Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

All right. We're going to get started with our next fireside chat with Norfolk Southern. Very excited to have them here in Nashville with us today. Presenting for the company, to my left here, we've got Mark George, CFO; Alan Shaw, CMO; I think Mark is going to lead off with some prepared remarks, Alan may chime in as well. And then we'll get into Q&A that I'll moderate. And I'm going to open it up to questions in the audience as well. So with that, Mark, I'll turn it to you, and thanks again for being here.

Thank you, Justin. Great to be here. Actually, Alan and I will collectively share some slides with you. We'll start with the normal housekeeping. The presentation slides are available on our website. So you can find them there along with a reconciliation of non-GAAP and GAAP measures. Both Alan and I will make some forward-looking statements today. So please be sure to refer to the website and any SEC filings, so you understand our risk factors. The first slide you'll see here, just a real quick highlight. I mean we had a very strong Q3. As you'll recall from the earnings call, we set a number of records, third quarter records in the quarter, namely, operating ratio, net income, income from operations as well as free cash flow. Our revenues were actually up 14% on flat volumes with really strong RPU growth in the quarter. We contained OpEx growth to 10%. So that led to a very strong drop-through in the quarter, very strong incremental margins. We had 230 basis points of margin expansion in the quarter itself, and it brought our OR down to a record low 60.2%. Income from railway operations, as I mentioned, was a record as a result of all of that. And we converted all that income from the income momentum that we have. We converted it to very strong free cash flow. I think our free cash flow conversion through 9 months is over 100% right now. We're benefiting from a little bit of delay in CapEx spending but very strong free cash flow conversion right now. That's 2 years in a row, and we feel really good about our cash generation profile here. We had a 33% increase in free cash flow actually year-to-date. If you turn to Slide 4, you can kind of see the journey here that we've been on since the middle of 2019, where we launched our TOP21 operating plan. We've been building out our trains longer and heavier, creating a lot of operational leverage. And you can see the double-digit improvements in both train weight and train length in that time period. In the process, we've made a number of structural changes to the network to adapt to the demand flows. And that's really enabled us to make these trains longer, reduced crew starts is a fall on from that. So we're enjoying it all, and it drops through as a 60.2% operating ratio in the third quarter. Good sequential and consistent improvement in our OR since the middle of 2019. So the results are pretty evident. And we've got plenty of runway for future productivity in here as well. So we feel good about our prospects in the long term. Of course, technology is going to play a role in the next phase of continuing to drive productivity in the railroad. We're putting a lot of focus on trying to improve our predictive analytics, failure prevention and even planning for our maintenance. So we've got a lot of technology that's going to play into this as well as siding extensions that will allow even longer trains as we deal with meats. Now let's turn to Slide 6. A lot has been written about our network and service challenges. Look, network fluidity had been improving going into the third quarter. We actually saw a 3% improvement in train speed and dwell had improved 1%. So we feel good about our progress in the third quarter. However, as we discussed on the call in late October, as we talked about our earnings, we were seeing some quarter-to-date deterioration in our numbers. And we talked about the fact that we were losing people. We had some pretty significant attrition that was going on in some key locations, and we're suffering from that right now. And to offer just a bit of perspective on this, we've got about a dozen locations on our network that have about 50% more attrition in the last 7 months than we would have expected in a full year. So our first order of business right now is really to replenish crews in those critical locations and do that as quickly as possible because we got to get the momentum back on the network, increase our fluidity again. Let's talk a little bit about the action plans we're doing, the solutions that we're focused on right now. There's really 5 levers that we've been pulling and we continue to pull hard on. Very simply, we have got to increase our hiring levels, and we've been doing that progressively throughout the year. We actually doubled our hiring rates since July. We've tripled it since the first quarter hiring rates. So we're putting a lot of emphasis on hiring. We've got more active conductor trainees than at any point throughout the course of the year right now in our training pipeline. We've been increasing our class sizes, all of that. So we've got good momentum on the hiring side, but there is a time line involved in all of this. And that kind of leads us to the second. Right now, it takes us about 10 weeks to get people through a training class. That's been compressed. It was a little bit longer, but we've done a good job compressing that. But we've also got to compress the amount of time it takes us to hire people and start getting them into the classrooms because that also takes 8 to 10 weeks. So we've taken some weeks out of that as well, and we continue to look for ways to shorten that time line. Meanwhile, we are pursuing multiple avenues to stem attrition. We're using a lot of incentives, hiring bonuses, retention bonuses, availability bonuses; we are even buying back vacation to keep people active. So we're doing a lot there. Fourth, we're continuing to try to drive productivity into our network. So one of the solutions here is obviously to continue to make our trains longer. And actually, month to date, we've done a good job of driving the length up about 9% so far. So that's through quarter-to-date actually. So we're working to resize our train plan actively. But there are some limits when you have a congested network. So it's one of the levers we continue to work on. And clearly, that's one of the longer-term levers that will help us drive more productivity into the railroad. And then fifth, we're working real hard to optimize our crews. We've got a fair amount of critical locations that we're focused on, where we're taking our Go teams -- these are mobile employees that we can move from one location to another. We've put about 50% of our Go Team population already in those sensitive areas, which is largely in the Midwest and the Gulf. We're also trying to increase our head count of go teams. You've got to have people who are willing to be mobile. So where we can, we're increasing that population. And we're also looking at more creative things like reorganizing some of our crew districts to make some of the transitions a little bit easier and to better optimize the availability of our crews. And in some cases, in the short term, we're actually routing around some of the more critical locations to avoid the absence of crews. So we've temporarily introduced a little bit of circuity to resolve some of the short-term pressures that we're having. But really, this is the mosaic. It's 5 levers that we're trying to manage this situation with. And I just want to be very, very clear, and Alan will reiterate this, we are highly focused on getting our network fluid again and moving with speed and serving our customers. And the entire management team is focused on it. It is our highest priority. With that, let me hand it over to Alan, and you can talk more about the markets and what are doing longer-term in growth.

Thanks, Mark. We'll flip to the next slide. You take a look at our volume trends for the quarter. It's -- they're weak. We're not happy with the business that we're handling right now. That's a reflection of our own throughput capacity and some supply chain headwinds that we're seeing. Demand in just about every market that we serve is exceptional right now, and we feel really confident that it will remain that way to start 2022. If you take a look at the individual markets, our chemicals volume is up 15%. We're seeing strength in energy products, not a surprise to anybody, right? We're seeing strength in NGLs and in crude oil and in frac sand. We're also seeing strength in waste shipments. And so that's been a growth market for us over the last year or two, and as consumption patterns change and the consumer continues to improve its own throughput and its own purchasing, we're seeing waste shipments move a little bit more. I think that's going to be an area in which rail and Norfolk Southern can benefit in the long term. Metals, you see what's happening in the metals market. Prices have come down a little bit, but they're still near historical highs. So there's a lot of demand for metals. And we're really encouraged about where metals could potentially head as you think about the infrastructure package and the automotive industry continuing to recover. Coal is -- it's up slightly. That's a function of coal supply. Demand out there is white hot, whether that's domestic in the thermal market and the domestic met market or overseas in both thermal and domestic met. And that's reflected in coal prices. Our Ag volumes have been pressured by network fluidity as has intermodal. Intermodal volume -- or intermodal demand, I should say, is incredibly hot. We see pressure from our own network fluidity. We see pressure from chassis, chassis availability, which we're working very hard to address. And we see pressure from the drayage community and warehousing throughput. We have started taking delivery of the leased chassis that we had talked about. We were going to take 1,100 in the fourth quarter. We're on target to receive those chassis, and we've also teed up additional chassis purchases for next year. So we're pulling on all the levers that we can, including network fluidity to improve our capacity and our service product within the intermodal network. So as I think about the headwinds we're facing, some of them are external; some of them are internal that we need to address. We've talked about the chip shortage. That seems to be getting a little bit better. And we're starting to hear confidence from our OEMs that we serve that we might be through the worst of that. Inventory levels in that network, finished vehicle inventory levels still remain near all-time lows. I don't know if any of you have been on a [indiscernible] recently, but there's nothing there. But that's going to be a boost for us in 2022. Because of our best-in-class industrial development team, we serve more North American vehicle production than any other railroad. So as that recovers, we feel really confident in our ability to participate in that and drive shareholder value. Port congestion remains an issue. We're starting to see that a little bit on East Coast ports. But we're working with those ports to offer a solution to get boxes off the terminals, whereas the ultimate BCO, where the warehouse might not even be ready for them, because of congestion there. We've talked about our accessorial charges, our storage service program in international, where we are offering the ability of steamship lines and customers to store boxes on Norfolk Southern Property. That's a service that we've provided. We charge for it through our accessorials. And so that's how it's reflected in our income statement, but it's a service that we're providing. And it's something that the market values. And you can see that through the money that we've collected there. Ultimately, what will happen, we firmly believe is throughput capacity, whether it's the drayage network or the warehouse network, is going to improve, accessorial charges will decline, but we'll have more throughput in freight revenue. So that's something that we're all looking forward to. I mentioned the chassis investment within intermodal, we've recently opened 2 new -- reopened 2 intermodal terminals that we had previously idled, reflecting the increased demand for our service product. We continue to focus on highway-to-rail conversion opportunities. We've talked about our Thoroughbred Freight Transfer program, which offers a kind of a hybrid box car intermodal product to serve the underserved LTL market, which is effectively out of capacity because of the rise of e-commerce. And then sustainability is another driver for highway-to-rail conversions. We've had much more meaningful conversations with our customers in the last 18 months about sustainability. And now what you're starting to see is the sustainability officers within our customers are becoming more linked with the logistics offices. And so it's becoming a focal point of conversation with our customers. And when you think about rail, rail has a number of advantages relative to trucks. Sustainability is one, cost is one and capacity is another one. And so as we're really confident that as the economy continues to recover in 2022 and our service improves and our capacity improves, then we're going to see fairly strong growth. So this is probably the best time to work on productivity. We're really stressed with our crews. We're really stressed by the number of trains that are out there. And so it gives the whole organization a common focal point on improving our productivity, which ultimately will result in structural cost changes for us, which is going to help us grow and become more efficient. There are a number of things that we're doing. We're obviously focused on network velocity. That improves the cycle time of the equipment, our equipment and our customers' equipment, which means we have more payload capacity. We invested in siding extensions here. When Cindy came in and joined us about 15 months ago, she looked at our network and highlighted a need to do that because, ultimately, our goal is to run longer trains. And to run longer trains and make more efficient meats, and run trains on time, we need to invest in sidings. And so we're actively doing that. We've got another one scheduled to come online this year and a couple teed up for next year. Mark talked a lot about what we're doing to optimize our utilization of our train crews and increase the flexibility that we have with the utilization of those crews. We're focused on yard efficiency. I can see that directly within the intermodal terminals as we're rolling out new technology, a terminal optimization system to make our terminals more efficient. And Mark and his team have helped us renegotiate a number of contracts with our terminal lift contractors to incent efficiency and share in those benefits and also incent a better service product as well. So we've got a number of initiatives going on right now, spearheaded by the situation that we're in such that everyone at Norfolk Southern is very much focused on how to make ourselves more productive because there's two ways that we're going to climb out of this; one, we're going to add crews in a couple of areas, which Mark talked about, the other is we're going to make structural improvements in our productivity and our efficiency. So the look for the fourth quarter is very similar to what we saw in the third quarter. Industrial production continues to improve. And the outlook for industrial production for next year continues to improve as well. Inventory levels, whether you're talking about wholesale or retail, are near historic lows. I saw a stat the other day that the inventory rebuild for next year is projected at about $100 billion. That's what's required. Inventories came down $75 billion this year, $35 billion in 2020. So that in and of itself, I think, provides a lot of opportunity for demand for rail. And I feel like Norfolk Southern is uniquely positioned because of the strength of our intermodal franchise, which is parked adjacent to the consumer. And there's more and more manufacturing in the East. There's more onshoring in the East. Our industrial development team and our real estate team see that as well. The intermodal market, as I noted, is white hot. We've seen estimates that truck utilization is going to be at 97% next year. I was with a trucking firm in Pittsburgh earlier this month. And they've got 500 trucks, but they've got 400 drivers. And they went out to try and purchase 60 cabs next year, and they could only get 20. So there's not going to be a quick rebound, I don't think, in the trucking industry. And then within coal, as I noted, there's high demand overseas. Met coal was at $435 a metric ton, which is just like off the charts. I mean we had to change the scale of our graph. It dropped down to $350 in the last couple of weeks as China has taken in the warehouse coal from Australia, but they're not accepting new shipments, right? So there's still -- and that's still like at historical highs. So incredible demand there, incredible demand for thermal coal as you take a look at LNG prices in Europe, it's over $30 today. This time last year, it was about $5, right? And so there's a real need for BTUs in Europe as well. And so that's impacting the demand for U.S. coals. There the pressure comes from coal supply. Coal producers are dealing with the same thing everybody else is, with respect to labor. And then there's the question of access to capital there as well. I'll close with a couple of comments about our outlook. And then Mark and I will be more than happy to take any questions that you have, Justin. We feel really confident in reiterating our full year guidance. Our year-over-year revenue growth is going to be over 12%. We'll have a -- more importantly, we'll have a 400 to 400 basis point improvement in OR. And just to go back to like 2015, that's well over a 1,200 basis point improvement in operating ratio since 2015. And we've got more room to go. We know we do. We're very confident in that, and we know that's our charge. So that's a focal point for us. Mark has talked about our capital allocation strategy, and he keeps a tight hand on that. I can tell you that. So we're reiterating that guidance as well. We're confident in our ability to close out this year. We're confident in our ability to improve our service product and get it back to targeted levels. And we're confident in what 2022 looks like.

Okay. Great. That's all really helpful. We'll jump into questions. So maybe to start with one on the last point about the reiteration of guidance. So I was a bit surprised, honestly, to hear that after your comments around the volume environment being weaker than you thought, the labor challenges. So what's the positive offset for some of these headwinds that you face quarter-to-date?

Well, we're seeing improvements in our RPU. The market is strong right now. We haven't really seen much of a change in our accessorials. And our network fluidity is impacting our volumes. There's no doubt it did in November, and I fully expect it too in December. But we still are very confident that we'll be able to hit our full year guidance.

Okay. And that RPU strength, is it broad-based? Is a big chunk of that coming from export coal. You mentioned some of the numbers that have been very, very high levels.

Yes. And you should -- it is broad-based. You should also recognize a lot of it's mix, right? Export coal relative to domestic coal typically has a higher RPU. We're also seeing strength from fuel surcharge. We're seeing strength from accessorials. We are seeing strength from price as well.

Okay. And maybe one on labor, and then I'll open it up if there's questions in the audience. But a very incrementally more kind of challenging environment, it seems like here in the fourth quarter. It's a bit interesting because I've heard from some other companies in the transportation market that the labor situation seems more stable, maybe improving. So can you just kind of give us some more color on what you think the problem is right now, why you've seen this challenge in the fourth quarter? And maybe where you need to get to from a headcount perspective to return to normal fluidity versus where we are today?

Well, the pace of attrition in the labor force has just been building or accelerating throughout the year. I mean the attrition rates that we experienced in the first quarter were in line with what we thought we could absorb and offset with productivity. And then they kind of stepped up a little bit in the second quarter at a higher rate and now the third quarter was yet even higher, outpacing our ability to kind of keep up. So I mean the real answer is, look, Norfolk Southern is a great place to work. We have a great comp package. We have a very attractive retirement plan as part of the Railroad Retirement Act. But it's an outdoor sport. It's -- you're choosing to work in a railroad and you've got now a job market that offers everything under the sun. So people have a lot of options. And what we're finding is that people are really making decisions to either leave or not to join based on lifestyle, largely based on lifestyle. So trucking is white hot, like Alan said, that draws a little bit. You've got Amazon warehousing popping up all over the place. You've got a really hot housing market as well. So a lot of these people have the skills to go into various different disciplines. And all of those job markets are hot. So that's what really we're competing against right now. Earlier on, for sure, we had challenges with maybe people being incentivized to stay on the sidelines and collect [ unemployment ]. I think that that's probably a little bit less of the challenge right now. And really, it's people making lifestyle choices. And I think you can read a lot about that. I think Wall Street Journal published something on that a week or so ago as well that in this post-COVID world, people are choosing different ways to live their life and work life balance as part of that. So that's really, I think, what we're dealing with. So we're making things a little bit more -- we're adapting. We're making things a little bit more attractive as well internally. Like I said, we're providing some incentives. We're addressing it in a number of different ways. And we've increased our absolute hiring, trying to anticipate further attrition and hopefully bend the curve here.

Okay. And roughly how many people would you say that you need to hire in order to get kind of caught up and dig out of this hole?

It's really hard to put a fine point on it because it's a moving target. You constantly have attrition. So we're trying to hire in advance of attrition. And then remember the time line. This is all in. It's like a 4.5-month process from when you hire somebody, when you target somebody, to when there are boots are on the ground. So I would say we're feeling the most pain in a dozen or so critical locations. But there's more locations that are [ tied ] as well. So it's really hard to put a fine point on the number of people that would help take us out.

Okay. But the hope now is thinking about that 4.5-month time line, maybe second quarter of next year, we could get back to something that's more normal from a fluidity perspective. Is that a fair way to think about it?

We certainly hope so, but we're going to try to move the needle a lot faster than that.

Yes. I think the uncertainties in there, Justin, are continued attrition and the vaccine mandate.

That was one of my questions, so I'll go ahead and ask it. Impact from vaccine mandate, any thoughts around that, percentage of employees that are vaccinated today? Just help us put that in perspective.

Go ahead.

Yes. I mean we're not going to go out there with the numbers that are vaccinated or not vaccinated. But I can just tell you, we spent a long time really assessing what rule we had to follow. It became clear after reviewing things with our legal department and assessing things that we are clearly a federal contractor. We move tanks and humvees for the military. And there was really no way for us to carve out certain segments of the business and say, "Okay, only you are a federal contractor." So unfortunately, we viewed ourselves as really no escaping the fact that we're a federal contractor. So we're working with our employee base to make sure that they understand the implications and what it takes to seek accommodations, whether it's medical or sincerely held religious beliefs. But in the meantime, we were working very closely with the government relations group in the White House to try to get them to understand that we don't want to be exacerbating already what our big supply chain problems that are existing in this country. I think that in part, our efforts along with other companies, are why the White House extended the deadlines into January. We're going to continue to have that dialogue as we work with our employee base. And really, we're going to find every angle we can to make sure that it doesn't provide further disruption. It's a risk for sure. But again, we're actually working hand-in-hand with our employees who are still, in some cases, reticent to get vaccinated, and we'll get through this together. We're trying to take a pragmatic approach. And I think that the White House ultimately will be pragmatic as well because I don't think anybody wants to see further disruption to the transportation ecosystem.

Do you think this is at all playing a role in the labor challenges you're seeing today?

Maybe a little bit, but I think the bigger risk is to come. The extension of the time line certainly has helped a little bit.

Okay. Question here.

Transportation is an asset-based network operating business. So there are a lot of similarities. You look at the ocean business and economies of scale on line haul have destroyed all the land side economy. In fact, bigger ships are causing more problems, right? The A380 is a bust. You're talking about running longer trains. But what happens on intermodal when they can't get into the terminal?

Yes. Look, I...

You can extend the siding if you don't extend the terminals but what's the plan?

Well, it's really about the throughput through the terminals. We have to be faster to get things through the terminals. The longer -- what's different about the A380 and what's different about the larger container ships versus trains is trains are scalable. So we don't -- we're not forced to always run extremely long trains. We can run trains in increments based on the locomotive pulling capacity. And the longer we can make them, the fewer crew resources we need to draw upon. But there are times and there are routes in our network where we may not run very long trains because we have terminal capacity issues. So the good news is that for us, it's scalable. We're not building one long train. That's always there. It varies hour-to-hour, day-to-day. And we can build it up in the course of a route and trim it down and cut it as we navigate through the network. I don't know if you want to add anything.

Ted, as you know, the folks who designed our intermodal network had that strategic vision. Design 1 in which we got pad tracks and then we've got support tracks in every one of our terminals. I'm not sure that's the case everywhere, right? You probably know better than me. So we can run long trains. When we run them on time, we can -- they can land in the support tracks and not create issues. We're not having issues with intermodal trains stacked up on line of road. Our issues have been -- and you know this, they've been train performance. They've been availability of terminal contractors because as Mark said, that's the same labor pool that everyone else is drawing from. So Mark and his team helped us refine our lift contracts. And they've been -- and it's been chassis availability, and we're addressing that as well. So we're pulling hard on all 3 levers, which is train performance, the terminal contractors and chassis. What the longer trains do is it allows us to be more profitable with intermodal, which means our Board is more and more interested in investing in continued growth for intermodal.

We're all for that. But the problem is when you are -- yarding on the support track instead of yarding it on the ramp track, and your efficiency program got rid of the switch crew that would have switched those over, then you got a challenge. You're right. They're not line or road problems, but there are getting up and down problems.

Yes. I think that goes back to we need to be a little bit stronger on that crew resource, right, so that when we need that switch, we can get it.

Any other questions in the audience? I wanted to ask one about pricing. So I believe about half of your business will renew here in the fourth quarter and the first quarter. I would guess, given the demand environment you described and we've heard about the pace of price increases should be accelerating. But inflation is going up, too. So when you look at the spread between pricing and inflation, do you feel like that gap expands as we get into next year? Or does it narrow? How are you thinking about that?

Justin, as you know, we price in the market. And it's a really strong market in which to price. We've demonstrated that by having 18 or 19 consecutive quarters and RPU growth in Intermodal year-over-year and 25% and 26% within merchandise. I think the only concern that I've got with price next year is associated in that export coal market. And it's just really hard for me to put down on something on paper and commit to mark that export coal prices are going to stay at $350 a metric ton, right? And so I'm not assuming that. And so that means we're pulling down our price in the export coal market. If it remains where it is, then that's upside for us. But you know our focus on yield management. We've demonstrated it, and this is a good environment in which to price.

Okay. And how much visibility would you say at this point you have in terms of coal RPU staying at these strong levels moving into next year?

Through first quarter.

Okay. Right here.

Related to that, what's -- I know it's hard to -- what's your forecast on fuel because that -- quite goes from a cost as a competitive decision to [indiscernible]. Do you have a -- I mean it's a big market, would you have a sense on what's going to happen?

Yes. We don't try to forecast fuel internally. We look at the forward curve, and the forward curve has a going down next year, particularly in the first quarter. It's hard to see that the supply and demand imbalance right now is going to take itself -- or fix itself in the first quarter. Again, there is upside there. If fuel remains strong, then that's more demand for our product as well.

That's what I was trying to sense.

Yes. I think there's upside there. The oil producers have been really disciplined. Now you're not seeing a lot of fracking capacity coming back on. You might be seeing a little bit more in the Marcellus region, but that's natural -- that's dry gas, right? You're not really seeing the crude oil out at West. And I'm sure it has to do with just a change in philosophy. It used to be barrels over profits. And frankly, we benefited from that when we were running 100,000 cartloads of crude oil in 2014. We don't see that now. And so that's -- we're really not incorporating that kind of volume or that what's going on with -- at lower fuel price into our forecast.

So maybe one on volumes. Alan, I think you made the comment that you're expecting growth in 2022. What we've heard from some of the other rails this morning is that the bogey is IDP with the goal of growing volumes above industrial production. Is that a fair way to think about Norfolk's volume framework for next year as well? And if that's the case, how much capacity do you have to handle volume growth like that given the current labor situation?

Our volume next year is going to be dependent upon inventory rebuild and how quickly we fix service. I can tell you over the long term that in our industrial markets, we should be looking at IDP. And in the intermodal market, we should be looking at a multiple of GDP.

Okay. And in terms of the inventory restock, any thoughts around the timing of how long that could take based on the feedback that you're hearing from your customers and IMC partners right now?

Yes. I think the -- it hasn't started yet, right? So it keeps getting pushed back. So I would expect you're talking late 2022, maybe early 2023.

It really depends on how long this current demand cycle pulls from production. Right now, demand is still red hot. So you end up having -- you're just basically feeding the beast with production is just feeding demand. And there's no inventory replenishment that's happening. So even if demand really does fall off a cliff, you're going to still have a good year of inventory replenishment that will fuel production.

Are there any areas where demand is weak right now? It feels like there are a lot of up arrows, even coal. But as we go into next year, anything that you're worried about as a down arrow?

No, there really isn't. I mean there's a less strong green arrow, right? But I don't think there's -- with respect to demand, there's any down arrows. There might be a supply issue associated with the ultimate demand, which could limit volumes. But I don't -- I can't think of anything where inventories are flush right now.

Okay. Well, for what it's worth, that's 3 for 3 on the same answer in the fireside chat so far. So on the labor situation, I wanted to circle back to kind of warehouse workers as well because I think, Alan, on the last call, you said something about warehouse capacity being -- needing to be 25% higher than it is today. How much of that is a labor issue versus an infrastructure issue? And any update on the progression there?

It would be easy to say a lot of it is labor because we're seeing that in other areas. But then you take a look at the demand for warehouse builds, right? That tells me that it's also a physical capacity issue as well. I was talking to an economic development partner two weeks ago, who was in that space. And he told me that he looked at -- he calls them [ NFL ] cities and then second-tier cities, right? So he's looking at big metropolitan areas, and he's looking for any parcel of flat land that's over an acre. And he said that's going for $7,000 to $20,000 a month, which he says puts the valuation at well over $1 million worth for an acre of land because of the demand for warehouse builds. And that's one of the things, Justin, that we've talked about is that the pandemic has accelerated some trends in the economy. I think one of them is forward positioning of inventory next to the consumer, which is warehouses. The other is e-commerce, which is warehouses and intermodal, right? Intermodal is very -- or pardon me, e-commerce is very intermodal and intensive. And so I think onshoring, we're dealing with a lot of customers. Our pipeline right now for industrial development projects is at a level that exceeds all the projects that we've landed in the last 10 years combined. Now we're not going to hit -- we're not going to get all those projects in the pipeline. But that gives you an indication of the demand for manufacturing and warehousing next to the consumer, which is one of the unique advantages of our network.

And as you think about capturing market share from truck and conversion activity, do you feel like there's still an opportunity to do that next year even if service doesn't get materially better versus where it is today? Or do we need to see service return to kind of fluid levels in order to get that conversion activity?

Yes. I'm not going to entertain a scenario in which service doesn't get better than it is today, right? And so service will get better than it is today. And as that happens, we will take more business off the highways. Again, we -- it's a cost advantage, it's a capacity advantage and it's a sustainability advantage. And you couple that with an efficient, reliable service and you layer on top of that a strong customer service environment. There's a lot of demand for rail. And so -- and it's not just intermodal. Intermodal is the one that everyone thinks about. But there's a highway conversion opportunity in multi levels in gondolas and certainly in box cars.

Okay. And you mentioned a few things that have changed during the pandemic. One that I might throw in there too is just technology and the need for technology investments going forward. So maybe that's a good way to kind of wrap this up. I'd love to kind of hear your plans for technology investments moving into next year and beyond and where you see the most opportunity?

So Mark, you are teed up on the productivity initiatives with respect to technology. I'll just talk about some -- the customer-facing technology because that's -- we're all consumers, right? We have a business, but now all of our interactions with our customers is B2C. And so we are continuing to invest in our customer-facing technology to make it easier to do business with us. We're revisioning our intermodal customer interface and technology. We've put out a mobile app for our customers to track and trace their cars. We're putting out a mobile app for our employees that -- 8,000 folks that we've got out in the field, which allows them to input work events real time, which then cascades into much better technology, much better visibility for our customers as well. And then, of course, we're focused on growth. We are also really focused on productivity because we know what we have to do with OR. And so we are looking at a number of productivity initiatives as well with technology.

Yes. We're doing an awful lot also on the data science side. We're doing -- we've got great technology that allows for automated train inspections and machine vision, which is really proving to be exceptional in terms of safety and quality and reliability. So that's one of the bigger areas that we're really starting to build out is a lot on the data science side. But we've got the traditional typical productivity tools that we're building system-wise, that helps our employees be more productive in terms of the way they report out their hours when we're pulling them into how they need to be reporting into the trains for calls. So there's a number of initiatives we got out there. And again, I think, between productivity and on the customer relations side, customer service side, it's a good solid pipeline for the next 2, 3 years.

Well, great. That's good to hear. I'm going to try to keep us on time. So we'll end it there, but thanks so much for being here today. Appreciate it.

Thank you, Justin. Take care.