Q3 2023 Norfolk Southern Corp Earnings Call
Greetings and welcome to the Norfolk Southern Corporation third quarter 2023 earnings call.
Time, all participants are in listen only mode.
A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce Luke Nickolas senior director of Investor Relations. Thank.
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 within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
These statements relate to future events or future performance of Norfolk, Southern Corporation, which are subject to risks and uncertainties and may differ materially from actual results.
Please refer to our annual and quarterly reports filed with the FCC for a full disclosure of those risks and uncertainties. We view as most important our presentation slides are available at Norfolk, Southern Dot com in the investors' section along with a reconciliation of any non-GAAP measures used today to the compare.
<unk> GAAP measures.
Turning to slide three it's now my distinct honor to introduce Norfolk, Southern's, President and Chief Executive Officer, Alan Shaw.
Good morning, and welcome to our discussion of third quarter earnings here.
Here with me are Mark George our Chief Financial Officer, Paul Duncan, Our Chief operating Officer, and Ed Elkins, Our Chief marketing Officer.
I want to begin by thanking my Norfolk Southern colleagues for working safely serving our customers and driving our strategic plan forward.
When we charted a new course in the industry, we understood unlocking the full potential of our powerful franchise would require an enhanced focus on resilience and operational excellence across every aspect of our business.
Our transformation into a more customer centric operations driven service organization.
Reveals opportunities to strengthen our franchise.
We saw some of that in the third quarter with two technology outages.
The first on August 28 was caused by a defect in a vendor software.
Second on September 29th involved a firmware maintenance issue.
These incidents were unrelated.
Not cyber security issues.
We are taking measures to prevent a reoccurring and importantly, we are not stopping there we have launched a top to bottom review of our technology infrastructure with the assistance of leading third party experts.
Operations, driven means pursuing operational excellence in every aspect of our business.
And that includes I T.
Demonstrating our progress and building resiliency are strengthened operations leadership enhanced operating plan and greater crew capacity.
Tabled us to manage the technology incidents with limited disruption to our customers and grow volume through the service recovery.
Throughout the third quarter, we continued to do exactly what we said, we'd do when we announced our strategy.
We are making smart investments in safe reliable and resilient service.
Although the macroeconomic environment of abnormally low volumes is an unwelcome headwind it has not changed our approach or diminished our confidence that our strategy is a better way forward.
The market will recover and we will be poised and leveraged.
To capture growth with strong incremental margins.
Mark will provide detail on other cost drivers in the quarter, including fuel prices and higher labor costs. As a result of last year's historic wage increase for our Kraft colleagues.
These costs combined with investments in our strategy and the backdrop of historically low volumes in the quarter.
Contributed a significant pressure on our operating ratio.
Which deteriorated year over year and sequentially.
We are clearly not satisfied with these results.
We will recover from these short term impacts to our operating ratio.
As we articulated when we launched our strategy continuous productivity improvement is a core element of our balanced approach.
We are committed to achieving and maintaining industry competitive margins over the long term.
Our focus on productivity is unrelenting.
Under the strong leadership of Paul and his team in operations.
We have an increasingly stable network with a high degree of plank appliance, allowing us to iterate the plan for service and productivity.
And as Paul will describe we are reducing our pipeline of conductor trainees through year end to more normal levels among other steps.
Against the challenges of the quarter there were several encouraging developments that demonstrate progress on our strategy and point to growth and profit improvement in the quarters ahead.
Notably service in the third quarter improved both year over year and sequentially.
Low enough to onboard more business.
Volume improved as well.
It appears to have turned a corner with each of the last four weeks running above 136000 carloads.
That's a level, we havent seen consistently since the second quarter of 2022.
In part this was a function of customers awarding us new business.
Our customers see the commitment we are making to deliver more consistent reliable service and our marketing team is creating innovative solutions to amplify the value of that service.
Even in a weak freight environment.
Ed will talk more about this later.
In addition to service and volume gains we delivered improvements in safety as well.
Our mainline train accident rate is down more than 40% year over year as we strengthen our safety culture and performance.
In East Palestine, and the surrounding communities, we continue to deliver on our commitments.
Mark will provide an update on costs associated with our ongoing efforts to make things right.
I visit regularly as we make significant progress cleaning the site and investing in the communities future.
I'll now turn it over to Mark.
Thank you Ellen and good morning, everyone.
I'll start on slide five with an update on our accruals related to the eastern Ohio derailment.
We are pleased to report that we will be completing soil removal from the derailment site shortly but expect that there will be ongoing testing efforts to ensure continued safety of the air soil and water through April of 'twenty 'twenty four.
And as such we accrued $118 million in Q3 to account for this timeline extension.
Additionally, we recorded another 70 million for legal and other costs incurred in the quarter.
Of note, we did file our initial claim for reimbursement with our insurers during the third quarter and will continue to file claims as costs accumulate.
We did receive notification of our first reimbursement under our policy of $25 million and accordingly recognize this as an offset to the cost incurred in the third quarter the.
The cash was actually received last week.
While we're encouraged by the speed of this initial reimbursement there are dozens of parties sharing exposure at 10 layers and the insurance tower. So we expect this cost recovery process to be protracted.
Also of the $966 million recorded as expense thus far.
Just more than half has been paid through September 30th.
The remaining $450 million I'd expect roughly half to be spent in the fourth quarter and the rest to be spent in 2024.
I will remind you that the situation remains fluid and we will continue working through these issues for many quarters to come.
We expect that there will be additional costs that have not yet been incurred related to future settlements fines and penalties as well as legal fees and we cannot predict the amounts at this time.
Moving to slide six where we illustrate the impact of these third quarter costs on our results.
Our GAAP results are in the first row on row, two we isolate the accounting to our Q3 financials related to the incident and our response.
At the bottom of the chart.
You'll note that comparisons of the adjusted financial results to the prior year.
I'll be talking about our adjusted results for the remainder of the discussion.
Revenues were down 11%.
Adjusted operating expense was down modestly.
The adjusted operating ratio for Q3 was 69.1%, which notably includes 270 basis points of headwind from net fuel price impacts.
On an adjusted basis operating income was down 28% net.
Net income and EPS were down 37, and 35%, respectively, but recall last year, we enjoyed a benefit from a state income tax change of $136 million distorting the year over year comparison.
Let's turn to slide seven for an overview of our operating revenues and it's a quick look at the drivers of the revenue changed from last year in advance of bad getting into the market details.
The biggest driver in the year over year revenue decline is the meaningful reduction in fuel surcharge revenue.
Volumes were down, 2%, which equates to a $74 million revenue decline.
And we are highlighting here the reduction in intermodal storage revenue of $71 million.
As we are now back to more normal levels and will continue to have tough compares through Q1 of 2024.
Ed will talk later about the traction we have on pricing as well as mixed dynamics in the quarter that collectively inform the positive $27 million of rate mix and other.
On slide eight let's drill into the operating expenses.
Adjusted operating expenses for the quarter were down 19 million or 1% on a year over year basis.
Fuel expense was down $94 million or 25% driven mainly by lower fuel prices.
Comp and Ben was down 20 million or 3% year over year as higher pay rates and employee levels were offset by a favorable comparison with Q3 last year from the $85 million charge, we took related to the retroactive wage accruals.
Depreciation expense was up in line with our earlier guidance.
Purchased services was up due to higher costs associated with engineering activities on our network as well as technology spend.
The increase in materials and other was up $42 million and driven primarily by an adverse comp on a favorable legal settlement last year.
As well as higher consumption of materials for locomotive repairs.
Property sales were also lower this quarter.
Moving to slide nine.
While we expect costs related to the past service issues to begin unwinding in the third quarter additional service challenges in the quarter resulted in a delay with only moderate easing.
We expect the unwind to accelerate here in the fourth quarter.
Now offsetting these fourth quarter savings will be an increase in incremental costs related to building resiliency in a couple of key areas that will pay dividends in the years ahead.
Firstly, there are investments in the continuation of our hiring in locomotives in order to support both future growth and faster recoveries.
Second are the investments in our craft workforce, including the quality of life enhancements like paid sick leave.
These investments overall should allow for the accommodation of higher volumes that will help cover these costs along with more productivity.
On slide 10, let's talk to a couple of P&L items below operating income.
Other income was up $42 million in the quarter driven by favorable returns from our company owned life insurance the.
The adjusted effective tax rate was 22.7% in line with what we normally guide.
And turning to free cash flow and shareholder distributions on slide 11.
Through the first nine months free cash flow was $1.1 billion lower than prior year.
With half two to derailment related expenditures and the remainder from a combination of lower core operating results and higher capex.
Shareholder distributions over the same nine months were $1.4 billion, thanks to a solid dividend and continued share repurchase activity.
I will remind that the citizen vote in Cincinnati to approve the proposed 1.6 billion dollar purchase of the CSR asset will take place in November.
So we are reserving capital capacity for that potential transaction, which would close in mid March of 2024.
I'll now hand off to Paul to provide an update on our operations.
Thank you Mark and good morning, everyone.
Norfolk, Southern everything starts with safety, so, let's turn to slide 13 for an update.
In the quarter, we have made significant strides our injury rate is up slightly versus last year, but it has improved 30% from where we were just three years ago.
Our accident rate is trending down from where we had been the past two years and we also continue to maintain a significant reduction in our mainline accident rate through the many efforts and initiatives, we have put forth, including the enhancements to our train makeup rules implemented earlier this year.
While those enhancements required a significant period of operational adjustment earlier. This year. They are now paying off in terms of our mainline accident rate improvement.
We also remained very focused on reducing exposures in improving outcomes in our yard and terminal operations. We have made further investments in our people, including enhancements to our training N P. P programs as well as leadership development.
On all of these fronts. The results are encouraging, but we are not satisfied and we'll continue to drive towards our goal of being the industry leader in safety.
Turning to slide 14 for an update on service. This is another area, where we have made sustained progress. This last quarter train speeds have resumed the improving trajectory. They were on before our challenging second quarter. We have also pushed to reduce dwell and improve schedule rigor in our terminals, which well now improved to its best level in two years.
We're sustaining this progress in October while bringing weekly carloadings up to their highest level since Q2, 2022, and while developing new service offerings that Ed will outline.
As part of our scheduled railroad model, though we will drive further progress we have to continue to minimize car dwell maximize velocity across the railroad sustained safe reliable and resilient service and drive productivity on the next two slides we will cover how we plan to accomplish this.
Turning to slide 15, our locomotive velocity was flat year over year.
Now that we are seeing improvements in train velocity and terminal dwell. This as an opportunity we are focused on driving further velocity and productivity in <unk>.
As our terminal discipline initiatives take further hold and as network velocity takes the next step above 21 miles per hour, we expect to see this metric improve along with fuel efficiency as we bring additional tonnage out of the network.
We now have a qualified team he workforces are sized appropriately in aggregate, although we are still investing to get them. All in the right locations. We're on track to have our conductor trainee pipeline Blu 600 by year end as indicated last quarter.
As our initiatives take hold and as Gm's increase this measure of productivity will improve from here.
Moving to slide 16 to discuss how we are driving service improvement aligned with our scheduled railroad model and how it will translate into additional gains and resilience productivity ultimately growth.
First is disciplined terminal execution.
This starts with strict adherence to the operating plan to ensure trains are arriving unplanned to bounce terminal flows in both our merchandise yards and intermodal facilities, we're minimizing dwell by switching cards within six hours of arrival at our intermodal facilities. It's ensuring we are driving precision execution to the trip plan of containers and leveraging our high frequency intermodal.
Model it.
It involves maximizing connection performance getting the right cars on the right train and departing our trains on time.
The second bullet point, we are driving a culture of strict compliance to the operating plan both at the train car and intermodal unit level and expect that this will drive further reductions in dwell and even greater consistency in our terminals next we invest generic people in modernizing our workforce to become more resilient and productive for example, 250 conductors are.
Receiving locomotive engineer training. This year this gives us resilience and flexibility to fill assignments, whether the need as an engineer work conductor or protecting future growth with an investment today.
We are moving forward with the first phase of extra Board consolidations Cross training 260 employees at seven key terminals across the network. Let me explain what this is is railroads and labor agreements evolved and merged over the decades territorial boundaries remains of the preventive certain employees from working assignments that were within their geography.
Many of these locations, we've worked collaboratively with labor to remove those boundaries, but have yet to get folks qualified to work all potential assignments with our new focus on resilience, we're investing in aircraft employees and getting them qualified to hold more assignments, providing them with greater work opportunities and offer a norfolk, southern and enhanced operational flexibility and efficiency.
To complement these labor modernization efforts, we are implementing predictable work scheduling a groundbreaking work life balance initiative negotiated with aircraft colleagues, which will also streamline our back office crew management functions and drive further productivity.
Lastly, we are kicking off a system wide initiatives that will drive productivity and enhance our first mile last mile service. This is a substantial initiative aligned with delivering reliable service productivity and most importantly, driving additional growth the network to.
To close running a safe reliable and resilient scheduled railroad using these principles is going to improve service consistency generate greater productivity and create capacity for growth I'll now turn the call over to Ed.
Thanks, Paul and good morning to everybody on the call.
Now before we get into the numbers I want to call out the collaboration between our teams and marketing and operations as we improve service and innovate solutions to deliver value for our shareholders and for our customers I will talk about it more as we move along here, but I think it's important to recognize the steady progress that we're seeing deepen these organizations.
It's starting to pay off.
Let's start on slide 18, and review our results for the third quarter.
Norfolk, Southern volumes and revenue was down, 2% and 11% respectively year over year in the third quarter.
Revenue declines outpaced volume due to lower fuel surcharge and intermodal storage revenue compared to the prior period.
Within merchandise weakness in several energy markets was the leading driver of a 3% decline in total volume.
Crude oil shipments were challenged by unfavorable fuel price differentials that discouraged crude by rail to east coast refineries that we serve also low natural gas prices negatively impacted shipments of sand and Ngls.
Helping to offset those declines in energy markets with strength in automotive where volume increased 7% year over year in the third quarter.
Growth was driven by continued strength in demand for finished vehicles as well as high shippable ground counts.
Merchandise revenue was down 7% due to lower revenue from fuel surcharge and lower volume. However revenue per unit, excluding fuel set a new record as it improved 3% showing sustained price and mix improvement.
This quarter marks 33 out of the last 34 consecutive quarters, where we've been able to achieve year over year growth in merchandise revenue per unit excluding fuel.
Moving on to intermodal volume was down slightly compared with last year as growth in international intermodal largely offset declines in domestic.
On the domestic side persistently abundant truck capacity and weak freight demand challenged volume while on the international side volume improved as customers continued to return freight to Ipi service.
Intermodal revenue was down 22% as revenue per unit, excluding fuel declined 15%.
Lower intermodal storage fees represented more than two thirds of this decline followed by adverse mix effects from strong international volumes and the impact of persistent competitive pressure and a loose truck environment.
We're also seeing negative mix effects within the international business first shippers are returning to lower yielding short haul lanes that shifted to the highway during the pandemic and second growth in lower yielding empty shipments is also outpacing loaded shipments.
Intermodal storage has returned to a normal level and we expect to lap this headwind in the second quarter of next year.
Lastly within coal.
Volume dropped 9% year over year with weak conditions in our utility markets, which more than offset strength in our export markets.
Utility coal volume was down roughly 26% from prior year levels, driven by high stockpiles and low natural gas prices and prolonged customer and producer outages.
Export volume increased year over year, driven by strong Asian demand.
Coal revenue declined 8%, primarily due to lower volume rep.
Revenue per unit, excluding fuel set a new record and revenue per unit also increased as positive mix and stronger than expected seaborne coal pricing and modest liquidated damages more than offset a decline in fuel surcharge revenue.
Turning to slide 19.
For the fourth quarter, we expect to see slow volume recovery amid uncertain economic conditions.
September presented us with some encouraging data that the contraction in manufacturing is slowing and onshoring to the U S is on the rise. However, we remain cautious in our optimism as uncertainties surrounding future fed actions strike outcomes and geopolitical tension is very pronounced.
Although the macro environment is unclear we are steadfast in our business development initiatives and I'll talk about those in a few minutes.
Our merchandise markets have upside potential in the automotive and metals markets. We expect growth in automotive as we continue to work through the backlog of shippable vehicles improve our cycle times and grow our fleet size.
We also still see unmet demand in our metals market, which we should realize as improving service should drive a year over year growth.
Offsetting anticipated growth in the fourth quarter will be sustained soft conditions in energy markets as the headwinds that pressured crude NGL and sand volumes in the third quarter are expected to continue through the remainder of the year.
Automotive production is a key driver for many of our merchandise markets beyond automotive so the duration and scope of the ongoing UAW strike as a downside risk to our overall merchandise volumes.
Our marketing and operations teams are collaborating to deliver incremental business wins across the portfolio of carload markets that we serve by identifying and solving business challenges for our customers at an accelerating pace.
This innovation and collaboration will be a driver of future growth for N S.
Intermodal volume is expected to improve year over year in the fourth quarter from sustained service recovery and improving market conditions.
We're encouraged by the momentum that we're seeing in our domestic market our.
Our customers are seeing improvements in bid compliance and demand, which has us trending positively in October.
But we continue to see a relatively muted peak season, which will temper overall volumes.
International markets will benefit from strong east coast import demand and favorable ocean rates driving demand for Ipi we.
We expect the negative mix effects from the shift back to short haul lanes to persist in the fourth quarter.
And we continue to experiment and develop new services for our intermodal customers and I'll talk about that in just a minute.
Coal volumes should be stable in the fourth quarter with upside potential in export markets as new production comes online.
In addition, recent trends and seaborne coal prices suggest higher prices throughout the remainder of the year due to supply constraints out of Australia as well as continued strong demand out of China and India.
Domestic coal shipments should improve sequentially in the fourth quarter on improved service and fewer outages that headwinds from low natural gas prices will continue to be a limiting factor.
And while uncertainty in the economy continues to persist we are confident in our ability to collaborate with our customers to drive incremental volume and to continue providing value in a manner that drives growth in the future.
Now before I turn it back to Alan I would like to expand briefly on how we're providing value in ways that drive growth and an unfavorable market.
Slide 20 features key examples of new service offerings, we developed this quarter aimed at making Norfolk, southern the preferred option for freight transportation and driving modal conversion.
It's important to recognize the collaboration and teamwork invested by both marketing and operations to bring these projects to life.
In October we partnered with CN to expand intermodal service and connect customers in Atlanta, and Kansas City with markets on the CN in Canada.
We also partnered with Florida East Coast railway to expand both domestic and international intermodal services in Florida.
These new services are designed to give our customers flexibility expand the reach of the N S intermodal network into key growth markets and give more ways for our customers to reduce their supply chain greenhouse gas emissions.
Early in September we also announced an investment in Dray now a company focused on modernizing technology solutions for intermodal.
Drain now is revolutionizing intermodal first and final mile journey through an app that provides customers with real time shipment tracking and document capture of drayage shipments Norfolk Southern is the operator of the most extensive intermodal network in the eastern U S and together with Dray now and our best in class.
Customers, we will drive more transparency into a fragmented supply chain and increase the ability to best serve our intermodal customers.
And lastly, our persistent industrial development efforts paid off as both new and expanded industries turned on additional volume in the third quarter, including a new cement trans load and ethanol terminal and a containerboard warehouse as well as expanded rail operations and an established grain elevator.
We'd like to make our customers for locating on our network and allowing N S to serve their market needs.
Together these diverse projects will generate over 7800, new car loads annually at full production.
We're aggressively pursuing project oriented growth to enhance DNS network in a fragile freight environment, we're not sitting back and waiting for carloads to come to us, but rather we are proactively making enhancements to our service portfolio to become a preferred service provider for our customers and drive sustainable and smart <unk>.
And concluding on slide 21, let's look at our 2023 outlook base.
Based on lower Q3 revenue, which included significantly lower fuel surcharge, we're now expecting 2023 revenue to be down closer to a 4% year over year.
With that I'll turn it back over to Alan to bring us home.
Closing on slide 22, although this year has presented a number of challenges we are emerging a stronger company due to our response and our decisive action to affect necessary improvements.
Im more confident than ever that our innovative strategy is a better way forward.
We are already seeing the benefits from leadership changes plan refinements and resource investments as we drive towards our strategy.
We are achieving wins with our customer base and we are incorporating operational discipline that drives consistency and enables productivity enhancements in the quarters ahead I'm extremely optimistic about our future.
We will now open the call to questions.
Operator.
Thank you well now be conducting a question and answer session.
If you'd like to ask a question at this time. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to move 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.
Everyone to one question to accommodate as many participants as possible.
Thank you and our first question comes from Chris Wetherbee with Citigroup.
Hey, Thanks, good morning, guys.
I guess, maybe wanted to start on slide nine Mark you laid out some of the temporary service costs and the incremental resiliency investments that you're making I guess.
Want to make sure I understand how to think about that as we move into the fourth quarter. And then also really more 2020 for I guess are you able to absorb these costs and generate sequential or improvement in the fourth quarter and then as you look out to next year.
<unk> of this cost kind of sticks around how much of it actually will go away and any thoughts around the cadence of that so thanks for that.
Okay. Thanks, Chris.
Yes. So if you start first on the service costs.
We saw slight reduction here in the third quarter, we were.
Hoping for a little bit more but obviously, we had some disruption to the network that delayed that.
We do expect the reduction to continue here in the fourth quarter and eventually.
Unwind over the next couple of quarters as fluidity on the network improves.
We qualify more of our <unk> and in the right critical locations as well and we start to build some solid processes.
Around delivering service as opposed to putting the band AIDS on like we are today with overtime et cetera. So those those will start to unwind here in the next couple of quarters. The right hand part of that slide those are I think you need to think about those as structural cost increases and those are really around developing and building.
Resiliency.
The whole point a lot of this is related to the <unk> ramp up that we've seen as well as the investments in our locomotives.
There are also costs related to the quality of life improvements that we've announced with our craft workforce.
And I would say that of these costs.
5% of those will probably reside in the comp and Ben line.
And then after that you'll see you'll see cost sitting in purchased services and also in some materials, but.
In terms of cadence as we go into Q4 like I said service costs will start to come down.
But that will be offset by another increase there and the structural.
Resiliency costs, and then I think at that point, we should probably be moderating.
Going forward into 'twenty, four, but we will give you more 24 guidance when we reconvene in January and Chris One way to look at this as our investments in resiliency arent investments and the elimination of the service.
Recovery costs and it's also an investment in top tier growth and then just three competitive margins. That's our vision for the future and Thats. What we said we were going to do when we laid this out in December of last year.
Ultimately these are going to get paid for by the elimination of those temporary service costs, but also by accommodating more volume than we typically would be able to.
As well as pricing and productivity. So it's it's exaggerated here because we are in a down cycle.
And does this give you the ability to improve our warm fourth quarters still.
So Quentin I think we're at a trough I think we're at a trough right here yes.
Thank you thank.
Thank you Chris.
Our next question is from the line of mantra with Deutsche Bank. Please proceed with your question.
Thanks, Operator, hi, guys.
Maybe first question can you just give us the liquidated damages and call in and where we think coal yields can can trend from the high <unk> levels and and you know Alan just a bigger picture question you know.
Every rail right now has a cyclical challenge everybody has a fuel headwind.
You guys.
Are still reporting margins at our six 700 basis points worse than your direct competitor and just generally industry.
I look at that as an opportunity because obviously with top SPG, you've you've you've fixed the network you're improving the service the volumes are coming so theres, obviously progress made there but is there is there an opportunity to look deeper inside the cost structure of the organization to say listen you know we're dealing with all these headwinds just like all our competitors of ours, but we're still are.
Cost structure is still seemingly very very high and what's the opportunity. There. If you are looking at it and you know how you're going about addressing those those differences. Thank you.
Thank you for that question why don't I address the second part of your one question first and then I'll turn it over to Ed talk about coal yields.
We're committed to industry competitive margins, we said that from the get go.
We're not going to chase short term or targets, we illustrated very clearly mark at a chart I believe that at Investor Day, and then Darren a economic trough right our margins would get a little worse as we can invest it over the long term, but as you evaluate this.
Through an economic cycle. This is the better way forward for Norfolk southern to invest.
And long term growth deliver top tier growth industry competitive margins and drive long term shareholder value.
We're not happy with our cost structure right now.
As we drive operational discipline into our network as we refresh our operations team as we drive high degree of plan compliance. It allows us to continue to iterate the plan for productivity and service and that's exactly what we're doing right now.
Do you want to talk about coal yields sure. Yes, I think you asked about <unk> in the quarter and I think I've said in the prepared remarks. These are episodic we don't expect them to continue.
High single digits in terms of millions of dollars and when we look out into the fourth quarter.
And again restating, what I said in the prepared remarks, we're forecasting prices be sideways through the end of the quarter in the year.
And that's really predicated off the continuation of strong demand out of India and China.
Excellent.
Thank you very much.
Yeah.
Our next question is from the line of Ken texture with Bank of America, Let's see with your question.
Hey, great good.
And a solid job on the new lanes interesting stuff Alan I, just want to follow up on that question, maybe a little bit more right. So you'll have a lot of temporary costs and restructuring costs.
Do you think you need to bring in <unk> expertise to handle some of that network resiliency.
That seems to be the thing that <unk> does right. It allows the quick snapback at least for some of the peers that have implemented that that process and I'm a little confused on the resiliency investments it sounded like when a win win.
Mark went through some of them as it paid sick leave or or is there more on the resiliency expenditures I just want to understand what's what's outside of agreements or cost that you've already implemented on the resiliency side. Thanks.
Yes.
Thank you Ken look I've been CEO for a year and a half.
We've been kinetic here we.
Refresh operations leadership implemented a new operating plan, we've launched a brand new strategy.
That's never been done in this industry, we revamped our marketing organization, we brought in a number of outsiders and leadership role outsiders too.
Rail industry outsiders to Norfolk, Southern I believe we've got the right team going forward, we will continue to look for opportunities to improve our strategic talent base.
With respect to the resiliency costs some of that has to do with predictable work schedules. Some of that has to do with the historic wage increase.
The rental industry and labor came to agreement on last year. Some of it has to do with.
Hiring.
Investing in additional resources.
As a result of that what Youre seeing is third quarter service was better year over year and better sequentially. Our safety figures improved in the third quarter and our volume growth right now our volumes. The last four weeks are at levels that we haven't seen in the last say second quarter of last year. So we're making progress we're doing exactly.
What we said we're going to do this is a better way for from Norfolk Southern to drive long term shareholder value.
And Ken just to put a fine point on resiliency expense about a third of that cost in the third quarter is related to the <unk>.
Quality of life benefits, which are essentially paid sick leave that has a cost to it and the rest is really around the.
The head count additions for primarily <unk>.
But also some mechanical staff and then the rest is locomotive investments as well to be able to accommodate an acceleration networks.
Thanks for the question.
Thanks Al.
Our next question is from the line of Scott Group with Wolfe Research.
Hey, Thanks, Good morning, Mark I wasn't sure. What you were trying to say overall cost ex fuel in Q4 versus Q3. So if you have any color there and then.
I just wanted to go back to that Big picture question, you've been clear in.
Consistent with your message, we're not going to chase short term or long term, we want to have industry competitive margin. I guess my question is what does 2024 look like in that short term versus long term view like are we committed to margin improvement next year are we committed to starting to narrow this margin gap.
Next year because.
It is getting pretty wide right now so I just want to know when do we start to see it.
Yes, the industry competitive again.
Mark do you want to address the first one yes, sorry Scott.
Look I think the way you look at cost ex fuel.
To answer your specific question it should be largely sideways.
And then you sprinkle in the nice uptick we've seen in volumes.
I think we're we've definitely probably trough here in Q3, and we should see sequential margin improvement.
Model out what you think that volume is going to be as we navigate through the quarter. When we report our volumes and you can pretty much assigned traditional incremental.
Rental margin rate to that so I think.
Trough here in Q3, and it should improve from there.
Yes, Scott with respect to industry competitive margins, we are committed to it we're committed to it over the long term.
What we'll see is that as service continues to improve.
Greater opportunity to eliminate the service recovery costs will have greater opportunity to drive productivity throughout our organization as we standardize our operating practices, we have greater opportunities to generate more volume will have greater opportunity to generate more price, reflecting the value of the products that we sell all of them.
Things will contribute to improvements in our margins and industry competitive margins and I think we're going to see improvement in that next year.
Yeah.
Okay. Thank you.
Our next question is from the line of Tom <unk> with UBS. Please proceed with your question.
Yeah. Good morning so.
I think it it seems fairly clear that you know that.
It's not so much a cost story, but it's much more.
Volume in our revenue story that you need to drive that margin improvement and correct correct me if I'm wrong on that.
But the question is really.
What do you think is necessary to really get that revenue story, improving I think we look at the.
Intermodal revenue per car was pretty weak in the quarter I know there was some mix, but how do you think about that that intermodal revenue strengthening is that Mexico to improve over a couple of quarters.
Do we really need to see some tightening in the truckload market I know you a lot of your business is truck competitive. So is that something that truck rates are key just maybe if you could offer some thoughts.
Intermodal net revenue per car, but broader thoughts on 'twenty for you know what what should we be looking forward to really potentially drive that revenue story is stronger.
Yes.
Tom to be clear. This is a balanced approach is not just about revenue growth. We will continue to drive productivity into our organization I'm committed to that.
Our improved service product is going to help us with productivity arent soup improved service product is going to help us attract more volume.
<unk> service product is going to help us price to the value of our products.
There's a lot of value in there as we continue to invest in network resiliency.
And why don't you talk about what Youre seeing in the market itself sure.
It's a really important question that I appreciate your asking and we want to sort of Peel. The onion here to make sure that everybody understands first of all let me say year to date, we are positive on our core pricing in every single market. We serve okay now, let's dig into intermodal.
<unk> impact once we strip fuel out with a decline in our intermodal storage revenue, we knew that that was going to happen.
I think I've said in the prepared remarks that storage for your accounts for over two thirds of the RPM decline that we saw in the quarter and then we had a couple of other things that were very important for folks to understand we had substantial negative mix in the quarter.
And that comes in two forms. The first is international shipments grew while domestic shipments were very anemic given the amount of pressure that's out there in the truckload market.
Our domestic shipments have a higher yield in international. So this was a substantial headwind.
We also saw negative mix in two different ways within our international business first of all we're seeing much higher growth in short haul lanes.
Those are lines that really shifted to the highway.
And then rolled are now rolling back to us.
85% of the growth in the third quarter and international came from those short haul lanes and those are intra state lanes. So it's very important to understand that.
Lastly.
The amount of MTS that we moved.
That is frankly much faster paced growth.
The lows that we saw that as another decremental pressure on our views. So a lot going on there the truck market continues to be loose.
I think the <unk>.
<unk> freight index has been down for 21 straight months.
Contract rates on the highway peaked in March of last year, there's a lot of downward pressure, but here's what I am confident enough number one I am confident that the market in general will rotate back to growth it always does.
The excess capacity that's on the highway will evacuate it always does and Norfolk southern is going to be really well positioned exceptionally well positioned to take advantage of not only the volume increases, but also the opportunity to reprice.
Thank you for the question.
Our 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 a two parter for Ed can you just give us an update I think last time, you mentioned that the $650 million headwind in the back half of the year for coal and accessorial intermodal storage fees is that sort of still tracking in line with expectations and then second.
Secondly to your point about core pricing can you just give a little more color on where that is relative to inflation. I think we have seen a decent disconnect in terms of just the core pricing realization for Norfolk and for some of the industry in terms of how that trended versus inflation, which is higher than expected. So when do you expect to really sort of catch up.
With that is there something structural that's been keeping it lower than what we would have anticipated or is this more a matter of timing with contracts repricing in service. How do you how do you expect that rolling forward.
Well, let me let me try to answer both of those first one I think you were asking about some of the known headwinds that we had coming into the second half and if they are intact.
Yes, we have.
Scene.
Storage revenue.
Normalized pre pandemic levels.
Persisted and it's been very consistent throughout most of the year, we all know what fuel is doing.
On the storage piece, we expect to lap that probably.
Second quarter of next year.
And so that's going to be a headwind until then.
Coal pricing has surprised to the upside and we'll see where it goes from here.
So that's sort of the known pieces of this on the core pricing side I think it's probably worth reviewing what our strategy is.
Number one we're always compelled to deliver a competitive price in the marketplace that our customers can recognize value in but we define that by long term contract pricing not by what's going on in the spot markets that recipe overtime is generated.
Above rail inflation pricing for for many many quarters now we're confident that it will in the future. Okay. It's a very unusual truck market right now we know that.
But on our merchandise business in particular, we recognize high or mid single digit pricing in this quarter and again were positive for price year to date across the book.
Thank you Ed.
Our next question is from the line of Justin Long with Stephens. Please proceed with your question.
Thanks, and good morning.
Last quarter, you talked about $175 million to $200 million of lost revenue from the operational disruptions associated with Keith Palestine any updated thoughts on the timing of when this revenue can be recovered I'm curious if that's something that could be driving some of the improvement in volume.
And then on that two outages any way you can quantify the impact you've seen from those thus far.
And why are you talking about revenue outlook and the cadence sure.
Service improves and it is improving both sequentially and year over year or.
Our customers are very encouraged by that and they are telling us that.
The improvement in service is going to bring freight back to Norfolk, Southern we know our customers are very sophisticated supply chain managers and purchasers and when we're not unplanned they have to make other plans to keep their factories running.
Some of our customers are going to see that value faster and as we cycle equipment faster. They are immediately going to be able to load more revenue on in Norfolk, Southern I think of markets like metals like automotive, even though there is a strike right now I think of that in the construction market in the aggregates market and some of the more flexible freight.
We have to demonstrate persistent value in the form of.
Reliable sustainable service over over a longer period of time, but we're making sure that our customers are well aware of our progress.
With respect to the tech outages.
Really.
And in fact was largely inconsequential was more of a service issue and a cost issue associated with the slower network and our re crews really what it does for US is it reinforces affirms the importance in investing in the resiliency of our network. So we can weather anything that comes at us.
Yeah.
Got it thank you.
Our next question is from the line of Jonathan Chappell with Evercore ISI. Please proceed with your question.
Thank you.
Alan pointed out you've had four weeks now of volumes that have been back to the <unk> 22 levels.
But it seems like you still have a lot of red traffic lights or yellow traffic lights on.
Free category that you laid out in your slides.
How much can we see acceleration in some of those traffic lights turned in your in your favor. This run rate that you've had the last four weeks seems to be kind of a catch up in service related but if you get a macro tailwind behind you what can those levels go to with the service operating at the levels that they are.
That it is today.
And we've tried to be very tight was the answer number one we're really glad to see a peak season happened this year and we're encouraged by that our services, allowing us to deliver that.
This network is built for a lot more freight in our aniline right now and as our.
As our customers recognize and are able to deliver that value to their customers. We're going to be we're going to be able to handle a lot more freight I'm confident in that.
The fact is and this is the last thing I'll say on it.
Economic uncertainty and geopolitical uncertainty are very high right now and I think we see that in the headlines every single day and it's just something that we have to keep in mind.
Its probably why some of those lives from colored the way they are right.
Thank you okay. Thanks.
Thanks, Sean.
Our next question is from the line of Allison <unk> with Wells Fargo. Please proceed with your question.
Hi, Good morning, just wanted to go back to intermodal and I would say the share recapture there I know you talked about servicing you talk about sort of that that time to regain that confidence.
Is that something you are starting to see now hear now from your customers when we could see that start to accelerate in the next few months, despite what's going on.
And the overall macro intermodal market just any thoughts on your opportunity set for that.
Well you are right. We are seeing volume come back in any no I can't say enough about the quality of the customers that we have in our portfolio. We're very lucky to have our customers. They are certainly best in class. They are out on the street everyday converting freight from the highway to Norfolk Southern is because we're able to offer valley.
That they can demonstrate to those customers. So yes, I think that we have the opportunity here to deliver additional value to our shareholders in the form of more volume more revenue, particularly from the animal market.
We have a network that's really built for that.
Thank you.
Thank you Bill.
Our next question comes from the line of Brandon Mccluskey with Barclays. Please proceed with your question.
Hey, good morning, and thanks for taking the question Alan.
Alan I think in response to a question earlier, you talked about standardizing operating practices across the network as you look into next year, maybe I'm mischaracterizing, what you said, but I guess can you put that in context for us I thought the op plan had been set you guys had won the changes from the train makeup roles, but maybe there is more to come.
Yes, that's been ongoing effort by Paul and his team to standardize the operating practices within our terminals.
Which allows us to drive further productivity and further capacity improvements and further services.
And Thats just part of the CSR principles.
Yeah.
Okay. Thank you.
Our next question is from the line of Jordan <unk> with Goldman Sachs. Please proceed with your question.
Yeah, Hi, just a follow up.
With velocity and dwell recovering so well of late is there a way to assess how much of that comes from better operations. The changes you've made there versus.
Adding the head count to get it closer to where they need to be and.
Do we think about head count sort of flat lining from here on out roughly thanks.
And.
Yes, Jordan, we've always said that service is a function leadership plan and resources, we've refreshed our leadership with an operations, we've implemented new plan and we're driving a high degree of compliance to the plan and we're investing in resources, whether that's additional teen you employ.
This cross training conductors to become engineers or investing in quality of life issues.
Are all generating results for us and you can see that with the service metrics you can see that with the volume metrics as well Mark do you want to talk about overall head count.
The head count certainly helps I mean, we've augmented.
And a lot of our critical locations the staffing in order to improve our fluidity. There. So that's a big driver.
Invested money in locomotives. So we have more locomotives available as well and frankly, Paul why don't you talk a little bit about the process changes that we're making in the terminals, which really are sticky.
And fundamental drivers for running a scheduled railroad well youre spot on I mean, we are seeing results from refreshing, our operating leadership resourcing up and executing the plan.
And both volume train speed and terminal dwell and as Alan highlighted.
Matched to our premise of Brian is the scheduled railroad.
Our focus on running the plant right car right trained right day enforcing a high degree of compliance to the plan again that is a fundamental tenet of Orion. The scheduled railroad, it's driving that accountability, we expect to see further consistency is as the year progresses, certainly expect to see dwell continuing to improve train speed continue.
To improve and as we have seen these.
Metrics corner, our velocity improve we're going to layer on productivity initiatives as we've talked and thats going to be a focus of us in 2024 running reliable service center and layering on productivity Jordan you asked about where head Count's going let me just put a fine point on that I do think that our conductor training pipeline really start.
To taper down here in the fourth quarter and I'd expect that we'd probably end the year just under 600.
We have enough qualified TNT here, probably in the fourth quarter.
Capturing meaningful growth that might be on the horizon.
And it's really about balancing where those <unk> amongst our hiring locations and we want to make sure that we're not just adequately staffed whereas resilient levels in those critical locations.
But probably I would say.
The other area of head count, we're going to need some more supervisor is now as you add a lot more TNA. So that's that's probably the remaining.
Pick up Youll see in some of the resilience investments that we're making in the fourth quarter is really around the area of field supervision.
But in terms of overall <unk> I think we're cresting here and now we will be able to handle more volume and start driving productivity to also.
Take another step up in volume absorption. So that's kind of the roadmap on TNT.
Thank you.
Our next question is from the line of Jason Seidl with TD Cowen. Please proceed with your question.
Thank you operator, Alan and team good morning.
Wanted to follow up a little bit on the automotive side, you guys mentioned that there's a backlog of sort of finished vehicles that you could move can you give us a sense of sort of how many weeks do you think that backlog is for you guys. Just in case, the UAW strike drags on longer than most people with one and then you made a comment about near shoring and how that is looking really good for you potentially down the <unk>.
Do you have any numbers from your industrial development projects.
The prior year's that'd be great. Thank you.
Sure and thanks for the question this is Ed.
On the on the automotive side, yes, there are there have been high.
Foreground counts at at a lot of places that we originate from.
Duration is probably longer than I want to be right now being honest with you and those around counts are going to dwindle over time.
And we'll see where it goes.
I really cant be more granular than that because of the nature of the strike, which tends to move from place to place.
On the on the industrial development side, there's over 600 projects in the pipeline right now we've seen tremendous investment mostly in the southeast and the Midwest, which is very beneficial for our network and for our customers.
Highlighted a few of those.
During the prepared remarks.
Total about it.
September we had three new lumber shippers that either originated or.
Started receiving traffic just that month and that's that's really highlighting number one the strength of that what I would call non res or manufacturing construction economy.
Which is.
Inc. Higher now than it was during the entire 2000.
For the U S. Most of that is focused.
East of Mississippi River, and most of those folks again in the Midwest.
Southeast so.
So we think we're really well teed up really well positioned for what I think.
Alan is referred to as a manufacturing super cycle.
In the coming decade.
Well I certainly hope so you mentioned 600 projects, how does that compare to say pre pandemic.
Still elevated from pre pandemic level.
The EV supply chain is really a new frontier out there and I think one of our previous calls I've mentioned that we've done over $70 billion invest into that and about 30% of that is our allowance.
Whether it's infrastructure Act.
Reduction AG jumps act.
There are a lot of compelling reasons, along with geopolitical instability and affordable reliable energy.
To make us a very compelling place.
Thanks, Ed I appreciate the time.
Our next question is from the line of Ravi Shankar with Morgan Stanley, Let's see with your question.
Thanks, again, everybody just to follow up the comments on the call.
Customer preference for short haul moves and the empty move that's pretty interesting.
Do you have a sense that this is cyclical or could this be structural given evolutions of supply chains and when the up cycle. It comes kind of are you confident that shippers will not choose to prefer a cluster.
To a haul truck moves overwhelm ops.
Thanks for the question on the international side, we saw those lanes suffered the most during the pandemic where steamship lines were basically moving towards support.
And then allowing customers to pick it up there.
Naturally as the part that has reverted back the most.
And obviously, it's naturally reverted back more strongly because of the <unk>.
<unk> capability that we have in some of those markets slight from Savannah and of the southeast light from Charleston.
<unk> white from Norfolk into the Midwest and even from the important New York into.
And to the hinterland markets.
Really good portfolio of intermodal services I'll remind you that over 100 million Americans wake up every morning within 50 miles of one of our intermodal terminals.
Compelling shrink.
That we think is going to allow us to succeed both on the internationally.
Look this is a positive for US right. This shows that we can add value into the market and even short haul lanes, where rail traditionally has not been competitive and we can do that because of our focus on productivity. We can do that because of our focus on the value of our service product and the east. That's why we are very confident that we've got a franchisee.
This is the fastest growing segments of the U S economy.
Great. Thank you.
The next question is from the line of basketball majors with Susquehanna. Please proceed with your question.
Mark Thanks for all the detail you gave us on the eastern Ohio spending.
And in the plan forward can you talk about without necessarily quantifying, but but any timeline or any major charges are outflows that you have a little bit of visibility into that are still ahead of you in.
Is there a point, where your ongoing spending tapers off but the insurance and legal recoveries are still coming in and in your response to this incident shifts from a cash flow burden to a cash flow tailwind. Thank you.
Okay. Thank you very much for that for the question.
We're certainly pleased that we're winding down the site remediation work, which obviously has been costly as you've seen from my chart and the impact there but.
But I do think we've got issues that we're going to be working through for several quarters to come.
And it's really impossible right now bascom to predict the amount or the timing.
And there could be a lot more developments at lead to additional cost in particular with regard to litigation matters fines penalties legal fees and these could end up being material.
But at the same time.
We do have insurance recoveries that have.
Started.
We actually got our first cash recovery at $25 million I cited.
That we recorded in the quarter, we actually got the cash last week for that so that's good.
I don't think that you should expect to see significant meaningful.
Cash recoveries from insurance in the near term I think these things are really going to become protracted.
But.
So it's hard to even match the timeline of those inflows with what potential future outflows might be.
I think with regard to insurance in general I think just bear in mind, it would be reasonable to expect.
Significant premium increases going forward as a result of of an incident of this size. So.
Hopefully thats helpful. Baskin. Thank you.
Thank you.
The next question is from the line of Ben Nolan with Stifel. Please proceed with your question.
I appreciate it.
I wanted to go back to some of the development that you're seeing from some of your customers.
And specifically, it's sort of a little bit of a mixed signal it sounds like theres a lot of people moving forward, but then the.
The lights are not all green.
I guess I'm, just curious if you've seen any as a function of higher interest rates or ambiguity in the market or whether any of those projects that are makeup that 600 on your book here have any of that has shifted to the right or is there any reason to think that maybe those are all full steam ahead.
Yes.
Let me start by reminding everybody knows those lives or just for the fourth quarter. So as the near term outlook.
Here's what we've seen we've seen an acceleration in projects associated with manufacturing, probably seeing some tail off or deceleration in projects associated with warehousing and I think thats I think thats a direct function of some of the pressure.
Trades out there.
But you think about.
Whether it's aggregates, whether it's lumber whether it's structural steel there is there is a lot of <unk>.
Man out there to move product into these building sites do you think about any energy intensive industry around the world.
If you want to be in a place that is not only.
Psychologically responsible has reliable stable predictable affordable energy and great infrastructure to connect to the rest of the world. The U S is compelling the eastern U S is very compelling with its customer base in the southeast is exceptionally compelling for those.
Thanks Brendan.
Thank you.
Our final question is from the line of David Vernon with Bernstein. Please proceed with your question.
Hey, good morning, guys and thanks for the call today, So Mark I wanted to go back to one of your earlier comments about sort of expecting average incrementals when.
When volumes do turn I'm, just trying to figure out how I can get comfortable with that thinking about costs being structurally higher and some of the mixed headwinds that adds pointing to in terms of.
Both short haul intermodal, bringing back more international entities into the network and seasoning. Some of these new intermodal services is that average incrementals is that sort of the day, one when volume turns or should we be thinking about that more.
The middle part of <unk>.
The cycle, when we think about incremental margins. Thank you.
Yes look I think we've had a challenging mix environment here. The past couple of quarters that have been consuming a lot of the positive pricing core pricing.
Ed and his team had been capturing.
At some point that mix headwind will reverse it usually does.
But as we think sequentially going into Q4.
Alright.
We're going to have some of the structural headwinds for sure but that should be offset by the <unk>.
The temporary costs related to the service. So I think we're kind of neutral there and then we're not going to have the same type of fuel headwinds that we had in the third quarter and in fact, I don't think I think it could be.
Probably flat neutral maybe slightly slightly positive.
So really we're talking about volume dropping through we have seen a nice uptick sequentially in volume and that should drop through with those normal incrementals of.
Call, it 60% or plus so.
That's the way I think about Q4, and then longer term things should play out that way I mean in any given quarter, obviously mix is playing a role and hopefully it's not adverse going into 2024. The way. It's been here. These past couple of few quarters.
Okay. Thank you.
Thank you.
This concludes the question and answer session I will now turn the call back over to Mr. Alan Shaw for closing comments.
We certainly appreciate your participation and your questions. This morning, thanks for joining us.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.