started early in the year in February and so.
Turning to bring it down and we took half a billion dollars out we will have taken half a billion dollars out of our capex budget this year by that.
Compared to last year.
And yes.
Definitely that is what's driving that at good conversion you point out in the first half.
So so the capex on the back half is going to continue at that rate. So that should help but also a minute as I as I mentioned in the prepared remarks, some of the conversion benefit that we did enjoy in the first half was a function of tax income tax payments that really in large part thanks to the care xactware pushed into July.
So some of that will be.
Made up unfortunately in the second half we won't have the same tax benefit and then we also had some working capital benefits in the first half when volumes come down you don't.
You don't have as much as a are building up so that will probably unwind as volumes recover in the second half as well.
But fully aware that from a cash conversion perspective, our goal is to try to raise that number from where it's been historically.
Capex is one of the one of the vehicles to get there.
Thank you.
Our next questions from the line of short analogy with Goldman Sachs.
Yes, hi at question.
Intermodal.
You had noted the truckload market tightening I am just yes of course, that's good for the longer term intermodal Im just sort of curious they actually seeing increased activity or dialogue with customers or perhaps even truck conversions.
Now with regards intermodal AG Dang truckload market tightness. Thanks.
Alan and Jordan, absolutely and again see that reflected in our numbers intermodal is actually leading our growth right. Now as is automotive basically that consumer segments are are doing really well and we've got a powerful intermodal franchise. We've got a lot of channel partners and beneficial cargo owners.
Out there, who who want to continue to align themselves.
With us and so we've got it we're delivering a wonderful service product and it gives us the strengthen the confidence to to initiate some of these new service products. We've got a couple of new products that we're going to be launching in the third quarter between the southwest in the southeast.
Which are the two fastest growing regions of the country and also some a product from the southeast to the northeast which has already started.
There is absolutely.
Demand for intermodal and this market and that the truck market in certain regions of the country.
Is extremely tight and Norfolk Southern's got the solution for that.
Great and just said.
Follow up I know you mentioned you guys mentioned on the call.
No not bringing back crew starts you know one for one with volume et cetera is airway could give some thoughts on on headcount as we move sequentially from here.
Based on where it ended in the second quarter, I mean is or what sort of think about the pace of that's coming back.
Mike Why don't you what did you comment on the trend in crew starts in the ripple through to two teeny employment. Specifically then Mark maybe you can take question on overall headcount going forward, yes, as you noticed in the slides we continue to leverage crew starts versus volume and the good news is that's continue.
You didn't through July is through July our crew starts are down 20%, while our volumes only down 10%. So we expect to see that leverage going forward and we've got it we've got a great nimble group to be able to it or rate to train plan as necessary and get the leverage on the.
On the volumes, so really pleased about that again, 20% down and crew starts drill I already while volumes only down 10%. So we continue to see that and will in the future.
Arc.
Yes, just to remind I mean, we've we've gone down 5000.
Employees versus Q2 of last year, that's a 20% reduction were kind of lapping now the big step change.
You know from the top 21 implementation, but obviously, we're still chasing a Q2 volume decline that was pretty significant. So we are focused on trying to rebuild that productivity curve and as Mike said hopefully.
You know with any volume growth that comes here in the back half we can absorb it with with what we've had with what we have but also continue to look for more productivity opportunities not going to put a put a fine point or or a number on.
On guidance for a headcount, but for sure it's going to be an area that we're focused on leveraging while we enjoyed the volume recovery.
Thank you.
Next questions from the line of Scott Group with Wolfe Research.
Hey, Thanks morning, guys.
Mark last last quarter, you gave us some good color on cost and said they don't expect them to be down more than than 20%.
Any initial thoughts on how to think about the opex in the third quarter and I know theres been a bunch of all our questions and you guys aren't giving guidance, but I don't know if you're willing to share, but maybe it would be helpful. If you have a sense on can you share with the June operating ratio as maybe that that will give us a little bit help.
Yes so.
Pretty much the volume variability that we had guided last quarter I think helped informed you on expectations for Opex and at the end of the day, we came in pretty much in line with with what we guided so it worked out it worked out well.
I would hope now Scott that as we start to see volume growth, we actually do better than that curve that we leverage it and get better incrementals.
That's the goal and that's the that's the objective that this leadership team is fully aligned on.
But really the big variable is going to be does this momentum we saw with the June volume recovery and what we're enjoying here in July does it continue.
On this trajectory or does it stabilize and you know.
That is really if it continues and fully expect they were going to try to leverage will leverage that and get more greater incrementals them, but hopefully what I showed you and yes, we had quite a curve to your second part of your question quite occur with in the second quarter.
I'm not going to give you the exact number but I will tell you. We we weren't in the seven days in the month of June.
So that's that was encouraging to see that we will.
Hopefully now thats behind US we had a real deep body blow we took in April and May that's hard to recover from but June we started to be encouraged by the leverage that we started to see with a 12%.
A 12% sequential improvement in volumes, so with a cost that we took out.
We had a we had a decent decent quarter sorry, a decent month in June with an award that was it was back in the sixties.
Okay.
Thank you and then Arlon any can you help us think about the coal ARPU and not going forward. It was still positive in the second quarter, but.
Is that possible in the third quarter on a year over year sequentially. However, you think it's the best way to help us out here.
Yeah, Scott as I noted there are two factors that primarily drove coal ARPU in the second quarter. One was volume shortfalls. The other was mix and.
And you can see that punctuated where utility was down 67%.
Whereas export was down 45%. So just there you get some positive actually feel back even more Scott.
Theres mix within these markets as well so our utility south franchise in the second quarter was about 54% of our volume last year at the time. It was 50%. So there is a positive mix there.
Similarly, with an export export, Matt, which tends to also be longer haul and a higher ARPU was 74% of our volume and the second quarter comp the 56% and the second quarter of last year. So we had a lot of positive mix factors going for us in the quarter.
Yes, I'd tell you seaborne coking coal prices continue to fall in the first quarter. They averaged about 155 per metric ton that cascaded down throughout the second quarter right now they stand at like.
One tend to 115, and so that will put pressure on prices moving through the through the third quarter.
Thank you.
Our next question comes from the line of Brandon Oglenski with Barclays.
Hey, good morning, everyone and thanks for taking my question.
Alan or Jim I guess can we just balance accounts you guys made here because I think your prepared remarks, you said the recent pace the volume gains could moderate but then I think youve answer some questions. Here you guys assembled relatively bullish about volume outcome. So what is it that you see in the market that gives you the bullshit now, but it may be making them.
Lottery solution.
Okay.
You've been bullish it's just the idea that maybe we pull back here on that reason Colby cases.
Brand in there there are a couple of factors number one we don't.
Expect to continue a 12% sequential improvement and volume.
Month over month as we saw as we move from May to June as Jim noted April and May were deep troughs for us and.
We climbed out of that we think that July is going to come in four or 5% probably above where we were in June. So you already see that that pay starting to moderate.
And as we look forward, we see a lot of demand and our consumer oriented markets, which includes merchandise and intermodal. The pressure continues within energy and so that will have a governor on sequential improvement as we move through the years and frankly as I just noted with outlets.
Scott Group.
Okay. Appreciate that and then Mike Congrats again on retirement, but I guess, you think you got.
The top 21, you've gone through phase three now can you just remind us what that phase was I think with integrating more line haul train operations, but can you dig deeper there and talk about what incremental changes you can make looking ahead to.
Thank you yeah sure. So you know, though the whole phases of top 21 implementation has been about lending more and more traffic into into the training network and we we first started out.
Lending a lot of the merchandise into into the.
Automotive network that was a big deal for last year's.
July 1st top 21 implementation a lot of that was done with the automotive multi level into the merchandise saw great results from that.
The phase two and three was was more along the lines of Ah.
Integrating the.
Intermodal into the.
Into the operation and then continuing to look at what we can do with a reduced terminal footprint, but still continue the integration of.
Traffic into into the train network and Thats kind of where we're at now is we've got to the point, where a train is a train and it gives us a lot of opportunities to add business back to the network give it all sorts of opportunities for train rights and still meet the customer.
Expectations. So you know we've got a lot of flexibility going forward now that weve blended all of that.
To the into the top 21 network. So really pleased about that in and again a train as a train and as volume comes back it just gets.
Added to the network in a really nice incremental away from a from a productivity metrics. So really excited about that going forward. So we're ready to continue to it or rate as necessary with top 21 is the business comes back so pretty excited about it.
Thank you. Our next question is from the line of Ken Hoexter Bank of America.
Hey, great Mike Congrats and good luck.
Jim maybe I just want to step back on the clarifying your 60% is that now a long term. It's not just wanted clarifies not it next year target and then I guess I want to dig into this quarter, Mike a little bit if you took out 20% of employees, but as you noted only a thousand the quarter with volumes down 26%. So most of the work was done before comp.
As now still 28% of costs, which is not different than it was back in 2017. So as you close to an over 70% operating ratio, which is now 700 basis points worse than your peer in 1300 basis points worse than the the company that that's right to acquire you just understand that the confidence still in top 21, what's missing we've.
And as companies, we're going through it.
We saw others unable to make improvements in that or what what is the that constraint hearing in getting the costs out.
Because in times like this sometimes companies are able to pull out be more aggressive in structurally taken out those costs. So Jim as you step back maybe maybe give a view of what what needs to be done here.
Sure 10, well as as we said a few minutes ago. It was a challenging quarter and we're not satisfied with the 70 operating ratio we posted in the second quarter.
We fully expect operating ratios to trend down through a combination of.
The growth that we reasonably expect overtime.
And that we will produce ourselves.
Under the productivity initiatives, the many productivity initiatives, we have underway.
Our strategy is adaptable and.
We will lean one way or the other.
We're into both as necessary given the environment we're in.
And we're confident that we will make progress toward a 60 operating ratio, we'll get there, especially as we possibly can.
But it is not it's not no longer into 2021 target might it's it's now back to long term.
No I said, we'll get there as fast as we possibly can and we we have a lot of initiatives underway to do just that.
Okay, and then Alan for follow up your your pricing up with the ARPU program, which which is yielding great results are you seeing any increased competitive.
Given your you're focused on pricing or is the industry, taking the opportunity.
To move on pricing as well I'm understand like if others are viewing and as an opportunity to come in and then take away business with your focus more on pricing.
Maybe that's why the extreme kind of volume swings.
Can we have seen increased competitive pressures from truck Theres no doubt and we went through a truck recession last year.
Well, we remain focused during that time period on the long term and long term value creation.
For our shareholders and Thats why Weve got 10 consecutive quarters of RPU ex fuel gross and all three.
Of our of our business units are we're focused on revenue revenue quality and margin improvement, we've got confidence and the strength of our franchise in our markets our customers and our service products and the fact that we can provide a long term platform for growth and you see that reflected in our activity.
Our next question is from the line of China's Chappelle with Evercore.
Yeah.
Thank you and good morning, everyone.
Alan the auto snap back in the third quarter, it's been quite noteworthy I'm not just the near segments that even across the industry a double digit jumps almost every single week since the third quarter started how much of that from your conversation with your customers is a need to restock aggressively versus maybe how much of it is.
The network that you guys have two relatively outperformed the rest of the industry.
Hi, John I'd say, it's very valid point, that's kind of one of the.
The issues that we've highlighted going forward. There there is their low inventory levels everywhere. We believe that auto finished goods finished vehicle inventories are close a nine year low at this point just look at.
Retail sales of the May inventories sales ratio and retail was at the lowest point in eight years. So some of what we're seeing right now is an effort to rebuild inventories than we saw our auto customers kind of adjust their normal July shut down time period in an effort.
To rebuild inventories on some of that will get pushed back until later in the year. So again as we talked about just hasten growth that we've seen over the last 10 weeks, we do not reasonably expect that.
But we are encouraged by the strength they auto industry and as a result, we're seeing our steel customers are out.
They're raising their rates and they're adding capacity back as well.
Great. That's very helpful and Alan I can give you for the follow up to you mentioned the intermodal service offering a couple of times of new ones in the grille part of the country just.
Just curious on the initial uptake response, so far from the customers on the one hand, you would think the cost proposition rail is even more compelling just given.
The pressure the most industry dive right now on the other hand, given the uncertainty in the market, maybe a little bit reluctant to to transition more to the rails. How the initial response been so far on some of those new offerings.
It's been very strong.
Summers are very interested in the product that that Norfolk, southern delivers and a lot of that has to do with the strength of our franchise. We've got the Rome, most robust intermodal franchise in the east It is a powerful asset for Norfolk, southern for our customers and our shareholders.
We've made this investment ads, it's already in the ground and it's created this this network that is unrivaled in the east.
Which is of where a majority of that consumption and the manufacturing take takes place and so we grew up as you saw by 11% in 2017, we grew up by 18% and 2018. It took a pause last year during the during the freight recession.
We're very confident and the strength of our franchise our market approach service product that we deliver and the fact that it's going to be a unique platform for growth for us.
In the long term and near term.
Our next question, it's from the line of Allison Landry with credit Suisse.
Hi, good morning.
Jim So, yes, indeed, starting in about a month or so.
Can you talk a little bit about the initiatives that so on top of first in terms of the network any ideas that she may have already box in the table on her time that you PRC at back maybe that are fine or are additive currently doing and then where well my style and will report directly to Cindy.
We continue to roll out BFR.
Cindy and I are are very focused on maintaining the operational momentum that we have demonstrated in 2019 and 28 in 2020. So we together view this as an opportunity to continue to push hard on productivity.
As we've said that's a key part of our strategy.
And and the measures that we take will be similar to the measures we have taken thus far to work to.
Enhance labor productivity fuel productivity asset productivity and on down the line.
And I are both also focused on maintaining a high level of service while we pursue these productivity initiatives. That's that's critical to our long term success. That's that's the basis for our ability to to grow the topline in the future.
And lastly, I would say that the Sheehan Ari and the rest of the border are closely aligned on the central importance of safe operations will be looking for every possible way to continue to drive safety performance as well so at a high level that will be the.
The agenda and.
The alignment that the two of us.
Yes.
Okay. That's that's really helpful.
Then just as my follow up their way to help us think through our quantify the cost savings are the our benefit from.
The network changes that you made and then more broadly do you see opportunities for further rationalization and whether that yard.
They are fulfilled either off and possibly a.
Hey, considering any change in the call network. Thank you.
Mike.
Yes. Thank you Allison like I noted yeah. We we are still going to continue to look at structural opportunities for cost reduction we're going to find terminals that we can live without and still still provide the service that we need so we're going to push ourselves.
To to do that ill note.
We we change the operation at the two humps this quarter and that's in addition to the two that we did last year, Jim noted the locomotive shop.
Of closure, where we've just gone down to one heavy repair shop.
We're reducing our production gangs.
Here are the rest of the year for a capital reductions. So we're doing a lot of things change the structural costs of the network, but that doesn't mean that we're going to stop what everybody is out there looking everyday hernan over every rock.
To try and continue to find ways to do that and yes terminals will be a part of that just like we've always talked about.
We've got more in the Hopper will continue to look at that.
But.
But it all the with an eye toward continuing to provide service product that we've committed to like we have so more and more in the gas tank and more to come in and Allison. This is mark.
I think we've mentioned before.
You can probably pencil in $10 million to $15 million for for the homes.
He chose free for each of the two homes that we've closed so to your specific question on.
Quantifying them, that's that's the number.
Our next question, it's from the line of Bascome majors with Susquehanna.
Yes, Alan looking at your coal volumes, specifically in the domestic utility side. The 10 years ago that was 30 million tons in the second quarter. This year, it's closer to 6 million times.
With quite a bit of that just coming out in the last year can you help us understand some of the differences between the structural pressure that you're feeling this year and what I mean by that is have you seen any newer accelerated celebrated customer retirements in the domestic utility side.
Plants, where that's just gone and gone forever.
In the cyclical we know what I mean by that it's just the pressure from natural gas and how powers being dispatched in just just just lower overall power consumption in the U.S. Thank you.
Hey, Baskin, we understand that that calls and a secular decline were.
When we get that and so what you've seen us do over time as adjust our coal network.
We've we've idled ashtabula.
Short line, some property and our Coalfields we.
We have reorganized our operations in conjunction with our customers in the coalfields into the southern utility market and actually improved service and improved efficiency. So we understand the pressures that we're facing natural gas prices in June were at a.
Hi, good low for the last 30 years.
So thats created some headwinds as we talked about and I also had talked about before that we fully expected that the economic shut down would.
Negatively impact load and and commercial and then and industrial markets for our utility customers. So.
That's where it's headed and frankly, we've got a diverse merchandise franchise that set a record for revenue last year in a pretty weak.
Freight environment and we've got the most powerful intermodal franchise in the east and so we are we're well positioned for where markets are headed.
Okay. So I mean looking into next year, it's I mean, clearly these declines or.
Are pretty substantial mccoll franchise today, I mean, do you expect that to moderate as at least the inventory withdrawal and the in the power consumption decline inevitably cyclical we adjust or should we just trying to model is zero several years out into domestic business to be safe. Thank you.
Yes, there is theres going to be half a billion tons of coal produced in United States. This year.
We're going to haul our share of it.
There will be close to half a billion tons of coal producing United States next year now, we're we're going to continue to participate in that market, where drive shareholder value and we're going to continue to look for opportunities within our strong merchandise and intermodal market to compete with truck.
Thank you our next question coming from Atlanta, David Vernon with Bernstein.
Hey, good morning, guys Jimmer out. This question for you on the commercial side, if we kind of look past the monthly sequential gains from the cold and volatility and we think about where norfolk's going to be a year year to for now presumably you're still going to have a little bit of INO, our disadvantaged year eastern tier how is that can affect kind of your ability to.
Get back to a market level of growth or should we not be thinking that that that cost position relative to CSX is going to impact the on the growth rates across the business.
Yeah, we're going to we're going to continue to focus on revenue.
And revenue quality.
And we performed pretty well there. It's you can see that in the numbers. We are we're fully intend on competing with truck, we're going to deliver and we are delivering a best in class service product, we're implementing customer facing technology, we've got a consistent and reliable service product schedules at our customers.
Value. We also have there's no surprises approach to PSR, and which were collaborating with our customers on changes that we're making to the network and so they know they're confident that we're going to partner with them and continue to provide them with a platform for growth.
We serve a majority of consumption and manufacturing in the United States. We're aligned with over 250 short on partners. We've got a best in class industrial development team that is developing a robust pipeline of new opportunities.
Near shoring Reashure and onshoring is only going to assist freight demand in the United States.
We serve more north American vehicle production than anybody else and more integrated steel mills.
Than anybody else, we've got a powerful franchise.
We're very confident and where we're headed with this thing it we've got it positioned well aware that consumer and the transportation markets are headed and that's in areas in which Norfolk Southern excels.
So no no sort of direct impact on the real competitiveness and it's more about what's happening in truck market for growth.
Yeah, we are going to continue to focus on a truck market for growth and you're going to see us continue to be aggressive and kinetic in offering new service products at our customers value.
We are aligned with the best channel partners in the intermodal industry. When we're in good shape going forward. This is where the long term markets are headed.
Thank you.
Our next question is from the last Justin long from Stephens.
Thanks, and good morning.
Maybe circling back to the operating leverage question and asking it a little bit differently and as you look into the back half third and fourth quarter do you think that operating expenses can decline at a rate it faster than revenue and then also mark if if theres anything she.
Well I'm in that second half in terms of gains on sale, you're expecting or anything outside from an operating expense perspective.
Thank you Justin So I'll answer the second one first we don't anticipate any unusual activity in the second half.
Significant gains or significant write offs at this point in time, otherwise, we would have probably taken them.
So nothing nothing at this point of course I do believe in the third quarter of last year.
You'll recall there was some account receivable.
Our provision that was taken that will impact the comparison, the third quarter, but I'm sure you'll have that in your models.
And the first that it truly the trajectory of Opex will be influenced.
Impart by volume I made a volume steps back down we will be attacking opex even more.
If if volumes.
To continue on an upward trajectory.
And we're still going to put pressure on certain lines of opex to reduce them all with structural things and we're going to try to limit volume variable type of increases that would typically come.
And as we say we were going to try to leverage.
Leverage the piano with any with any growth that Mike.
That said there is fuel cost is creeping back up.
No I think our average price at the pump in the second quarter was under a dollar per gallon.
So that will go up.
In the in the back half of the year I think right now it's already trending in the dollar 20 something range.
So that so that will be something that we are fighting against and you know since I bring that up we will have some fuel surcharge probably headwinds in the in the third quarter because that's on a lag.
That 98 cents of range in the second quarter will hit our fuel surcharge in the third quarter, because it's it's a leg.
Our next question is from the line of Brian Ossenbeck with JP Morgan.
Thanks, Good morning come back to intermodal, where you clearly focusing a lot of.
Time and effort, there and see growth down the road.
Could you remind us how the clean cheating.
Programs going on within those intermodal terminals is that still pretty well.
Developed or is that something that you have yet to see much benefit from especially if you're expecting for this to be one of them to the primary levers to drive growth across the network as you look out over the next couple of years.
Brian We continue our progress and making our intermodal network, both within the terminals and in our try and performance more efficient and as Mike has talked about we continue to look for opportunities to.
Ex intermodal trains and knows that as intermodal and merchandise revenues come back.
So.
It's going to its going to fold into existing tracks and in the third quarter, we're going to be rolling out a.
Optimized.
A terminal optimization system across our our intermodal network, which is going to offer even further improvements in the and the service that we provide within our terminals to our customers as well as the.
The efficiency of our terminals that you know I also want to make sure that is really clear we're focused on growing merchandise just as much and we're putting out new products and merchandise based on this strong and reliable and consistent service product that we've got that's going to allow us to take share from truck.
Well and pass.
We have after all.
Hi side, well, that's exactly right, Mike referenced the capacity dividend, Brian and so that's that's where you were going to old new business into existing operations, which is going to give us great operating leverage going forward as as we continue to grow.
Okay, a quick follow up from Mikes and.
Congrats again on the retirement and the recent success with top 21 and phase three.
Well, what do you think would be as we look forward what are the biggest challenges you see structurally on operating side as you look over the next next couple of years and how do you think.
You would be addressing those.
Oh, I guess I'll take away the the answer of volume, there's a big Big challenge. So maybe volume agnostic what are some of the bigger challenges and if I'm not trying to see opportunities as well.
In terms of what's left for it for the network. The next couple of years in into long term.
Well, thank you and the opportunity is the fact that our operation leadership team is completely bought into an aligned with the PSR principles. So they understand them. They know one and they are implementing them. So so they are using that everyday to find ways.
To be more productive.
But still provide the good service product. So I think that's the great opportunity is we've got a great team out there that everyday is looking to turn it over the rocks and find what they can do.
And then the network planning an optimization group that we put together. That's this really helped drive the top 21 iteration take the structural costs out they are in place continuing to look at long term structural cost changes and these are the terminals that.
We're talking about and.
And then and then the last thing is we continue to have technology implementation across the operating division, whether it's in engineering to look at where we need to replace ties in rail and making sure. We're doing it the most efficient way in the and the safest way how.
We do train handling so you know we we've just got so many opportunities out there on the railroad to continue to provide the service product that allows marketing to grow the business, but also folks know how to take out tactical and structural costs and then utilizing two.
Technology that we put out there.
Across the river.
And that and the technology really is driven.
Our fuel efficiency that you've seen over the last couple quarters and that will continue to be another opportunity for cost going out the door, because that's nothing but.
Dollar savings right to the bottom line and it fits in with the SG, making us.
A really really good partner there.
Thank you our next questions from the line of Walter Spracklin with RBC capital markets.
Yes, thanks, very much good afternoon, everyone I want to go back to him to one of the questions on operating ratio I understand that looking out to next year or in the back half I should say is a little difficult given the macro uncertainty.
So I wanted to kind of take out that uncertainty and give you a scenario where.
You know volume is down more or the volume rebound continues and year over year down just modestly.
In that scenario not guidance, but in that in that scenario, where we have volume down modestly could you do better in terms of operating ratio than you did last year.
Walter I think in the in the current to environment of uncertainty, it's very difficult for us to sign up for any scenario, even a hypothetical one.
But I would say this we are committed to driving toward 60 operating ratio irrespective of the macro environment in which we find ourselves and that means that if if we are unable to grow volume and revenue at the pace, we would like we will.
Attempt to make it up through productivity improvements and I think we demonstrated that yes. The operating ratio in the second quarter was not what we wanted it to be and not what it needs to be but in the midst of that.
We committed to productivity improvements and we demonstrated that commitment through the actions we took.
Okay.
A follow up on yields.
It is regardless of based price I don't know if you can give me an indication X coal what the mix effect.
It is expected to be in the back half just kind of should it be additive or negative I would assume with automotive in some of the other products that are higher yield coming back that should be positive, but as we make sure.
Walter Good morning, and it will be negative as intermodal as a growth driver for us So that's.
And that's negative with respect to to yield certainly positive with respect to revenue growth.
Our next question is Fineline as David Ross with Stifel.
Yes, good morning, gentlemen, I just wanted to circle back on intermodal, obviously, much better third quarter to date.
In the second quarter International is a lot weaker than than domestic how would you characterize July so far in the international versus domestic.
No. They both have improved quite a bit at what you're seeing is theres not a lot of exports right now there's heavy demand for imports and the and the international space since inventories are so low you're seeing a lot of stuff.
It's hitting the west coast.
As opposed to come and all the way around to the east coast and so that's creating.
Trans loads and to 53 foot containers out on the West coast, which is helping the domestic demand, but you know I should say that we do have several ports.
That we serve were important demand right now is very high as well.
And when you talked about the new service offerings.
Is that fair to say that those are.
New intermodal lanes or new intermodal corridors in the question is are they.
I guess new to intermodal as if.
A shipper did not have that intermodal choice versus truck in those lanes before or are they just new to Norfolk southern.
They're certainly knew they are they are a new level of product that is that not out there in the marketplace right now or had not been.
Yeah, we're confident that it's gonna be it's going to help us growth moving forward as I noted, we're going to be very aggressive and launching new products based on the capacity dividend and service product that Mike and his team our delivery.
And the good news most of that falls into the current intermodal network that we had.
We've got our our investments in place in our intermodal network.
Thank you.
Our next question is from the line of Jason Seidl with Cowen.
Thank you operator, Jim and team good morning, Mike Congratulations on the retirement and let's see if you're listening welcome.
One of the talk a little bit about your end markets and.
So to give us an eye.
I'm sort of what percentage of your end markets sort of started to come back into queue on what per spend what percent are out still here looking as we operate in creek.
Jason.
Now we as we've talked about about 70% of our business is tied to the consumer economy, and that's certainly has as improved.
Sharply in June and July ended we maintain our optimism for that through the third quarter.
We also saw some improvement as well, so and they energy market, but you're still talking about pretty difficult year over year comparisons. There. So we're seeing left and all of our markets sharper left within the consumer oriented products.
We serve.
Okay, that's good color and the other one and Jim this might be one for you, but you know you gave a joint venture. The Panam you know up in new England that railroad has been put up for sale.
Wondering is this something that Norfolk would look at.
And sort of you know how would it work if another class one took over that railroad.
Oh PNM southern is an important part of our network. It is our presence in new England, and we're committed to maintaining a presence in new England as part of our overall network footprint and let me leave it is done.
Thank you.
At this time. This includes a question answer session now now hand, the call back to Mr., Jim Squires for closing comments.
Thank you for your questions. This morning, before we close I want to take a moment to affirm for everyone on the call whether youre, an investor customer employee or other stakeholder of our company Norfolk Southern's commitment to diversity equity and inclusion.
At a time when our society is experiencing dramatic upheaval, it's important to state and this forum that such a commitment is essential to delivering shareholder value.
By pursuing measures that ensure inclusion and equal opportunity inside our company and in our interactions with others, we will serve our bottom line and our shareholders well.
Thank you and be safe.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
[music].
[music].
[music].