Q2 2022 Norfolk Southern Corp Earnings Call
Greetings and welcome to the Norfolk Southern Corporation second quarter 2022 earnings call.
At this time, all participants are in listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce Luxe Nichols senior director of Investor Relations.
Thank you Mr. Nicholls 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.
Please refer to our annual and quarterly 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 in the investors section along with a reconciliation of non-GAAP measures used today to comparable GAAP measures a full transcript and download will be posted after the call.
Turning to slide three it's now my pleasure to introduce Norfolk, Southern's, President and Chief Executive Officer, Alan Shaw.
Good morning, everyone welcome to Norfolk, Southern's second quarter 2022 earnings call.
I'm joined today by Cindy Sanborn, Chief operating Officer, Ed Elkins, Chief Marketing Officer, and Mark George Chief Financial Officer.
In the second quarter, we stabilized service levels.
Spanned at our pipeline of conductor trainees and launched the next evolution of our operating plant top SPG with our signature no surprises approach.
Service is not yet where we want it to be but I am encouraged by our progress and inspired by the commitment and shared vision of our talented team.
I am privileged to spend a lot of time in the field with our hard working craft employees and operation Supervisors I see firsthand sincerely appreciate their daily dedication to serving our customers.
We are eager to reach an agreement it keeps our people among the highest paid craft workers of any industry and recognizes there are central service to our customers our company and the U S economy.
Moving to slide four.
Thanks to the combined efforts of our team.
We delivered solid financial performance in the second quarter with record revenue and earnings per share.
Revenue increased 16%.
20% increase in revenue per unit more than offset a 3% volume decline.
Expenses grew by 21% year over year, due primarily the higher fuel prices.
Operating ratio was up 260 basis points versus last year's quarterly record.
Comparisons were adversely impacted by the absence of a large property sale, we called out last year as well as fuel price headwinds.
Despite these headwinds EPS improved by 5%.
The $3 45 per share a second quarter record.
The steps we are taking today to restore service and implement our new top SPG operating plan are making Norfolk, southern a more customer centric operations driven organization that will deliver long term value for our customers and shareholders.
Our top SPG operating plan as part of the equation for improving service.
We named this iteration SPG.
Because it creates a platform for consistent service continuous productivity improvement and smart growth for our customers Norfolk, southern and our shareholders.
There is no doubt we have an enviable value proposition to compete in today's logistics marketplace and where markets are headed.
At the conclusion of our prepared remarks.
I'll share a few insights on how we will unlock that value.
I'll now turn the discussion to Cindy for an update on operations and a detailed look at how our company is aligned around restoring service and creating a safe efficient and reliable product that meets our customers needs and support their growth.
Cindy.
Thank you Alan and good morning, everyone.
Turning to slide six in the second quarter, our team continued to face a challenging operational environment as we work to stabilize service levels drive productivity gains and increase our teeny workforce.
Crew starts were down 3% in the quarter on volumes also down 3% and flat gross ton miles.
Similar to what I discussed last quarter, we continue to make gains in crew productivity. However, we would have preferred to run additional crew starts that we're limited by staffing challenges.
As we promote more of the conductor trainees currently in our pipeline, we will see additional highly productive crew starts that will support more volume and further increases to the record train size. We have produced this year.
Despite the ongoing decision to keep a portion of our surge locomotive fleet active to promote service recovery. We produced another all time record for fuel efficiency, driven by our multi pronged strategy to reduce consumption.
This strategy includes the DC to AC conversion program data driven solutions to idle reduction and small but powerful investments in friction modification technology just to name a few components.
We expect to drive even better results as we execute on that strategy and enhanced the fluidity of our network.
Moving on to slide seven.
Train speed and terminal dwell remained challenged in the quarter, but we're really encouraged by the improvements we're seeing here in July .
We're pulling every lever to restore service levels and delivering for our customers is our top priority.
We have a long way to go and our workforce is dedicated to getting the job done.
I'm going to speak over the next few slides about the plan for accomplishing this turning to slide eight which is an update on our teeny staffing progress.
We're maintaining a very strong pipeline of conductor trainees and even more encouraging as you can see that in July we're really making progress on getting those employees qualified more than offsetting ongoing attrition.
And the impact on our network is being felt.
We are continuing to start classes weekly and expect this momentum to continue.
I will note that the labor market is still very challenging, particularly in certain locations.
We're taking advantage of every option to get folks, where we need them, including go teams transfers sign on an attendance bonuses.
<unk> deferral and referral incentives and more.
We're also examining how we can adjust our operation to best align resources with demand.
An example of this is that our two of our major terminals, making in Bellevue.
Call that both of these former hump yards were converted to flat switching in 2020.
Switching demand has increased in both locations since that time, and we have begun the process of resuming conventional hump operations at both facilities to provide the capacity, we need to move expeditiously and efficiently serve our customers with negligible upstart or ongoing costs.
Having the ability to return to humping operations as demand dictates as an example of resiliency. We now have in our network and a lever we can pull to improve service.
We are excited about the talented individuals' joining us to help move the economy and we are confident we will continue to make progress on our staffing priorities.
On slide nine I'm very happy with the progress we've made on our safety initiatives and translating that to fewer injuries and train accidents.
Especially with large numbers of new employees starting out in the field. This reinforces that all of our employees tenured and new alike are laser focused on running a safe operation, providing a critical foundation for the future.
Now moving to slide 10, I'll talk about the progress we've made with rolling out the latest evolution of our operating plan top S. P. G.
As a reminder, top isn't an acronym building on the legacy of Thoroughbred operating plans and as Alan noted earlier SPG signifies the equal prominence of the three pillars service productivity and growth.
Late in the second quarter, we launched the plan, which was focused on creating more balance and execute ability within our network.
Looked at how our business great flows and train composition have changed over the last few years, and then coupled that with a deep dive on how each of our terminals and routes can best handle the business.
We took a fresh approach to balancing the number of crews and locomotives flowing across our core routes.
I've spoken before about the benefits of distributed power locomotives are longer trains and as we're creating longer trains we rebuilt the planning for when and where we apply distributed power.
We looked at prior and prospective train consolidations and weighed what it would take to continue launching and landing longer trains both from a time and resource perspective, and made holistic decisions about what is best for service productivity and growth.
As we go forward, we will increase the service frequency and several of our core intermodal markets, while simplifying the role of each terminal, particularly where we have more than one terminal in each market.
This will allow us to drive even more value from our intermodal franchise, and we will promote <unk> ability and growth.
Our bulk strategy has a long term focus in recent years, we've made solid progress on train consolidations and to a lesser degree blending with other traffic types now.
Now, we're putting added emphasis on identifying how we can take the remaining unit train network and add an incremental 10, 20 or 30 cars to each train.
Moving to slide 11 to discuss a couple of metrics that indicate the early progress we're seeing.
First our rival train performance has seen substantial improvements here in July .
The top SPG readjusted, 90% of our train schedules to meet service and execute ability standards I described on the previous slide and this improvement is very encouraging.
As I showed on the network update or velocity has been improving in July and this trained performance trend reinforces that velocity is translating into trains hitting their slots at an increasing rate.
One of the several reasons for this is the strong increase in the number of distributed powertrains people on each day team built the solid plan isn't that and is now executing it and this is a component that will directly impact each aspect of S. P. G. As DP trains run smoother, creating service resiliency there also more fuel efficient not sure.
Train driving productivity and they give us the capacity to dividend and driving growth.
We have a long way to go to fully restoring service. These are just a few examples of where we are and further improvements will continue to be driven by three primary functions staffing initiatives paying off the success of top S. P G and our solid execution by our field workforce. Thank you and I'll now turn it over to Ed.
Thanks, Andy and good morning to everybody.
Let's go to slide 13, our results for the quarter reflect strong revenue growth amid still recovering volume from network challenges.
We achieved record revenue for the quarter of $3 3 billion, that's up 16% year over year on higher revenue from fuel surcharge and price improvement.
Revenue per unit was also a record and revenue per unit, excluding fuel saw a double digit increase from the same period last year.
This revenue growth more than offset a 3% decline in overall volume, resulting from service disruptions.
Within merchandise.
Overall volume was down slightly as declines in steel and construction related shipments from strained network fluidity were partially offset by gains in sand driven by increased drilling activity in response to rising demand for natural gas also helping to offset those declines.
Notable growth in our green shipments due to rising export demand.
Merchandise revenue and revenue per unit were records for the quarter on higher revenue from fuel surcharge and price gains.
Now turning to intermodal revenue revenue per unit and revenue per unit, excluding fuel were all up double digits in the second quarter with higher fuel surcharge price gains and higher revenue from storage fees more than offsetting the impact of those volume declines.
International intermodal shipments were markedly down year over year, driven largely by a shift in our customer base away from inland point intermodal or ipi.
In response to ongoing supply chain challenges.
Declines in international intermodal were partially offset by modest improvement in domestic shipments year over year.
Due to sustained consumer demand.
Revenue growth was strongest in our coal business unit this quarter with total revenue revenue per unit and revenue per unit, excluding fuel all increasing well north of 30% year over year in the second quarter.
This growth was propelled by price gains, particularly in our export coal markets coal volume in the second quarter was negatively impacted by limited supply and facility closures overall, our performance for the quarter reflects an improving revenue portfolio that will serve as a platform for long term.
Stable revenue growth into the future.
Moving to our outlook on slide 14, we're cautiously optimistic that the demand environment will remain strong through the end of 2022, providing opportunities for us to expand our volume and revenue base as fluidity is restored to the network.
Despite recession risks amid record inflation and aggressive monetary policy, most economists are still forecasting GDP growth above 1%.
For both the third and the fourth quarters of 2022.
In addition, we are beginning to see gas prices moderate nationally and unemployment remains very low both of which bode well for consumption, which drives many of our markets.
Specific to our merchandise segment, we expect volume strength in the second half to be led by our automotive markets, where U S. Light vehicle production is currently forecasted to be up 18% over their production levels experienced in the last six months of 2021.
Looking at commodity prices, we see mixed signals for many of our markets, but overall prices remain elevated from those pre pandemic levels.
Manufacturing activity has been a tailwind throughout 2022.
However, the outlook is less certain for the remainder of the year.
Lastly, we anticipate overall year over year improvements in most of our merchandise markets as our service levels recover.
Within intermodal, we expect sequential volume improvement in both our domestic and international lines of business in the second half of 2022 as demand remains strong and service improvements will allow for greater throughput on our network.
Backlog demand for container movements will provide opportunities for growth in our domestic franchise. In addition, new opportunities for domestic volume growth exists in the truck and logistics market and we're laser focused on driving highway to rail conversions to expand our market share.
With respect to our international lines of business.
Increasing import activity is providing growth opportunities, although lower ipi is a limiting factor.
We're also keeping a close eye on truck pricing as rates have fallen, albeit from historically very high levels.
Finally, our outlook for coal is positive for the second half of the year with growth in our utility and export markets driven by energy demand.
Recent declines in export met coal prices suggest we're not likely to realize the same upside potential in <unk>, we achieved in the second quarter.
Conditions support year over year volume growth in these markets with upside potential driven by coal supply.
And network fluidity.
While we recognize that uncertainty persists in the macroeconomic environment, we continue to see opportunities for volume growth in the markets that we serve as part of our execution of our top SPG operating plan. We are committed to capturing these opportunities expanding our business by delivering the quality service.
Is that our customers need to thrive.
I'll now turn it over to Mark for an update on our financial results.
Thank you Ed.
As Alan noted our EPS grew 17, 5% in the quarter, while the operating ratio contracted 260 basis points.
On slide 16, we reconcile some of the drivers for both of those changes.
Recall, the $55 million discrete property sale in Q2 of 2021 that impacted our or by 200 basis points.
Also in Q2 last year, there was a state tax law change that impacted EPS by <unk> <unk> and I had a 220 basis point favorable impact on last year's Q2 effective tax rate.
This year, we have some outsized impacts in claims related to accrual adjustments.
But also an accrual related to a legal case.
All totaling $16 million and that creates a 50 basis point headwind on our operating ratio and a nickel drag on EPS.
That leaves a modest 10 basis point increase in core or.
Was heavily impacted by 140 basis points of headwind from fuel.
Shifting to the overall reported highlights on slide 17.
As Ed discussed revenues grew 16% despite the 3% volume decline thanks to strong ARPA you again this quarter.
Operating expenses were up 21% driven in large part by fuel.
Operating income was up 9% and net income was flat due to tax rate compares and non operating headwinds from company owned life insurance investments.
Despite the flat net income EPS was up 5% from the lower share count.
Drilling into the operating expense components on slide 18.
Nearly two thirds of the increase in operating expense is from higher fuel costs.
Increase of material and other of $75 million is affected by the $55 million property gain we called out last year and the $16 million of items that I spoke about earlier.
Purchased services and rents are impacted by both inflation and our current service situations.
The slower network speed is a critical driver impacting the higher equipment rents while purchased services captures higher rates for our third party lift contractors as well as our contractors.
Compensation and benefits is a tailwind with lower incentive accruals offsetting the cost of trainees as well as general wage inflation.
As you can imagine the current labor negotiations are likely to play out here in the second half.
And may result, in incremental headwinds to comp and benefits.
We are unable to estimate at this time.
Shifting to the P&L below operating income on slide 19.
Other income is actually an expense in the quarter of $14 million.
By losses at our company owned life insurance investments.
I know this line item is difficult to estimate model.
So let me provide some clarity to help you at least directionally.
This account is a collection of non operating income and expense items that typically nets to about $15 million of income per quarter.
On top of this we have returns on our company owned life insurance investments.
A portion of this asset roughly $525 million.
Is invested in a traditional blend of equities and fixed income and we mark to market each quarter.
Our noncash gains or losses, and it's important to note that neither the games nor losses from these investments are subject to income tax.
As such the effective tax rate in this quarter was a bit higher than usual at 24, 7%.
While net income was exactly flat earnings per share increased 5% due to the accumulation of our share repurchases in the past year.
Going back to income tax for a moment.
I'd also like to highlight that Pennsylvania enacted legislation in July to reduce their state tax rate.
And the accounting for that change will have a roughly $135 million onetime.
One time noncash favorable adjustment to income tax expense in the third quarter.
Now.
Turning to free cash flow on slide 20.
We've generated nearly $1 2 billion and free cash flow through six months with.
With property additions trending higher than last year with strong progress being made on both our rail replacement program <unk>.
And our DC to AC locomotive conversion program, where as Cindy touched upon we gain operational benefits as well as improved fuel efficiency.
Incremental inflation is also having an impact on property additions. So I would expect capex to be at the high end of our 181 $9 billion guidance range.
Shareholder distributions are up and you'll observe here the 19% higher dividend payments through six months on top of continued strong share repurchase activity.
And with that I'll hand, it back to Ellen.
Thank you Mark.
I'll conclude with an update on our outlook for the year and brief thoughts on our strategy for long term value creation.
You'll see on slide 21, our confidence in the revenue outlook has improved to 12% plus year over year growth.
Underpinning the improved revenue outlook. The strong first half performance continued strength in fuel surcharge revenues.
Better sequential volumes associated with service improvement in the back half of 2022.
Our first half operating ratio was a result of a delayed service recovery and elevated fuel prices.
These headwinds will translate into a deterioration in full year operating ratio.
Although we expect the back half or to improve from the first half as our service recovery ramps, allowing us to absorb more volume and reduce costs associated with our service challenges.
As Mark mentioned, we do not know if there will be any incremental costs recorded in 2022.
Associated with a resolution in our labor negotiations.
Turning to slide 22, although our focus today is on restoring service in the short term our vision extends much further as I complete my first 100 days as CEO I'd like to share some insights on our future.
The work we are doing now to improve service is only the beginning.
We're going to build long term resiliency into our network, creating sustainable value for our customers.
Norfolk Southern as a franchise that is built for growth.
Being customer centric and operations driven propels Norfolk southern to a service organization that will compete and win on operational excellence leveraging the strengths of our powerful network to achieve above market growth.
Our value proposition starts with the investments we've made over decades to build a robust network that faces the fastest growing segments of the U S economy.
Our markets extend globally through our strong working relationships with ports all along the east coast.
Great Lakes and Gulf of Mexico.
We have cultivated more than 250 short line partnerships. The most of any class one railroad extending the reach of our network, even further and creating even more options for our customers.
We have long standing relationships with a desirable portfolio of valued customers, reflecting a diversity as broad as the U S economy.
Our automotive metals, agriculture, and consumer products markets are enduring strengths and our unparalleled intermodal franchise will be an increasing driver of long term growth.
Our best in class Channel partners and industry, leading industrial development team position us well to capitalize on the growth of e-commerce and the acceleration of onshoring as we move Norfolk Southern forward.
Leveraging the sustainability advantage of our service product will give us another compelling selling point as more shippers prioritize scope three emissions reduction in the years ahead.
We'll keep driving forward with industry, leading technologies, enhancing our productivity and efficiency and creating a best in class consumer oriented experience that makes it easier for customers to do business with Norfolk Southern.
Consistent convenient cost effective service.
Enable shippers to build their supply chains around the inherent advantages of our network.
We will deliver the simplicity of truck with the efficiency of rail.
This is how we will achieve our vision of a customer centric operations driven organization and compete successfully in the $800 billion plus truck and logistics market.
When I talk to my colleagues throughout Norfolk, Southern from our headquarters to our rail yards I am energized. Our people are passionate about serving our customers and proud of the central role we play in moving the American economy.
Our team is the reason we will be successful we are building a winning culture with innovation is a core competency for people confidently bring forward their best ideas continuously develop their skills and feel valued for their contributions.
We look forward to sharing more about our strategy for long term shareholder value creation in the months ahead.
We will now open the call to questions.
Operator.
Thank you.
Now be conducting a question and answer session.
Like to ask a question today. Please press star one on your telephone keypad.
Indicate your line is in the question queue.
If I start to feel like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Due to the number of analysts joining us on the call today with limiting everyone to one question to accommodate as many participants as possible.
Thank you and our first question will be coming from the line of Jordan <unk> with Goldman Sachs. Please proceed with your question.
Yeah, Hi morning.
And thinking about.
You look ahead to the second half than in the sequential improvement can you maybe discuss in your mind, what the most critical factor is to getting that that service up and in term and in turn volumes is it adding more hedges at the new top SPG plan.
Simply easier comps you know, maybe just give some color around the critical factors as you would rank them. Thanks.
Hey, good morning, Jordon critical factors.
Already in play.
We've ramped up our head count and we continue to have a very robust pipeline of conductor trainees was up close to 900 as of this morning, and we've implemented a new operating plan, which is already providing some benefit for us and our customers into in terms of improved fluidity and.
Since service to our cost sources.
As we continue to add head count.
And our plan, we are very confident about the ability to improve service, which will allow us to accept more volume and enhance our productivity driving or gains.
Thank you.
The next question is from the line of Brian <unk> with Jpmorgan. Please proceed with your question.
Hey, good morning, Thanks for taking the question maybe just to follow up on the service we've seen improvements in first final mile trip plan compliance, but they're coming off of really low levels.
Is that improvement that rate of change is that enough to really see substantial volume recovery or do you think you need to hit a certain level.
To start to bring volume back sustainably onto the network and then just a quick clarification.
Mark can you talk about gain on sale in the quarter looks like it was about $31 million wanted to see if that was right and what your expectations are for the rest of the year.
So would you talk about what Youre seeing with service. Please yes. So it's a great question, Brian and specifically to our measure around first mile last mile. It's a very rigorous measure and we put that in place very specifically to make sure that we were understanding what the customer is feeling and we've had it in place for a while now.
Two years, and we look back to see where service was when we had a really good level in 2019 and so.
That's what we're aiming towards and while the number on the pages percentage wise.
Challenging.
It's a measure that we hold ourselves to a real high accountability worsen I think Ed can can talk a little bit about how the customer feels and how they how they see the measure sure and thank you Sidney the first thing I would say is our customers helped us.
All of our metrics and our targets here.
Our customers want to do more business with us and they are starting to see some some early green shoots here in terms of service improvement and we fully expect that to continue throughout the year.
And Brian can I, just clarify for you the games.
We got about weak last year, you may recall, we had $6 7 million of gains we kind of called out 55 is a more anomalous figure.
And this year right now in Q2, we had $28 million of gains.
Brian I'll add in addition to first mile last mile. We're also delivered improvements in train speed and terminal dwell as well.
Mark for the rest of the year what should we.
Pencil in for for a normalized level of gain if you have one.
Yes, im not going to really give you much more than the.
The normal usual quarterly cadence.
It can be a little bit volatile.
In real estate gains obviously can can move around even if we expect them to happen this year or they can they can certainly slide. So if you look so far year to date, we're running at about.
In the low $30 million range there might be.
Similar amount in the back half, but probably less than that.
Good thing is things are moving around a little bit on us.
Right makes sense, okay. Thank you for the detail I appreciate it.
Alright, great. Thanks.
The next question is from the line of Chris Wetherbee with Citi. Please proceed with your question.
Yeah. Thanks, Good morning, I wanted to talk a little bit about the operating ratio outlook and understand if theres any volume assumption underlying that can you give us a sense of sort of what you need there in terms of operating leverage to be able to hit the numbers and then.
I guess, mark you've given us some clarity in terms of Opex going forward.
Quarter by quarter should we assume somewhere in the $1 9 billion.
Is the right number sort of ex fuel going forward steel or any help around that for the back half in terms of the operating ratio in volumes would be great.
Chris with respect to our outlook for volume, we have said will be flat for the year.
We're down 4% year to date, so that suggests some sequential improvement as we move into the second half of the year and that was that's going to be supported by our <unk>.
Our improving service product Mark do you want to comment on Opex, Yes, Chris you're exactly right in your thinking if you look at our Q2 opex numbers and takeaway fuel because fuel is going to be where she was going to be.
As that moves, but you look at Opex ex fuel in the second quarter and even maybe excluding the items that I called out the $16 million.
That was somewhat anomalous.
We would project at that amount would be representative of what to expect in the last two quarters on average.
There could be some moves in.
Within any particular account or line item in the P&L, but in aggregate that's kind of the area that we're expecting in.
If we have unexpected events, we'll call them out to you like we typically do on our quarterly calls.
And then with respect to the cadence of or improvement Mark also highlighted in his comments the 140 basis point headwind that youll add in the first half of the year, we do not expect that to be the case in the second half of the year, we expect it to moderate as we go through the balance of the year.
Okay, great. Thanks, very much for the time appreciate it.
The next question comes from the line of Jason Seidl with Cowen. Please proceed with your question.
Thanks, Operator wanted to talk a little bit about the call RP you I think you guys mentioned.
You're expecting it to step down here just wanted to get a.
A little more meat on the bone is that or is that just a sequential step down or do you think it could step down on a year over year basis as well.
Ed would you please address that sure.
We stay very close to our customers and of course, we're looking at these commodity prices every day.
The export prices have changed quite a bit.
The fact is.
There is still historically high and Theres still a lot of energy in the market so to speak.
The coldness either dropped off as a result of the rise in coal inventories ahead of sanctions on Russia, but they remain near three year highs. So when you think about production limitations, you think about constrained supply chain and really what it looks like steady demand it should continue to support higher prices.
For both thermal and met coals.
We expect to see contract and spot pricing outpace where we thought we were at the beginning of the year, but we don't expect to be in those same inflated atmosphere that we saw towards the end of Q1.
No.
When I think about it.
Do see sequential declines in the yield.
And that's about as far as I want to go.
Okay. So it sounds like notable sequential declines, but at least for now probably still above prior year.
Yes.
Okay. Thank you for the time as always.
Next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks, good morning.
I guess a couple of thing how much more head count do you realistically expect to add in the second half, maybe Cindy and any thoughts on restarting some of these hump yards and if that's if there's more of them to do if that's permanent and then Ed I just wanted to follow up.
Point about was that was that call <unk> is going to be down sequentially or is that overall ARPA. You that you think it will be down sequentially from <unk> to <unk>. Thank you.
Yes, Scott I'll tackle the head count question, and just say that I expect that we will be probably about 1000 heads higher at the end of the year compared to the end of last year.
And so that is going to be <unk> first with trainees higher training accounts, but then also qualified TNA employees as well.
And you can see our targets that we gave to the FCB.
Our target of $73 30, I think by November .
It continues to ramp up on the qualified ranks as we get into next year I think we've got a target out there of over 7500 by the time, we get to May.
Let me hand, it off to Cindy you want to talk about service, yes. Thanks for the question Scott because I want to make sure I put that in my prepared remarks, so I could talk a little bit more about it.
We reactivated these homes to give ourselves some additional capacity that we need in this and the two areas served by making <unk>.
The way switching demand has evolved since our 2020, there's enough critical mass to justify returning them to services as hump yards.
Because we idled them, which was our plan always in 2020, and we didn't eliminate their capabilities, we do not expect any upfront or ongoing cost of any of any substantial nature. So.
We think that returning to hump yards.
Humping cars, even for either short or long term as an example of resiliency and it's important that we have that and.
I do think and when you think about it the productivity gains that we generated when we idle.
And the first time, we're going to be able to hold onto most of that was that was a lot of the thinking that went into that was part of the thinking that went into returning them to service and I do think we will always evaluate it there'll be times, where we may see that will well.
I told him again so.
It's meant to help us do our number one goal here, which is to return our service levels.
Yes, let me talk about coal for a second yes, we're going to see sequential improve excuse me sequential decline in the.
Nicole our view, that's going to be an inevitable drag on the on the overall our view for the for the rest of the year, but we.
We continue to see strong price opportunities in our other markets, including merchandize intermodal auto.
Thank you.
The next question is from the line of Ben Nolan with Stifel. Please proceed with your question.
Yeah I appreciate it.
So you guys mentioned storage fees on the intermodal side I am curious if you could maybe put a little context around that and then how you see that playing out in the back half of the year.
Sure I'll take that.
Had anticipated the supply chains would would be improving as the year has progressed and while we saw some improvement earlier in the year, we <unk> seen.
More of the constraints become more acute lately.
We are anticipating that supply chain will improve throughout the rest of the year and as they do.
And fluidity improves then we will see those storage charges decline.
Okay any context as.
As to how we should think about.
What that means in terms of order of magnitude at all.
No I think.
We will see.
This is.
Forecasting the future of where things I don't control like supply chain is but.
If you see improvement Youll see youll see similar change in the in the rate of store.
Right I appreciate it thank you.
Our next question comes from the line of Justin Long with Stephens. Please proceed with your question.
Thanks, maybe to start with one for Mark just thinking about the full year <unk> guidance.
100 to 200 basis points worse than what you anticipated coming into the year, how much of that is fuel versus everything else and then Sandy I was wondering if you could talk about what youre seeing with the attrition rates right now versus normalized levels, especially attrition rates for new employees that cheap.
In the last year.
Yeah.
Justin Thanks This is mark.
Certainly a portion of its fuel for sure, but I think.
The real issue here is just the volume has not come.
The way we expected it to come when we were talking about.
Middle of the quarter, there about still having a path to our prior guidance. It was really going to require that we saw an upward inflection on volumes.
Take hold pretty quickly and lead to some sustainable ramp.
That obviously did not happen as we as we concluded Q2, and we're now projecting more of a gradual ramp in volumes as were seeing service start to start to improve here.
And yes, you heard it its a 140 basis points of headwind now in the second quarter is bigger than we had expected.
We do think it moderates as we go through the back half of the year, we're not.
Can't control that we're not sure.
We do take into account the fuel curves when we when we look at our projections for fuel, but certainly fuel is an element of that change as well.
And Justin as far as so far.
Attrition rates globally.
Seeing about the same as we've seen.
All year, both from tenured employee perspective, and a new employee perspective, or a conductor trainee perspective, there are clearly markets and locations, where it's more challenging than others and that's also consistent.
Where we've been all year I will say that we just recently announced that we are increasing our conductor training rates and we think that will have a very positive impact for us both in retention as well as attraction. So we're feeling we're feeling good.
Okay. Thanks for the time.
Thank you.
The next question comes from the line of Jon Chapell with Evercore ISI. Please proceed with your question.
Thank you good morning.
Sydney Theres been this acute focus on labor and it seems like you guys are doing a good job of ramping up pretty quickly, especially in July and you're starting to see it in your service metrics, Norfolk, specifically has had a little bit more issue with chassis over the last 12 months as well and you guys kind of laid that out in the presentation. If we take the labor component out of it what's the equipment situation.
And what's your latent capacity that if youre appropriately resource from a TD perspective, you can actually meet this demand and we will see more of an inflection in volumes.
So let me just add equipment wise you know we do we are.
I'll talk about locomotives and I'll turn it over to Ed talk a little about chassis you Didnt mentioned locomotives, but it is important to make sure you know in my prepared remarks I did indicate that we are keeping our surge fleet fully activated throughout this whole process here as we recover service and we're bringing on our DC to AC conversions.
Which is also allowing us some capacity from equipment basis on locomotives from a chassis perspective, let me, let me turn it over to Ed for some detail sure. Thank you Cindy we have a couple of hundred in hand with more revenue each week and we expect a significant tranche of improvement the land during the fourth quarter. This year. So I think we're in pretty good shape when it comes to our chassis.
We see the normal what I would call normal course of business sporadic.
Disruptions associated with chassis for both other domestic partners as well as steamship lines, but again I would consider that normal course of business outside the gate, we are seeing supply chain impacted by the congestion of first mile last mile on the St elevated Street wells as well as volume.
<unk> associated with different ports drayage capacity issues and of course available warehouse space.
And if you read the papers, where do you see a lot of ships waiting offshore that a number of ports, which is really not shrunk very much.
Yeah definitely okay. Thank you I think sandy.
Okay.
Thank you next question is from the line of Ken <unk> with Bank of America. Please proceed with your question.
Hey, great good morning, maybe.
Maybe sandy I, just wanted to dig into that.
Returning a little bit here, just why bring them back isn't it more efficient to be flat I guess just from us being on the other side of the table years and years. It seems like all we heard was the first thing on the precision scheduled railroading to do with eliminate the humps to save on touching in time.
And then I guess, Alan with that would you consider bringing on any <unk> expertise just as CN just did with that harriss on a consulting basis. Obviously, there is a couple of X.
<unk> experts out there that are available is that something you would consider.
So Ken let me, let me start with the Humps. So we really did take a really deep dive into this and when you think about not only.
Sort of traffic changes that have occurred since 2020.
That had a big impact on it.
But the other pieces the idea of switching cars beyond hump hump yards and bypassing them are flat switching to reduced demand. So he can flat switching split switching them challenge has really been having the people to do that switching where we are moving them to serving our customers. So the value is really in being able to.
Have a location that you can get the switching done.
It may be short term and maybe longer term, we'll just see how it evolves, but that's the thinking behind it and again I do want to emphasize that.
We really considered the cost associated with it to make sure that we had a really good trade off here and we are really going to be able to hold on a number of the gains that we have.
We're confident that's not going to add cost one of the keys to the <unk>.
<unk> is making sure that youre not running cars out of route just to have them humped and so we saw that discipline. When we close these two hump yards during the pandemic and the volume outlook has changed we maintain our focus on a very efficient balanced opt.
Operating plan, we've just installed a new operating plan and opening the humps just makes those switching operations more efficient and we've got a great team.
As you take a look around the table.
On this call we're fortunate to have two folks join us from from outside of Norfolk, Southern who contributed greatly to our success.
Thanks, Alan Thanks Sandy.
Yes.
The next question comes from the line of Tom <unk> with UBS. Please proceed with your question.
Great Yes.
Thank you.
Wanted to ask a little bit more on top SPG and schedule changes I think Cindy you said something like 90% of the trains you reviewed.
How should we think about the scheduled changes that were made and then also maybe if you consider that relative to the changes made a couple of years ago. When you originally implemented top.
I think of those changes as being fewer train starts longer trains.
How should we think about the train schedule changes made with top SPG as it also.
Train starts or it sounds like an intermodal it might even be more train starts.
And some some different approach. So I just wanted to if you could offer more perspective on.
What youre doing with that in terms of train starts and other changes. Thank you.
Sure. Thanks for the question so just to go to.
High level here.
Our main three objectives on top SPD or to balance the network improve execute ability and increase train size and part of the changes in the schedules were really to help us balance the network.
Balanced flows across the network.
Cars and locomotives and make sure that we had realistic.
Schedule that allowed trains to arrive and depart terminals. So we didn't have them bunched in or bunched out.
That particular terminal we also as I noted in my prepared remarks that increased our distributed power utilization and accounting for that as trains were departing <unk> working in individual terminals is a lot of the work that we've done in the 90% of the schedules doesn't mean that.
Changed dramatically, but we've adjusted them so that we can do.
We can make sure that when we operate our plan that we don't have conflicts that prevent us from being able to execute consistently. So so that's really what we were trying to achieve there. It has substantially reduced the number of train meets on our network, which makes our operations more fluid more executable by our team in it.
System with our no surprises approach, we evolved our customers that you want to give some perspective on the customer involvement sure absolutely.
The first thing our customers want and by the way let me just say weird. We're so lucky to have a great coalition of partners that we do business with every day and they really want is to have an executable train schedule.
They want to have a predictable service product and so they have been highly collaborative with us as we've gone through the top SPG process to look at the changes that were necessary to improve the executability of our product and I can't say enough about the collaboration that we've had with them and I think we're starting to see some early results.
I think that they would say the same thing. So we're encouraged by those results, but I am most particularly encouraged by the level of the collaboration that we've enjoyed with with our partners.
So just I guess to be clear should we think of this as a reduction in train starts or an increase or kind of net not a big impact, but just more rebalancing.
I think as we continue to roll it out.
I noted that we started in the second half or actually it was in late second quarter and we still have some some work to do to roll it out in the intermodal space.
And what I would say relative to crew starts as we're going to improve service frequency in some of our core markets and we're not going to be adding crew starts and we may have a small reduction in that.
In that lane in those lanes.
But it's it's.
We're still in the process of putting them on the railroad Tom what it does is it really improves the executability of our operating plan.
Which means we're going to be more consistent more reliable more on schedule. Those are the principles of <unk> that will reduce the friction costs associated with.
With the slowness in our network.
Okay, great. Thanks for the time.
Thank you. The next question is from the line of <unk> with Deutsche Bank. Please proceed with your question.
Thanks, Hi, everyone I appreciate the time.
Mark I just wanted to understand the cadence of the or in the back half because of volume out of the gate here in the third quarter.
It's pretty weak I think it's down like 3% or something like that.
Typically we do see maybe flattish to slightly worse or <unk> versus <unk> I don't know if.
I mean is the is the full year guide the revised full year guide really contemplating kind of a big inflection in the fourth quarter or does the third quarter look a lot like the fourth quarter. If you could talk about that and then just you know.
For the industry, maybe this one's for Cindy and Allen.
The industry has been talking about better service and more labor for a long time over the last several several months and we've been kind of disappointed not just with Norfolk, but I think the industry as a whole I think it would just be helpful to understand when do you guys actually think timing wise, we see a more pronounced inflection we've seen some green shoots as you mentioned.
Stabilization I mean are we talking about September October when do you think you're at the point of equipment and labor wise, where we actually see some tangible inflection in the service metrics.
Yes, I'll cover the service metrics first.
We outlined our plan for the surface transportation board it'll be.
Beginning of next year before we're at our targeted head count.
That's going to create a big lift we've already seen improvements in our service product with the implementation of top SPG and with the implement.
The onboarding of new conductors and I think that will continue to improve as the year progresses, it won't be linear, but we should see some some lift as we move out of vacation season as well in terms of the availability of our crews.
So that leads to pretty much of a volume profile as well, we will probably see more of a ramp go into fourth quarter with more volume that should help the operating ratio but of course, there are seasonal headwinds that typically take effect in the fourth quarter versus the third quarter.
Got it.
Neutralize some of that when we look at the or progression. So.
We're not going to give the quarterly guidance, but it does seem to be.
Probably a little bit more of an upward I'm, sorry, a little bit more of a gradual improvement in the.
Or as we go through the balance of the year as volumes come on mainly in the fourth quarter. The volume growth I should say it comes on mainly in the fourth quarter.
So does that so does that mean, we take a step back before we accelerate into the fourth quarter I'm just trying to understand.
I understand is it a is it a slope upwards in the back half versus where you were in the second quarter or is it a step back is it a little bit of a J curve.
No I think we're going to I would fully expect that we will see sequential improvement from the second to the third quarter.
I'm, just I'm not going to tell you yet whether we'll also see sequential improvement from the third quarter to the fourth quarter or if there'll be somewhat on par with one another.
Got it okay. That's very clear. Thank you very much everybody appreciate it.
Thank you Robert.
The next question comes from the line of Ari Rosa with Credit Suisse. Please proceed with your question.
Yes, hi, good morning.
So I wanted to ask just kind of a broader philosophical question I think we've been dancing around it with a couple of questions have been asked but.
You are talking about obviously, adding adding head count bringing equipment back onto the network.
Reintroducing some of these hump yards.
Is there a point where service improvement maybe is at odds with with our improvement and.
What point do you think we can we can kind of see a resumption.
Our improvement is as we think about 2023, what kind of incremental margins might we be looking at.
That service gets gets back to where you want it to be.
Or do we fully believe that service and margin improvement are complementary.
To support each other and our trajectory for service improvements and the tenant improvement and or belies that fact, we're going to take a balanced approach. We've got balance objectives of service productivity and growth in our new operating plan that provides some sort of insight as to how we are thinking about this thing.
Already as to improve service.
Our service and fluidity improves youre going to see significant volume uptick and productivity gains, which will collectively drive margin improvement.
To remind you.
In a difficult service environment like we're dealing with there is a fair amount of incremental costs that we're absorbing to have to cope with it.
Whether it's incremental over time, whether it's re crews whether it's drayage costs.
You name it training travel taxi.
There is a fair amount of cost right now that we're absorbing in our P&L to deal with the current service challenges so.
That starts to.
Lesson as service improves and I think you need to keep that in mind and even in my in my prepared remarks, I talked about the fact that both train length and train weight are up even in difficult circumstances here. So I think we'll hold on to that end I am very positive on being able to run a very efficient network that serves our customers extreme.
Well.
Got it okay. Thank you thank you for that color.
Yeah.
Thank you. The next question is from the line of Brent <unk> with Barclays. Please proceed with your question.
Hey, good morning, everyone and thanks for taking my question.
This might sound, a little naive, but I know, we always focus on conductor trainees.
My understanding though is that for engineering.
To be an engineer that training is a little bit more incentive or maybe longer duration. So can you talk about your qualified engineer ranks.
That potentially the next bottleneck or again is that just a naive question.
It's a great question.
We are.
You noted conductors take promotion to engineers that is our pipeline for locomotive engineers.
Over the years, our investments part of the resiliency investments. We've made is to qualify more and more people to be locomotive engineers as conductor step them up to qualify and then step them back down to acting in active working conductors. So we keep a buffer that is that we've used through this.
<unk>, where we can step up the engineers and then backfill with conductor trainees.
And I would say that we're already starting the process training. Some locomotive engineers will be next month, we will keep an eye on that and maintain that buffer that's going to be part of.
As we as we stabilize service levels and get our conductor ranks, where they need to be that will be one of the big areas that we focus on in 2023.
Thank you.
The next question comes from the line of Ravi Shanker with Morgan Stanley . Please proceed with your question.
Thanks, Good morning, everyone.
It's a new Alan can you help us understand how your customers right now are thinking about.
Truck to rail conversion, obviously your service improving youre, putting in place top SPG and that held at the same time the truck market's loosening.
And I think for now at least.
Shippers want like Super tight fought supply chains with with hydro <unk> so well.
What's driving that incremental conversion and his top SPG enough to do that.
Ed why don't you talk about what you're hearing from our customers clear respect up opportunities.
We're talking to our partners.
Everyday and.
Frankly.
Prices are loosening, but our customers remind us every single day that those are from historically very high levels.
The contract rates have stabilized.
There are a number of things that our customers want but one of them is they wanted to do more business with us.
Our customers have freight that they would like to put on the railroad and as our network throughput capacity improves through network velocity theyre going to do that.
We have line of sight on freight that wants to move on the railroad right now whether it's in our industrial markets, our consumer markets, where energy markets and.
We're confident that as the network velocity improves our customer who are going to find additional value in the product that we're able to deliver to them and.
That will manifest itself in additional volumes later this year.
Got it but given the incremental value proposition of rail do you guys feel confident that you can push yields higher even if the truck market in a truck pricing comes down.
We stay very very close to that we're always looking at what drug prices are doing are you in contract prices have stabilized at very high levels.
We're always looking at the gap between what we believe the value that we're offering versus what a truck offers.
<unk>.
We've looked at a number of lanes, specifically, where we offer intermodal service as an example, and we're comfortable that our door to door pricing.
Competitive against over the road trucking.
And let me remind everyone, including myself there are multiple advantages to using rail versus the highway including sustainability. We've seen we've seen a lot of our customers make amendments publicly about what it's going to take for them to reduce their greenhouse gas emissions and when we think about the consumer packaged goods business is approximately 80%.
Sent the greenhouse gas comes from transportation.
The efficiency advantage that we deliver for our customers over the long period of time is going to help them achieve those goals.
Very good thank you I'll add.
We had our intermodal franchise has delivered 22 consecutive quarters of year over year growth in <unk>.
Thats Darrin, a freight recession and during a pandemic and.
And so there is there is great value with.
With the product that we deliver our focus now is on enhancing the value of that product.
It makes sense. Thank you.
The next question comes from the line of Bascom majors with Susquehanna. Please proceed with your question.
Mark now and as you both alluded to in your prepared remarks, theres some uncertainty as to what the actual union wage increases from 2020 forward are ultimately going to be can you talk about how you have managed that uncertainty with your accruals, so far and if the actual wages come in different than those expectations. When do you true that up.
Retroactively you communicated to us on a go forward basis.
Pay baskin. Thanks, a lot for the question this is mark.
Look we've agreed with Phoebe that we weren't going to disclose discuss publicly what our relative positions are but I will tell you we have accrued.
Level of back wages.
It reflects our efforts to keep our craft workers amongst the highest paid in any industry.
And obviously, if there's a settlement.
That is at a different level.
Whether that happens through the PB or subsequent to the PB, we will have to make an adjustment and we will make that very very clear in terms of disclosure to you all what the impact will be.
So again whatever that increment is we'll let you know, but right now we are accruing something.
Based upon what our expectations were.
Thank you for that and just to clarify you mentioned the P. B a couple of times in your timing is it the <unk> report that would be that trigger in your mind or something subsequent like.
A tentative agreement with the coalition or something in that vein.
Yes, we have to work with the accountants to understand what the trigger event will be so I'm not really at liberty to.
10 point that right now on this call.
Thank you for the time.
Thank you Beth.
Our next question comes from the line of Jeff Kauffman with vertical Research partners. Please proceed with your question.
Thank you very much and thank you for taking my question.
Just a question about the hiring process and I know theres been a bunch this quarter.
One of the complaints we had heard from some other rails is that they were seeing a problem retaining employees post training now you had mentioned the wage increase in some of the carats that you had put out there, but I guess two questions.
Why is this becomes so problematic is it just that it's kind of a gen Z.
Employee wants different things and we've got to change the job kind of item is it more of a pay item.
And then secondly.
Let's say the economy slows a lot faster than we all think.
Just theoretically and I know your volume forecast doesn't imply that do.
Do we still stay to the thousand employees by the end of the year.
Great well, let me, let me start with the training retention piece one of the challenges for our Chinese when they do markup as seniority based system. They will tend to get the work that others do not necessarily do not want those will be the jobs that they can hold so as they as they step into that role some.
That's not not really what they're looking for.
We are.
Our training process allows us to.
Convey that information, but sometimes it doesn't become real until you come up and you Mark up I will say.
In terms of.
What could be a solution at.
At the National table is conductor redeployment.
Will allow us to have a more structured work environment for more conductors than we do today. So that is part of what we feel like is a good solution and we feel like it will fit the needs and demands of our workforce in the future, which is why we've got it on the table for negotiation.
Thank you so more of a lifestyle. Thank you.
Jeff It's really more of a lifestyle challenge in a very unique.
Where everybody is looking for talent. So you have to compete against everybody simultaneously.
So labor has a choice of what they want to do it in many cases, despite the very rich and attractive based structure that the railroads offer sometimes they'd rather work in a more.
Predictable schedule.
Warehousing or.
Home construction, where they can be nearby where they live and not.
Not staying in hotels.
And also just not beyond coal or work third shift. So we're just in a very unique environment right now where the entire labor market.
<unk> has their options to choose from and SME noted some of those work rules changes that we're proposing.
Would directly address some of those issues that mark articulated.
Okay and second half of the question I know the trainees were already in process. So we are pretty committed to that thousand plus employees by year end with the STB plan or what if the world changes.
We are committed to high levels of service throughout all economic cycles, because we believe that services resiliency enhances the ability to be opportunistic during the near term recovery and generates confidence by our customers and building supply chains around us for the long term as Ed noted.
There are a lot of inherent advantages to our network. There is a lot of reasons that customers wanted to do business with us over the long term.
Okay. Thank you.
Thank you. Our final question is from the line of David Vernon with Bernstein. Please proceed with your question.
Excellent Hey, good morning, guys. Thanks for fitting me in here at the end.
Two longer term questions for you on top SPG.
If we're adding 1000 heads to workforce can you talk about maybe Cindy what level of volume growth you could absorb that head count once they get productive I'm trying to understand whether the embedded labor productivity level. In this new version of the operating plan as higher lower than maybe what we've seen in the early days of the <unk>.
And then Alan maybe longer term on the service side does this get us to that low to mid eighties, and first and last mile for our service levels as you outlined for the FTB or is there upside to that I'm, just trying to get a sense for kind of how you think about is low to mid eighties enough to drive modal conversion longer term.
Hey, David I'll start I mean, so from a from a <unk> I mean, I would think it's going to be a very productive operating plan and obviously, it's not going to be static we're going to adjust as as volume adjustment is in his business suggest across our cone across our network.
It's about balanced Executability and train size as I described.
One of the areas that I mentioned in my prepared remarks in the bulk network. We have seen a lot of improvement in train size from a standpoint of combinations of trains, but we will be able to add additional cars to trains as well and our standard sets in our grain network. So I see this as a as an enabler from a productivity stand.
And allow us to bring on volume with a consistent operation that we will that we will offer.
So let me just add to the fact that the <unk>.
People were adding it requires a lot more energy.
People to skip it network sped up to where it needs to be and then also.
The number of people, we're adding once we're up to speed gives us the capacity additional head count capacity to handle even greater volume.
So I think that's the other point is the capacity dividend at a faster network provides.
<unk> will allow us to take on more volume.
Stable reliable predictable service product over a long period of time is exactly what our customers need to build their businesses around ours.
We can offer tremendous value and unlock value for them and for their customers by delivering that kind of service and that's what we're committed to a long term delivering a high level of service that our customers need that allows them to deliver growth and value for their customers.
Thank you.
This concludes the question and answer session I will now turn the call back to Mr. Alan Shaw for closing comments.
Well, we thank you for joining us today.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.
[music].
[music].