Q2 2021 Norfolk Southern Corp Earnings Call
Greetings and welcome to the Norfolk Southern Corporation.
<unk> second quarter 2021 earnings call.
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A brief question answer session will follow the formal presentation.
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And now my pleasure.
It's introduced Mega and ACA Massey senior director of Investor Relations.
Thank you Ms. Ackerman you may now begin.
Thank you and good morning, everyone. Please note that during today's call. We will make certain forward looking statements, which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual.
Clearly reports filed with the SEC for a full discussion of those risks and uncertainties, we view as most important.
Presentation slides are available at an S Corp, Dot com and the investors' section along with a reconciliation of non-GAAP measures used today to the comparable GAAP measures.
Full transcript and download will be posted.
After the call. It is now my pleasure to introduce Norfolk, Southern and <unk>, Chairman, President and CEO, Jim Squires.
Good morning, everyone and welcome to Norfolk, Southern's second quarter 2021 earnings call John.
Joining me today are Cindy Sanborn, Chief operating Officer, Alan Shaw, Chief Marketing Officer, and Mark George.
Chief Financial Officer.
Building upon our momentum to start the year or.
And our team delivered another record setting quarter as dramatic improvement in both revenue and volume up, 34% and 25%, respectively, outpaced and 11% growth and expense.
And while the year over year.
Improvement is aided by easier comps from last year's economic shutdown, our performance and the quarter also improved sequentially and a number of ways as shown on slide 4.
Our results include second quarter Records for net income and earnings per share and all time records for operating income and operating ratio, which was 50.
1.3% this quarter.
We're excited to share more details about our results, but first I want to take a moment to thank each and every 1 of our employees for helping us run a more efficient and safer railroad.
While serving our customers.
And I'll now turn to Cindy to go through our operations.
8.
Thanks, Jim and good morning.
We accomplished a lot this quarter and I am most pleased with <unk> progress during the past several months, we continue to get more productive face our challenges head on and seize the opportunities we are creating.
And the second quarter, we saw the benefits of a structurally.
Lower operating cost base, coupled with an operation that successfully absorbed increased volumes and the network.
Turning to the operating metrics on slide 6 you can clearly see the operating leverage generated and the quarter leveraged that flow directly to the bottom line.
Our operating discipline enabled us to handle.
Cindy 85% year over year volume increase with 8% fewer people and our workforce and a 1% decrease and active locomotives.
This success shows our improvements and train size, reflecting our goal of absorbing more business into our existing operating network wherever possible and further driving productivity.
<unk>. These gains were achieved in part by the increased deployment of distributed power and more blending of previously separate traffic types on the same train.
We will continue to unlock train size increases through targeted siding extensions on key routes where train length is currently limited.
Terminal capacity enhancement.
<unk>, which we've achieved through more efficient operating practices will also be a key factor and absorbing and process and growth on these larger trains and.
Increased train size promotes better fuel efficiency and our progress this quarter reflects our commitment to closing the fuel efficiency GAAP with our peers.
Our mechanical team, which.
<unk> and it is the maintenance of our highly reliable locomotive fleet pulling these larger trains has been crucial to many of these accomplishments and I will give you more detail on that a little later in my presentation.
On slide 7 you can see and the second quarter, we showed sequential improvement and terminal dwell and train velocity. After we got.
Through the severe winter weather and the first quarter.
However, our progress was uneven and we lost ground in June and part due to several discrete but geographically impactful operating disruptions.
We aren't satisfied with our service levels and we are working extremely hard to seize the opportunity <unk> presents to recover faster.
And from disruptions.
As the graph show, we resumed our improvement in July we.
We are committed to continuing to improve service levels and running a faster railroad not just because a faster railroad is a lower cost railroad, but also because speed generates capacity for us to take on additional traffic within our existing.
Train network.
I'll move to slide 8.
During the quarter, we strive to deliver a consistent service product, even with significant volume changes by focusing on the consistency and productivity of our yard and local operations.
We are teaching and equipping our field.
Interest to better measure the work our yard and local crews do and answer some important questions.
Does the number of assignments working match the car volumes flowing through a terminal or territory.
Are we getting full value out of each resource and our yards.
It's the right balance of overtime costs.
Where are there further automation or process opportunities to help us reduce support costs, including clerical staff and mechanical presence.
We are implementing technology to provide better and more timely data to answer these questions, which helps us reduce direct operating cost and improve service consistency.
And several.
Several locations, we've renewed our focus on more efficient remote control operations, which have been facilitated by the changing nature of the work over the last year.
Local operations scheduled and properly sized to volumes enable us to be more predictable to our customers and move cars quickly.
Having a higher balance of cruise assigned to road.
Train service, while creating capacity within the terminal through process enhancements and makes us nimble and responding to market changes and reducing our fixed costs.
Local service is at the core of our service product and these changes are designed to improve that product.
So far we have reduced the cost per yard and local crude.
<unk>, 7% versus last year and expect additional progress as the year continues.
And a moment mark will discuss the benefits of reduced head count and employee activity levels and constraining overall compensation expense as we absorbed volume.
Our focus on yard and local productivity has played a pivotal role and driving those benefits.
<unk>.
We pursue targeted initiatives such as these with an eye towards the next generation of modern railroad and which we are bringing to life today.
We continue to empower our workforce to the delivery of mobility solutions and have distributed 8000 smartphones to our teeny employees to facilitate improved reporting and to streamline.
<unk> and the process of keeping trains moving.
And the third quarter, we will begin rolling out a next generation local train reporting application to improve our visibility and customer service for the first and last mile.
We are also and the final months of deployment of our current phase of the mobile track authority application that facility.
And <unk> more efficient coordination between engineering and dispatching functions for right of way maintenance activities.
We are at a very exciting time for our company and industry, and which we have ample opportunities to drive customer and shareholder value through both operational improvements and technology a powerful formula.
Earlier.
Pension and the role of the mechanical team has played and our P. S. Our success. So I thought it would be useful to explain their crucial role on slide 9.
P S. Our railroads Norfolk southern included and.
And up needing fewer locomotives.
What our mechanical Department has done is to take that initial Annie and use it strategically to call the worst.
Performing units and to make our locomotive fleet more homogeneous.
And those changes unlock repair productivity I think about the benefits and repairing newer and fewer locomotives, which drove down the number of units out of service for repair.
That started a virtuous cycle of improve reliability with 175% improving.
<unk> and the days between unscheduled events to a shop versus pre <unk> levels, meaning that when units do go into the shop, our craftsman can spend more time on preventive maintenance and instead of triaging issues.
This cycle repeats itself and ultimately supports the efficient movement of trains and serving our customers fewer and more reliable.
Liable units also require fewer resources, so we need fewer servicing facilities and have fewer people maintaining locomotives.
This is just an example, a big example of Norfolk Southern's <unk> transformation.
These changes are purposely aligned with our overall fleet strategy, including investments and our fewer but better you.
And through our DC to AC conversion and.
Energy management solutions, and predictive analytic tools for maintenance planning and failure prevention.
And when taken as a whole the benefits of this strategy flow through our materials fuel and compensation expense lines, while ensuring we have a robust fleet capable of supporting profitable growth.
Now I'll turn it over to Alan.
Thank you Cindy and good morning, everyone.
You can see on slide 11 that we are approaching pre pandemic revenue levels.
However, the composition of our business has changed dramatically due to the secular trends and the overall economy that were accelerated by.
Units and Eric.
Norfolk Southern is positioned at the forefront of these shifts due to the unique advantages of our powerful consumer oriented franchise and the diverse industrial markets we serve.
The progress we have delivered amid dynamic business conditions underscores the value, we provide and the markets.
<unk> we serve.
Norfolk Southern's network directly connects to the majority of consumption and manufacturing and the United States and is a vital resource for maintaining the flow of goods to support the economy.
We are building on the inherent value of our network by working to provide our customers with the digital.
Digital logistics solutions, they need to compete and grow and and evolving market.
The sustainability advantages of the Norfolk, Southern franchise, and deliver a competitive advantage and provide customers with solutions to their carbon offset goals.
And our and accelerant to growth.
And the second quarter of 2021 we successfully capitalized on opportunities by leveraging productivity enhancements and collaborating with our customers.
As a result second quarter revenue and our non energy markets exceeded pre pandemic levels by 4%.
Growth this quarter was driven by.
For facing and industrial segments, which helped to offset sustained headwinds and our energy markets.
Revenue and our energy related markets returned to just over 2 thirds of pre pandemic levels and the second quarter of 2021.
Our market position enabled a quick recovery and consumer and industrial.
Industrial markets, almost fully offsetting the 50% decline and our energy revenue.
Despite the sharp decrease and there is this historically profitable segment, we reduced operating ratio levering the strength of our unique franchise to target segments of the $800 billion truck and logistics markets.
With a sharp focus on productivity.
Turning to slide 12, our quarterly volume and revenue improved significantly from pandemic, Lowe's and all 3 business units, reflecting our ability to capitalize on and build on the momentum of improving economic conditions.
Total revenue for the quarter.
Quarter was $2.8 billion up 34% year over year on a 25% volume improvement.
Rising fuel prices and price gains drove a 7% improvement and revenue per unit led by our intermodal franchise, which delivered record breaking revenue per unit and revenue per unit less fuel.
Sequentially volume and revenue improve and all 3 business units over the first quarter in line with the accelerating economic recovery.
Beginning with our merchandise segment, both volume and revenue improved 29% versus the second quarter of 2020 driven.
Driven primarily by recovery from COVID-19.
And related shutdowns and the prior period.
While automotive continued to face headwinds associated with the semiconductor chip shortage shipments and the second quarter were up 122% year over year against easy comps associated with near complete shutdown of vehicle production and the second quarter of last year.
And our steel franchise also delivered strong growth this quarter up 67% as record levels steel prices and elevated demand fuel production activity.
Combined gains and automotive and steel volume represented roughly 63% of total merchandise growth for the quarter.
Revenue.
Revenue per unit was flat while revenue per unit, excluding fuel declined slightly.
Driven by mix headwinds and chemicals and automotive.
Turning to intermodal our powerful franchise delivered record breaking revenue revenue per unit and revenue per unit less fuel for the quarter.
The second quarter of 2021 and marks the 18th consecutive quarter of year over year growth and revenue per unit, excluding fuel for our intermodal franchise.
Strong consumer demand and tightness and the trucking sector drove growth for our domestic service product.
Domestic shipments were up 17% year over year and the second quarter.
And up 4% for on the same period and 2019.
International shipments were also strong and the second quarter, improving 26% year over year on sustained high import demand but.
But were down 3% from the same period and 2019.
Revenue per unit gains were driven by increased accessorial.
<unk> revenue.
Higher fuel surcharge revenue and price gains.
Approximately 50% of the revenue per unit gain was driven by higher can and container storage time on terminal due to supply chain recovery challenges.
Lastly, our coal segment experienced some bright spots and the second quarter.
<unk> due to higher demand levels, driven by global economic recovery and weather events.
Coal shipments improved 55% year over year with strength and both the export and utility markets.
Revenue per unit decreased slightly due primarily to and negative mix experienced and our export markets where growth.
Driven by strength and the lower ARPA you export thermal market.
Moving to our outlook on slide 13.
We expect the current economic momentum to continue through the end of the year and are raising our guidance for full year revenue growth to approximately 12% year over year.
The overall economy continues to surprise the upside with forecasts for 2021 on GDP growth now at around 7% and approximately 5% for 2022 and.
Industrial production is forecasted to increase 6% and 2021 and north of 3% in 2020.2.
<unk> was increased manufacturing coupled with record low retail inventories high savings rates and increased energy consumption I'll set the stage for continued growth and the second half of the year.
Merchandise growth will be led by strength and steel markets as low business inventory to sales ratios and sustained.
Demand for durable goods drives manufacturing activity and the second half.
We are well positioned to capture opportunities associated with current strength and the steel markets as our network serves more integrated steel mills than any other railroad in North America.
Merchandize energy markets will benefit from increased travel.
<unk> and commuting activities as businesses continue to reopen and virus restrictions are lifted.
Pulp board and plastics volumes are also expected to increase as personal consumption drives demand for packaging.
Merchandise gains will be partially offset by a year over year decline.
Line, and automotive shipments and the third quarter due to planned production downtime associated with the semiconductor shortage.
Demand for international trade to support recovering global economies is expected to lead second half growth and our intermodal franchise.
Domestic intermodal demand will continue.
Will improve as well with consumer spending and e-commerce forecasts strengthening through the end of the year and ongoing capacity constraints and the trucking sector driving more opportunity for highway to rail conversions.
Our coal franchise will continue to capitalize on near term opportunities to support global.
<unk> energy demand and steel production.
Volume and the second half of 2021 is expected to improve year over year, driven by export markets benefiting from high seaborne coal prices.
Making U S coals more competitive and the global market.
Demand for domestic met.
Net to support growing steel production activity is also likely to produce year over year growth.
Gains in these markets will be partially offset by expected year over year declines and utility volume as this market deals with unit retirements coal supply and planned maintenance outages.
Volume.
Agility is an ever present risk and the coal market. So we are closely monitoring and geopolitical trade tensions and coal production both of which have the potential to influence results.
Overall, we expect economic conditions to be favorable for Norfolk southern growth through the end of 2021.
We are confident and our ability to leverage the strengths of our unique franchise and continue to drive revenue and margin growth.
I'll now turn it over to Mark who will cover our financial results.
Thanks, Alan on so.
Slide 15, you see the reconciliation.
<unk> and of our Q2 reported operating ratio and earnings per share versus 2020.
The operating ratio of 58, 3% represents a 240 basis point improvement.
We had $67 million of property gains and the quarter of which there was 1 major transaction that closed at the end.
Peter and resulted in a $55 million gain.
We view this single transaction is incremental to our normal yearly operating property gain guidance of $30 million to $40 million and it alone represents 200 basis points of the operating ratio improvement this quarter.
Earnings per share.
And at $3.28.
Was $1.75 higher than prior year.
Aside from the 17 cents goodness from the property gain there was a state tax law change that resulted in a favorable adjustment to our deferred taxes of 9.
Moving to slide 16, Alan.
Alan and walked you through.
Of the quarters of the 34% increase in revenue.
Including the 25% growth and volumes.
And at the same time, we contained growth and operating expenses to 11%.
As we harvested additional benefits from workforce on asset productivity.
The volume growth coupled.
And with the productivity drove strong incremental margins again this quarter, resulting in an operating ratio that was a record low 58, 3% improving 240 basis points year over year, and 320 basis points sequentially versus Q1.
Including the 200 basis point tailwind.
And from the major property gained.
Our operating income at.
At 1.1 dollars 67 billion and the quarter is another record up $557 million or 91% year over year.
And we generated free cash flow of $1.4.7 billion through 6 months also.
<unk> record and that represents an increase of $447 million or 44% versus the same 6 months last year.
Moving now to a drill down of operating expense performance on slide 17, you'll see that operating expenses increased $157 million or 11%.
Scent and fuel was the biggest driver of the increase with price driving expenses up $83 million.
Usage increased due to higher volumes, which was partially offset by another quarter of fuel efficiency gains a 4% improvement and the quarter.
The increase and purchased services and rents is driven by volumes.
Although we managed to keep the increase in these categories well below the volume growth rates.
Comp and Ben is up 6% with savings from head count being down 8% year over year offsetting increases in pay rates and overtime.
Higher incentive compensation and the quarter was 30.
<unk> $39 million, reflecting the improved outlook for the year and low accrual rates of last year.
Despite the 25% growth and volume materials were actually down year over year from lower spend associated with fewer but more productive locomotives. Thanks to the rationalization of your equipment last year.
And the initiatives that Cindy described earlier.
The big item in the materials and other column is the favorable compare on gains from property sales in Q2, and that was $67 million and the quarter versus only $2 million last year.
Turning to slide 18.
You'll see that other income net of $35 million is $14 million or 29% unfavorable year over year due primarily to lower net returns on our company owned life insurance investments.
Our effective tax rate and the quarter was only 21% lower than we typically model and.
<unk> was primarily from the benefit associated with the state tax law change.
Net income increased by 109% while earnings per share grew 114% supported by the nearly 3.4 million shares we repurchased and the quarter.
Wrapping.
<unk> up now with our free cash flow on slide 19.
And as I mentioned free cash flow was a record for the 6 months of 2021 at 147 billion.
Buoyed by very strong operating cash generation.
And relatively modest property additions of $627 million, thus far and.
And that and.
And that translates to a free cash flow conversion of 99% through 6 months.
Although we still expect property additions to ramp up on the balance of the year and hit our $1.6 billion guidance number.
Shareholder distributions through 6 months exceeds $2 billion and.
The year to $870 million versus prior year, thanks to our recently increased dividend and the meaningful increase and our share repurchase activity.
And with that I'll turn it back over to Jim.
Thank you Mark.
And when we spoke last quarter I took the opportunity to share our company's long standing commitment.
<unk> to sustainability.
Along those lines I am excited to report 2 brand new milestones and our journey.
Earlier this quarter, we became the first North American class 1 railroad to issue, a green bond launching $500 million and green bonds to fund sustainable investments to reduce our carbon emissions and.
And partner with customers to do the same.
As outlined in our green financing framework potential projects range from improving locomotive fuel efficiency to fostering truck to rail conversions power and company operations with clean energy to increasing the use of energy efficient buildings and technology and supporting reforestation.
And projects that restore natural landscapes and offset carbon emissions.
In addition to our green bonds, we achieved another significant milestone earlier this month with the approval of our science based target.
Our commitment to reduce emissions intensity by 42% in the next 15 years.
These 2 steps are a critical part of our shared commitment to sustainability with our investors customers partners and communities underscoring our resolve to be an even bigger part of the solution.
Before we open the call to Q&A and I'll take a moment to provide our updated outlook based on the current economic.
<unk> environment.
And as Alan mentioned, we are even more confident about growth for the balance of this year and we now expect revenue to be up approximately 12% year over year.
Strengthen our consumer oriented and manufacturing markets will drive the majority of the growth and the near term upside and coal markets will provide more of a lift this year than previously.
Expected, though the market remains challenged and the long term.
We are also succeeding and driving productivity into our operations and as a result, we got onto our 60% run rate here and the second quarter.
We expect to maintain this <unk> level for the balance of the year, which translates to at least 400 basis points.
<unk> improvement for the full year versus our adjusted 2020 result.
And we will build upon this momentum for more improvements in 2022, and long term sustained value for our shareholders and customers.
So with that we'll open the call to your questions operator.
Thank you.
And then.
<unk> I think a question and answer session.
And if you'd like to ask a question. Please press star 1 on your telephone keypad and a confirmation tone will indicate your line is that the question queue.
And if I start to accumulate to remove your question from the queue.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Due to the number of and.
I would come back and so on the call today.
Getting everyone to 1 question to accommodate as many participants as possible.
Thank you and our first question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.
Hey, Thanks, and good morning.
Maybe if I can just pick up where you left off Jim on the guidance, particularly for the operating ratio guidance. So.
And joining obviously there had been some service dynamics that have deteriorated and in the quarter not just necessarily for Norfolk, Southern and certainly that's more of an industry comment, but I'm kind of curious how you think about resource management and the back half of the year. So it sounds like Capex is going to ramp back up to sort of get back on run rate for the full year target and we think about head count how do we think about some of the.
Other resources that maybe you have some levers that you can pull and kind of how quickly do you think service can kind of ramp up so a few questions built in there, but really kind of embedded in that <unk> guidance, which is obviously better than what you gave us before and the context of what we're seeing with the service.
Good morning, Chris.
Let me, let me start and then I'll turn it over.
Cindy to talk about some of the specific actions, we're taking on the workforce front, we continue to see opportunities for workforce and other productivity and the second half of the year. Yes, we are facing some spot labor shortages, but theyre just that systemically, we think we'll manage and that we will continue.
Continued to generate labor productivity and the second half and fact.
And that should that should translate into into favorable results for for expenses and for the bottom line as well, we mentioned as part of the overall or guidance.
The expectation for revenue revised expectation.
Revenue, we took that ups on too. So you put the 2 together and that gets you to the new guidance on the <unk>, which is more than 400 basis points for the year, Cindy talk a little bit more about what we're doing on the resource side sure Jim. Thanks.
Thanks, Chris So.
Think about where we started the year, we had planned to higher.
Patients were going to be broad based we expect it to gain productivity and our workforce throughout the year and largely has played out that way.
And my my prepared remarks go into some more detail on that.
I will say that from standpoint of hiring where we are hiring there were a few higher group locations specific.
Areas, where the job market is extremely tight and and so we are experiencing that and our ability to bring on new employees.
So, but it's fairly localized it's not it's not broad based.
To mitigate that we pull on some of our typical net.
Adams.
How we deploy people through what we call go teams.
Where we have employees that quickly can go into areas and and support the existing crews that are there temporary transfers.
And net transfers and even craft transfers from let's say and mechanical craft and the transportation and.
And in terms.
<unk> of hiring.
Some of the areas that we're working on there to continue.
To be able to get people to come to us we've increased our training wage.
And we've also have some.
Sign on and and retention bonuses for the new employees as they as they come on so so we're working very diligently there.
And it is.
The headwind for us we're watching it very very closely and.
And you.
Tied it to service and I would tell you that.
Our service yes.
As I think about that more broad based and coming into the beginning of the year.
We had fairly strong service measures, we went through a very challenging.
<unk> February and a very strong demand for <unk>.
Volume in March on top of the really low.
Demand for service because of the weather in February and and we started coming out of those challenges in late April and May.
And it felt really.
About where we are.
We headed into June.
We had and I also described this a bit and my prepared remarks.
And sort of a series of events that couples of derailments, not big derailments, but just locations where they were challenging for us and then as we are recovering from that we had some weather events that just a.
Really good on gated the recovery. So June was just a challenging month.
As we came out of the July holiday July 4th holiday, we have accelerated the gains from May and the run rates that we had for may and I feel better and good about where we are we're not satisfied with where we are we want to continue to improve service.
<unk> customers.
But that's largely how I see the dynamic here between resources and service.
Thank you.
The next question on the line of John Chappell with Evercore ISI. Please proceed with your question.
Thank you good morning.
Alan and everybody knows.
And as for RC chip shortage and the impact it's having on the auto industry, but your comments about being down year over year and <unk>, maybe a bit surprising just given your network, it's been a little bit more immune given the heavy SUV exposure. There can you speak to your expectations beyond <unk>, especially you know as you get into that 12% increase and volumes for the full year for.
For the total network what are you expecting from auto is there a massive snapback there were.
The second half kind of looks the same even though the third quarter, maybe a little bit lighter and how does that kind of pretend into next year's view on on the auto market.
Hey, John.
Semiconductors are certainly the headline issue what we're seeing right now is.
About the impact of the Delta variant on.
On producers, who are and and.
And our suppliers I should say and southeast Asia and so we've got a couple of plants that source parts from southeast Asia and Eze and.
Because of issued production issues over there and they've had to pull forward.
The average planned.
Production downtime later this year and so.
And that has had an impact on.
On our production and our volumes right now over time.
Feel like.
We're going to get back to all the plants operating and and.
In August but John.
4 we know that we've talked about that before and had to push it back and then we're still anticipating by the fourth quarter, we're going to be in a position where we're at full production.
Youre right the plants that we serve and the products that we move our and high demand. So they will be the ones that get the first call on.
John J available parts, whether its semiconductors or anything else right. Now finished vehicle inventories to normalize sales are in the teens, it's probably about a third or a fourth of where our customers want them and so we serve more U S vehicle production and anybody else and we serve and industry.
John it's going to be very interested on inventory rebuild.
Both this year and and as we move into next year. So we're pretty we're pretty confident about.
The trajectory of our auto franchise once a week on a well.
This this initial bump.
Okay, and so just to be clear that the 12% total volume growth does that and calling a quote unquote made whole on auto or that's in spite of the auto maybe on weaker than you thought.
Yes, I'm glad you brought that up it is 12% revenue growth.
On upper single digit volume growth right.
Okay, great. Thank you Alan.
Our next question is from the line of Justin Long with Stephens. Please proceed with your question.
Thanks, and good morning.
On the <unk> guidance, just wanted to clarify are you, including the $55 million gain on sale.
And the expectation for 400.440 basis points of year over year improvement and then maybe just thinking beyond even the second half of this year would love to get your thoughts about incremental margins going forward as we look into 2022 and beyond and think about the opportunity beyond.
And as <unk>.
Mark why don't you take that 1.
Sure.
Just on the guidance does include it all and.
So it does include this major property gain that we.
And that we called out or highlighted for you.
And look I think Incrementals, we had various.
And very very strong incrementals here and the first half.
And the guidance implies we're going to continue to have very strong incrementals in the back half, albeit less than the first half we.
We do have some unique headwinds here in the second half that.
And that would include things like fuel.
Fuel is a <unk>.
And with a lot of the incremental revenue.
And that we're adding here and our guidance change is coming from fuel.
So its fuel surcharge, which is mitigating incremental fuel expense. So there's really no incremental margin from that so it tends to dilute.
And what we have organically and the back half.
And then on.
And we will have some diminishing.
<unk> charges, which hopefully help fuel some more volume.
Comes with it and of course, we've got some IC headwind here in the back half as well, but that said Inc.
Incrementals are good and we continue to believe that going into 2022.
<unk> top of that we will continue.
And to improve our or on an incremental basis and.
Buoyed by some of the.
On productivity initiatives and measures that we're on.
Constantly looking at and Cindy and her team are iterating on the <unk> side as well as fuel efficiency that should help.
To again provide us consistent and continued improvement.
And our overall request.
Okay I appreciate the time.
Our next question is from the line of Thomas <unk> with UBS. Please proceed with your question.
Yes, good morning.
And wanted to ask you a little bit on intermodal.
I guess first.
Component just being.
Or do you think about the storage fees.
You alluded to them being a pretty big factor and revenue per unit growth and intermodal do you think they continue at that level and third quarter second half.
And then a big falloff on that and.
Related to that how do you think about the terminal operations are you.
Constraining volume into Chicago and.
And kind of what's the chassis impact on your fluidity and and how you think that may how quickly that may change in terms of capacity constraints.
Thank you.
Hey, you're welcome Tom.
Our accessorial programs are designed to align our mutual goals than us and our customers for more efficient and reliable service product and.
And with the pressure on the drayage community and with the pressure on warehousing Dude.
Half the protocols and labor.
Labor shortages, our customers and certain locations needed more space for storage and so we responded to the market.
<unk> added satellite yet lots and some areas, we have reconfigured our stack configuration and.
Lenders are.
And then international facility and and Chicago.
And we've been able to accommodate a lot more.
International units dwelling on our terminals because that's what our customers need It's and act are accessorial and this case on an activity based.
Service and price that we.
We apply to the market.
We are absolutely focused on programs that encourage the fluidity.
Of our operations and and really our whole clearly is that the accessorial go up because that means that customers are pulling more quickly from our terminals and as and as soon.
Soon as customers pull boxes from our terminals and weaken inbound more boxes and through our terminals.
Not an issue of capacity, it's an issue of throughput and we're working on some some programs to encourage dual emissions with the drayage commodity so anytime that they engage a box they are out getting the box as well.
You mentioned chassis and I am glad you brought that up as you know that.
About 6 weeks ago, we determined that over 5100 of our chassis had a manufacturing.
And the fact, it was a supplier issue and with our uncompromising commitment to safe.
We didnt hesitate to pull those off the street now that happened and a tough environment were already short of chassis.
Cause of elongated street, well associated with the same warehouse and the same.
Drayage community pressures that I noted before I'm very proud of the way that.
We have responded and frankly in collaboration with our customers as well.
And we stood up a number of different locations and.
And the entire network of vendors.
To repair these chassis the brand new process, we've got 80 different locations.
<unk> and which we are on repair and chassis. Some of them are even off of our network and we're working with 4 and roads are western partners.
On a number of gateway locations as a result, we've already repaired 40% of our chassis just and the first 6 weeks right now we're on a run rate where we're repairing about.
10%.
And of those affected chassis and we fully believe that by the end of August we will have repair and about 3 quarters of the effect of chassis, which are effectively anything thats on our network.
<unk> have kind of migrated off network and we're working with the foreign roads to get that back those back to us.
So that.
So that we can.
So that we can repair them.
Net.
We haven't closed gates and want to make it very clear, what we're doing and certain lanes, where we werent at the destination, we have a shortage of chassis.
Cause of this.
Safety recall, we are metering are capping volume and every day. This improves because every day, we're repairing chassis and putting them back into the market and we are relaxing.
The the metering program you can see the impact on our volume sequentially.
As you move out of May into the first half of June and then where we are now and that is.
As we continue to repair the chassis youll see volumes pick up.
So I.
Okay.
Are you optimistic that improvement and as quick or is that kind of slowly I think thats kind of underlying.
<unk>, what I was asking.
Improvement in volumes throughput, yes, you said the key would you expect quick improvement and throughput or is that pretty gradual.
Throughout the second half.
Well, it's going to improve as.
As we get more chassis back into the market and as I.
We're going to have about 3 quarters of these all the ones that are on our arm network repaired by the end of August we're also and starting in September we're going to inject more asset out of the lease market into into our network as well so.
We are applying capacity to the growth opportunities that are out there for our.
Told you.
Okay. That's helpful. Thank you.
Our next.
And as from the line of Scott Group Wolfe Research. Please proceed with your question.
Hey, Thanks, good morning, guys.
Mark I wanted to ask you about some of the cost lines, we saw a step up.
And purchased services and comp per employee and the second quarter, how should we think about that going.
Going forward from here and then similarly, Alan merchandize and coal <unk> was they were both down sequentially and any thoughts on how to think about that into the back half of the year. Thank you.
Hey.
Hey, Scott.
Let me first I'll tackle Cup and behm per employee it did step up a little bit here and.
And the second quarter, frankly, we ended up hitting our <unk>.
There are 2 earlier than we thought to get on that run rate.
Let us to increase our outlook for the year on operating ratio.
So and I think as you know our incentive plan is heavily oriented toward or improvement. So that resulted in an increase to incentive comp.
Accruals beyond what we had initially guided so youll see about an 8%.
Well, sorry, a 16% increase on the.
The quarter year over year and confidence.
And per employee about half of that is is from the incentive the rest is really.
Split between wage inflation overtime payroll taxes. So now I think when you look at.
The balance of the year.
Just look at it on an absolute comp per employee basis first half is roughly around 33000.
<unk> between the first quarter second quarter, and I think it's going to end up being pretty much in that territory.
And the back half as well around 33000, and so pretty pretty specific number there purchase services. It did step up I think we guided you that it would step up there Q1 was Moore.
And anomalous drop there was some deferral of expenses, we were slow out of the gate on some spend.
I do think where we ended the second quarter was in line with what we expected I do expect a modest tick up here and the balance of the year.
For Q3 Q4.
We're containing it it'll be.
Les and revenue growth.
But probably a little bit of a modest tick up and the back half as.
Some of the engineering expenses step up here during the summer months and into the fall and also some of the it spend.
B coming through and the back half.
And the question Scott was on.
On our for you.
We are exceeding our price plan that we had established at the end of the year and we delivered 7% <unk> growth.
For the quarter, despite negative mix and each of our 3 business units.
Within merchandise rock salt was up about 40% are happening.
Happy to handle the business, but thats generally lower rated business.
H, which is.
Very high rated business was down and a quarter year over year and also within the auto industry.
No how disrupted and individual plants have been because of these production issues or supply.
On various issues I should say and.
Okay.
As a result of plants that took some downtime our auto and length of haul was down significantly and the second quarter, which impacted overall RPM and I'll pivot over to call you referenced that and that really is continues to be a function of mix and.
<unk> hi.
Guided to that that that would be pressure going forward.
Within our export thermal market volume was up 250% year over year, we've got a really good service product and that line and and we're leveraging that to the benefit of our customers and to our shareholders at the same time.
On export thermal is up to 50, which as you know has lower rated export met was up 20%. So we handled growth there and any given year, we'd be very happy with 20% growth, but that just creates severe negative mix and frankly within export.
Last year 3 quarters of our business was.
<unk> net this year. It was 50.50. So there you can see the impact on RPM.
Okay. Thank you guys.
Thank you.
Our next question is coming from the line of Brandon <unk> with Barclays. Please proceed with your question.
Hey, good morning, everyone and thanks for taking my question.
And here I guess I was I wanted to talk about network velocity, because it does look like you're running.
Pretty well below where you've gotten and 2019 and even early 2020, obviously with less volume stuff.
Can you talk about that.
And your road service redesign and how.
It could be improving things, but is there mix impacting that aggregated number as well.
Yes, Brandon So let me, let me start kind of at a high level I really see we've got some very strong building blocks and place.
We've continued to.
Bring on some talent with DSR experience.
<unk> and <unk>.
On carrier, who was running our operations efficiency team has now added to his portfolio of responsibility to include our network Operation Center. So we have we have.
Of that and going for us.
We have longer term siding extensions that are going to allow us to continue to grow trains. We are still growing train length as you heard.
How that prepared remarks, but theres still some work to do.
From a.
Consolidation perspective on our line and I do think that.
And that should be.
A benefit to us because it unlocks capacity the fewer trains that we have out there.
And we're working every day to be better so 1 is I.
Think about it and a more short term view.
We're working every day to be better or re crews have come down substantially.
And in July.
And.
As I think about even from a capacity perspective, I'll give you this kind of data point.
Last quarter I talked about Factset on.
Our intermodal trains at about 10%, we're running above 10000 feet.
It's actually the same number this quarter, even with the train size increases that we've seen so we're actually starting with the smaller stuff and being able to put that together.
And then as we grow the sidings will be able to even do more.
And again that just unlocks capacity on our line of road. So so I see a bright future here longer term and then medium term again, it's just basic blocking and tackling and I think a hunting and the NFC has brought some different thoughts into that work group and I think we're seeing those benefits already in July.
Thank you.
Our next question comes from the line of basketball majors with Susquehanna. Please proceed with your question.
Yes, good morning, and thanks for taking my questions I wanted to talk a little bit about intermodal pricing.
So much of that is on long term contracts and there are some.
And are the escalators in there, but can you talk a little bit or is there a lag benefit.
Where you really do see a lot of what's happening and the truckload market and your pricing in 2022 or would that be similar year over year, just any thoughts on on how you get paid for for how the truckers are getting paid today would be helpful. Thank you.
And basket and there is a lag and.
Our long term contracts on intermodal price and so we would expect next year to see.
More improvement and year over year price than where we see this year on some of those deals and I'll just reiterate.
It's.
We're not going to see a huge uptick like you see and the spot market.
We just are not structured to the.
Chase the spot market, either up or down we take a much more measured approach with our customers. They are looking for rate surety as they go out and bid season, and we want them to be successful.
<unk> rely on what the best channel partners and the business, they're focused on growth and we're here to support that growth.
Over time that has generated rate increases and intermodal that exceed both of the contract.
And the spot market within truck and and.
As I talked about we've got 18 straight quarters.
Year over year growth, and our <unk> and intermodal both on and up.
<unk> and down so expect continued improvement as we move through next year don't expect the kind of volatility that youre seeing and the spot market.
And I appreciate it and I am actually.
Orders us to your point about the long term by US with these partnerships as this environment change the conversation about.
How you want to convert traffic long term and work with your partner student and I'm, just curious what might be different too.
And 2 to 3 years.
2 there are a number of trends and that were in place.
Curious that we believe were accelerated by by the pandemic that includes more interest and rail forward positioning of inventory.
Shifts from from highway to rail there is a number of reasons sustainability, Jim talked about that.
It is definitely entering into.
Conversations with our customers and and.
And the intermodal space with our channel partners that is helping them win business as well.
And I look at our industrial development activities and compared to just 2 or 3 years ago and there is a lot more interest and economic development in rail.
Sites so yes.
There is more and more activity more and more discussion and both the merchandise and in the intermodal sphere or.
For highway to rail conversions and Thats frankly, the way that we've positioned our franchise.
And that's why we're so confident about the future.
<unk>, thank you for that color.
The next question is coming from the line of Amit Malhotra with Deutsche Bank. Please proceed with your questions.
Thanks, Operator, hi, everybody and good morning, Alan just following up on.
The chassis discussion I understand I guess the cost to fix the.
Our problem is not very material, but I think it's 15% of the owned fleet for the company.
So just just for my own curiosity is there any recourse or claim.
The customer has if theyre not able to move the boxes out of the terminals and Q2 chassis availability or is this maybe an issue for.
That impacts failure channel partners you can guess.
Give us some color on that and then and then just as a follow up Mark you've been Super helpful and the pass on Opex cadence, you're kind of highlighting some step up and Opex ex fuel wondering if you could just help us put up put a finer point on that and the back half relative to first half and the second quarter.
Revenue looks like it's going to be maybe sequentially down a little bit and the.
Oh and flattish at best So I'm, just wondering what the corresponding increase in Opex ex fuel we should expect on the back of that and thank you very much.
I mean are on our primary focus is on safety and our primary focus is on injecting capacity.
And our customers grow.
And the downstream impact.
The back and a share with the supplier issue is is fluid and it's I'm not going to comment on that right now.
Yes, Amit just.
The 12% revenue guidance kind of implies youre going to see.
Flattish to maybe modestly down a little in the back half.
<unk>.
And in terms of Opex I think fuel is 1 of the variables where that continues to creep up here in the back half.
And then as I mentioned I think.
The comp and Ben per employees kind of just that will stabilize and be.
On the at that.
33000 per level.
Other than that.
We do see a little bit of a step up like I said.
Scott on purchase services and.
A modest step up there I don't think we will see continued diminishing material spend I think we're kind of hitting a bottom there.
And we'll probably be.
More flattish and.
Sure.
Rents I think there will be some pressure.
As volumes are coming back there's a little bit of a lag usually with equipment rents and I think especially if autos when when auto starts to come back we will see a little bit of pressure on rents from where we are right now.
Okay. That's helpful and Alan just maybe if I can approach I respect your.
And want to comment on it but maybe I can approach. Your question a different way do you think the impact of this chassis shortages, primarily a volume and service impact that that rebounds, when when when you finish a when the company finishes addressing these issues.
Is there some idiosyncratic cost issue as well that maybe is meeting some of the results. We can unwind over the course of the next couple of quarters, yes.
We've been we've stated that the revenue and the cost impact is not.
Cereal or on the call out.
We are intently focused on.
And on standing up a new program preparing these chassis and serving our customers and injecting more assets into the network. So that we can help them grow and and <unk>.
And a great plan to do that we've responded very quickly to this issue.
Okay, Alright, thank you very much appreciate it.
Thank you.
And as a reminder, if you could please.
Just 1 question to accommodate as many as possible.
Your next question will be coming from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.
Yes, hi, just longer term thinking about intermodal can you maybe talk to or give an update on your.
Thoughts about east coast versus West Coast ports, and some of the issues around the West Coast. Maybe then stimulated further conversations people <unk> and <unk>.
More of a shift retailers et cetera to a to the east side. Thanks.
And Jordan.
Saw or we've continued to see a.
And they measured shift and market share from West Coast East Coast and Thats due to over the last 10.15 years that stood on number of issues.
Widening of the Suez Canal.
Labor strike on the West Coast and <unk>.
On 14.
Widening of the Panama Canal.
And just basically east coast is where youre seeing a lot of.
A lot of growth and population and consumption. We're very fortunate that our franchise serves a majority of the consumption and.
The manufacturing and the United States and.
And so yes, we fully expect that our.
<unk>, which are very active and attracting new business.
We'll continue to do so and that's going to continue to be a.
A strength or for our unique intermodal franchise.
Alright, thanks, so much.
The next question is from the line of Ken and texture with Bank of America. Please proceed with your question.
Hey, great Good morning, Jim and Mark maybe just a little clarification and great outlook on the 400 to 440 basis points of margin improvement can.
Can you clarify did you stay say before Jim that you were going to stay at the 58 through the rest of the year I thought.
Should something about holding these levels and then just kind of wrapping up with what you've just talked about on the last couple of answers you kind of fighting the tide with higher fuel surcharge, which is 100% or you've got the bump now from the real estate gains incentive comp challenges. So are you looking for a step up and any of the segments in order to get.
Further gains from to these levels or I'm, just trying to understand.
If we're looking for any additional gains on real estate gains that are coming or any or is it just the benefits may be from the higher revenues.
Thanks, Kevin I'll take the first part of that the guidance was that we would maintain the 60% run rate and the second half.
You bet, which which puts us a you know for the full year, where we were we had expected to be but ahead of schedule you know, having having gotten to that mark in the second quarter.
Mark.
Yes, Okay and just to put.
And you'll find a point on things I mean, we don't expect gains like this to happen again on the back half. So it is really maintaining the levels.
And.
X gains is basically implicitly what were low.
And we're trying to guide to here.
Wonderful.
Thank you.
Thank you.
Okay.
The next question comes from the line of Brian on <unk> with Jpmorgan. Please proceed with your question.
Hey, good morning, Thanks for taking the question 1 for Cindy can you just give us a little more context on the yard and local productivity. It seems like it's a recent effort for both service and.
And on the cost side.
How far along are you into this process is there any way you can kind of size that up for us and you mentioned.
<unk> and some head count reduction benefits from that but what else do you do you see potentially coming from this effort and maybe you can help with how long how far along you are with executing this initiative.
Yes. So thanks for the question, yes. So the team has done a really great job on our operations efficiency team out here really fine.
Fine tuning our processes and our operating practices. If you will within our terminal footprint and so you've seen again broadly the transition from pumping to flat switching which has been which has occurred in 2019 and into 2020 and now we're fine tuning processes and other terminals as well as our big.
Big 4 humps that are left so it's essentially a very very detailed process around net matching big blocks of cars to outbound trains with a shortage.
Maritime between those those big blocks being processed to departure, it's small things like that but then it's other things.
<unk> that we've been working on as well that with the ability to generate and the capacity that we have and our terminals, particularly let's talk about Elkhart, we've actually been able to take in volume that traditionally we had bypassed intermediate switching carriers and Chicago for forwarding to western destinations we've been able.
Take those cars into our terminal and make and make direct connections to our western carriers, our western partners.
And with traffic. So it's really 2 fold. It is a matter of finding fine tuning processes and generating.
More productivity, because we need less crews against the work in the terminal as well.
Freeing up capacity and the terminal to bring more work into our higher powered humps that save us and this case intermediate switching charges with the western folks. So it's pretty broad based as to what we're working on and we will find opportunities as we look to.
A reduced footprint at some of our smaller terminals.
So it.
It is.
It also and also thinking about it driving service reliability for our customers because we're much more consistent.
And work on this effort so it's fairly broad based.
Alright, thanks for that Cindy I appreciate it.
Our next question comes from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question.
Thanks, So I just want to follow up on the.
And the intermodal side on the near term I mean, some of your peers on conference calls this season and I have said that.
Current service issues and makes it hard to drive.
Incremental truck the railroad.
And conversion at this point kind of do you see things the same way and if you don't want to kind of do you see incremental share opportunities.
And promoter share from your peers. Thank you.
Hey, Ravi.
Talk to our intermodal channel channel partners 1 of their primary concerns as overall.
Assay, they absolutely want to ship business from highway to rail.
They are concerned about the overall throughput throughout the supply chain and frankly, we are a big part of that right and I am confident that as our network fluidity improves.
As we resolve these chassis issue.
Issues.
As the drayage community productivity improves as warehousing and productivity improves then and we're going to be able to grow more because there is a phenomenal opportunity out there and.
And our channel partners are starting to talk a lot more confidently about next year as well so.
And Theres a lot of runway.
<unk>.
The macro environment for us and we're intent on addressing the issues that are within our control and working with our channel partners on things that we can do to help them grow.
Okay. Thanks. Thanks, a quick follow up on did you quantify the accessorial.
Way within the quarter at all.
Normal run rate and kind of hard and we think about that going forward.
And what we said that is about half of the improvement and ARPA you within intermodal is associated with.
The activity based service that we provide which is which is.
Sorry on crude under the Accessorial program.
Incremental <unk> versus last year, yes.
Thank you.
The next question is from the line of 5 day Shimbun with BMO capital markets. Please proceed with your question.
Good morning, Thank you.
And maybe a question for Jim.
If I look across the industry at least.
2 franchises and railways.
Strong indexation and to intermodal.
And the franchisees.
Tough time over the years to achieve.
We've and sustained and below 60% operating ratio.
And they attribute that to the intermodal business overall being a little bit more margin dilutive compared to others.
My question is kind of now hit the 60, Mark and you start to kind of look beyond beyond that.
What is unique about NFC.
And good modal franchise that would allow us to achieve and sustain lower than 60 or and secondly has this pandemic kind of changed maybe the competitive positioning.
Positioning of intermodal versus the other modes, and maybe helping you know.
And make a better alignment.
And fix the water on a sustained basis.
Thank you Patty.
Let me first start by saying that we're not done we are.
We have we have more upside more and more room to run when it comes to productivity and growth.
So we hit the 60.
On the Mark and the second quarter, we're proud of that.
And we got there ahead of schedule and that's due to the hard work of all of our employees.
But we're not resting on our world will continue to push.
Now 1 of the 1 of the clear growth engines for our company and for the industry generally is intermodal and I will say this.
Run rate economics of the intermodal business or.
Our vessel and improved from what they were say 10 years ago Theres been a lot of a lot of work on hard work done and so.
And our company and in partnership with our companies to really drive the.
On the value proposition.
And intermodal so there is.
There's lots of opportunity there for incremental margin and improvement and the operating ratio.
From growth and intermodal volumes going forward and of course, the same goes for other parts of our business as well where the Incrementals are also excellent. So I think we have a winning winning formula 1 and all.
And there's opportunities.
And certainly in intermodal and certain parts of merchandise as well coupled with a continued focus on productivity throughout the company.
And thank you.
Our next question comes from the line of Walter <unk> with RBC capital markets. Please.
Proceed with your question.
Thanks, very much and good morning, everyone. So just keeping on the intermodal capacity question.
Looking back pre pandemic you guys, we're hitting about on 85000 per month carload basis on intermodal and and.
And obviously it dipping down during the during the pandemic, but.
Coming right back up in the fourth quarter again, hitting that 85000, and then coming back down from that again. So my question here is I understand the chassis issue and the efforts there, but given what appeared at least to be given given those.
Those data.
Is there anything longer or more fundamental.
And from a structural standpoint that.
And that you are looking at outside of chassis that will open up your intermodal.
Capacity.
After the chassis issue is completed what would be your growth potential.
And intermodal.
After that issue is resolved by your best estimate over the next year or 2.
So Walter you've got a chassis <unk> safety recall issue.
And that I have highlighted you also have the overall chassis, whether it's our chassis our customers chassis is the international.
<unk>.
Jesse and box issue.
That's associated with stress on the drayage community and and warehousing.
When that gets resolved when that starts to improve.
And Street times and decrease by 20%, which is what they've been elevated by then youre going to see.
Great for throughput through the.
And the entire intermodal supply chain ecosystem.
With respect to our overall capacity, what we're doing about it.
As we improve our on time performance and our train network and <unk>.
Low as our customers to schedule their appointment.
And with more specificity.
Which will help them improve their overall equipment utilization, we're continuing to invest and our terminals both physically.
And with and with with technology to to make our terminals.
And more efficient both for us and for our customers.
We're rolling out.
A terminal based.
Operating system for intermodal this year, which will which will help us improve.
And we're working with our lift contractors on on.
And on how we can help each other.
That's with and and make sure. We're all looking at the same sorts of service metrics. So theres a number of ways in which.
We can all drive improvements and gains and the intermodal volumes and I'll tell you that based on our conversations with our customers.
We're looking at multiples of GDP.
And improve over the long term and that's effectively what we've been delivering.
Over the last 10 or 15 years as well and then.
And also think steel will interchange thank you Stephen.
And has been a benefit to us here as we work with our western partners to take pressure off the terminals and Chicago and having to drop boxes and dream across town. So.
And that's another area that we'd love to see continue.
And to growth.
And it helps both.
To be more efficient so.
So cindy highlighting and another area on which we're operating within the entire supply chain ecosystem.
In order to improve efficiency and fluidity.
Sure.
So when this bottleneck of the chassis comes off you see clear path of getting I think I said monthly and weekly volumes of North of 85000 on the intermodal side.
And timeframe for the chassis the chassis issue overall is that.
<unk> 2 quarters.
Quarters.
And Walter I think you are talking about the street dwell for the chassis is that right.
Yep.
Yes.
I don't know.
And I don't know and that gets resolved.
That is a.
And Labour issue and Thats.
3 pandemic protocol issue.
Yes understood.
No I know, it's a tough 1 and Jonathan Thanks for the time I appreciate it.
The next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Thanks, Good morning.
Morning.
Jim I wanted to ask about the regulatory environment, obviously, we had the executive order and the push for Arista switching but also salmon Olbermann has recently expressed concerns about intermodal terminal congestion and the orange as well.
And whether the rails have sufficient resources and labor in order to meet demand.
Could you comment on net.
And whether you are concerned about the risk with a broader and broader.
Broader regulatory backdrop becomes more onerous are challenging.
And to the extent that you do have concerns how might you plan to address these to the STB. Thank you.
Sure sure. Thank you Allison.
And I'll get to your question about competition policy and our industry and just a minute, but I think it's worth pointing out.
To start with that our operations our business model overlaps nicely with many of the administration's priorities and we are very much in sync.
With what the administration is trying to achieve more broadly so.
For example, sustainability as we've talked about for a long time and and we talked about today. We are the the green forms of ground transportation pound for pound miles per mile. We can handle freights more efficiently using less fuel and emitting less carbon than any other form of transportation. So so theres.
And that and we're building on it I Hope you noted the publication of our science based on our proof science based target.
The Green bond that we issued and many other measures that will be detailed on our ESG report that should come out shortly.
Secondly, the administration and Congress are both very interested and infrastructure look no further than the rail industry for infrastructure.
And in top shape, that's next to the private investment that's been made over many years.
And infrastructure so.
We excel there and what we're doing is very much in line with what the administration and Congress and want to achieve.
And third the majority the great majority of our jobs are good.
That is hanging union jobs to quote the president.
So there too we are a heavily unionized and just read the jobs pay well theyre good jobs and we're hiring.
So that 2 lines up nicely with the administration's priorities.
In terms of the STB.
First look at most of what we handle.
Good competitive and.
And most of the freight that's on our railroad will move by truck, if we move rates above the truck competitive level.
For freight we handle that is less truck competitive there exist many mechanisms before the STB to challenge the rates.
And 2 to adjudicate.
Is fairness and the customers utilize those mechanisms all the time. So there is there is a way to.
2 to challenge, what we're doing before the STB. It works the customers are familiar with it the STB is familiar with it it rests on a very sound policy framework and theirs.
A lot of precedent.
And.
So it's.
It's it's working and.
And we.
And don't believe the STB will take measures to change.
All of that in the and.
The STB has looked at reciprocal switching and the past and has.
And is concluded.
A number of times.
Kate there fits and it's not the right solution for the industry would create severe operational disruption.
And that's not good for customers Thats not good for the railroads and that's not good for for passenger trains either so and then I think they may invite evidence on that and once again as they have several times in the past, but I think youll conclude that that's.
Not the right measure.
The mechanisms that are already in place to to determine whether rates are competitive or the best.
We have so thank you.
Thank you.
And final question for today is from the line of David Vernon with.
With Bernstein. Please proceed with your question.
Hey, Thanks for squeezing me in here Alan 2 quick ones for you.
Can you comment on the trend and the intermodal <unk> sort of ex fuel and the fee increase and what some of the drivers might have been there and then the second question is really around sort of utility coal you mentioned is going to be down.
For the back half of the year are.
And we kind of hitting a bottom.
And as you think about it on a 3 year view or do we see as you think about the retirement pipeline and that's I. How do you is there still further room for that to bleed out into 'twenty 2 'twenty 3.
So David.
Trend on intermodal <unk> fuels and as I noted we've got what.
Q4, and a half years of quarterly growth year over year and that.
So I.
And I expect that to continue.
And we as I noted before base based on our contract structure, we're going to have a lot of support for pricing into a market.
And next year, not only because the market.
Strong next year, but right now intermodal rates lagged truck pretty significantly so theres a lot of headroom.
For us and as our service product improves theres going to be even more demand for for what we're putting out there with respect to utility coal.
On.
We've got some.
On specific unit outages or retirements on our system thats going to impact year over year comps you've got some planned maintenance and then frankly, it's an issue of.
And overall coal supply.
Coal production and the United States. This year is projected to be down 18% compared to just.
<unk> 2018.
There are some unsold tons out there from the producers, but we're not sure. If those are going to go export or domestic with the.
On the export thermal market, so hot with API, 2 well above.
$100 then there is a lot of pull for that product.
<unk> overseas.
If that happens we'll continue to handle it and Thats was 1 and certainly 1 of the drivers of our significant growth and our export franchise and the second quarter.
Alright, thank you.
Thank you.
This concludes our question and answer session and I will turn the call back over to Mr. Jim Squires for closing comments.
Thank you everyone for your questions today, and we look forward to talking to you again next quarter.
Good day.
Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may now disconnect. Your lines at this time and have a wonderful.
Okay.