Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

I think we're going to get started at 12:00, I think, we'll let [indiscernible] now. We're just kicking things along. They want the transports conference here at Deutsche. We have CSX this morning. I really, really pleased to have Norfolk Southern here joined by the CEO, Alan Shaw, the CFO of Mark George; Luke Nichols from IR. Gentleman, thank you so much for taking the time and joining us today. Obviously, a lot to talk about volume and cost and a lot of the recovery now behind you guys, and hopefully, the service momentum is very clear to everybody. I just want to say before your prepared remarks, I think [indiscernible] a really tough time. And I think you've handled this almost perfectly. I think everybody in the investment community knows that you guys responded in a way that was great and effective and responsible. So I just want to congratulate doing that. And that, hopefully, kind of on the upside from a service and volume perspective. So the company has got a few minutes of prepared remarks, and then we'll jump right into Q&A. Alan, I'll hand it over to you and Mark [ to put ] this right there if you want to pass it on to the slides. Thanks a lot.

Amit, thanks for hosting us, Mark and Luke and I really happy to be here, and I appreciate your comments. And I would -- I'll tell you that what we've done this year is perfectly aligned with that groundbreaking strategic vision that you and I have talked about quite a bit, right? It's really kind of focusing on the best interest of our shareholders over the long term and doing the right things. That generally works out. We're going to make some forward-looking statements today, which are certainly subject to risks and uncertainties. I'd invite your guests to take a look at our website. The slides are up on the website. If you take a look at on the website and the SEC filings for a better description and more detail on our risks and uncertainties. Being a CEO is all about accountability. And it's all about keeping your promises. And I'm really proud of how we have done exactly what we said we were going to do this year. I'm proud of the fact that we're becoming known as more of [indiscernible] coming down is the railroad that does that says it's going to do. We went into this year on the heels of our Investor Day in December, saying we're going to be focused on investing in safe, reliable and resilient service productivity -- continuous productivity and smart and sustainable growth. And what we've done through this year is we've continued to invest in our resources, which includes locomotives, intermodal infrastructure. It includes technology, it includes flight cars and the merchandise network that help us compete with truck. And it includes our people as well. So we're seeing through the near-term headwinds associated with inflation and associated with interest rates because we've got so much confidence in our franchise, our customer base, our strategy and the U.S. economy. We said this year, we're going to make a safe railroad even safer and we're doing that. Our safety stats are markedly improved over last year. And last year, the number of derailments on Norfolk Southern was lowest in 2 decades, and we can do better. One of the things that I do, you know I've been at Norfolk Southern for 29 years, I look outside of Norfolk Southern for inspiration and for talent. And I'm wanting to look outside of the rail industry for the same thing. I mean that's one of the reasons that Mark George is with us. We talked about another addition that we just announced this morning where Norfolk Southern is looking outside of NS and looking outside of the rail industry for talent and inspiration. You can also see that with us hiring the folks from Atkins Nuclear Secured. I wanted to get a safety consultant this year. That was something that we had teed up at the end of last year. And it could have been -- it would have been really easy for us to hire any number of rail safety consultants who do a good job, right? And they've done a very good job for the rail industry. But I want to do something better because that's what our strategy is all about, is being best-in-class. And so I got in touch with someone who used to run the Navy nuclear program and ask them to put together a team to work with us as an independent consultant reporting directly to me for 2 to 3 years and focusing on our safety culture. And so Admiral Kirk Donald has put together this like all-star team, several former admirals, 7 or 8 others, all of whom have careers in the nuclear Navy. And the Nuclear Navy is a gold standard of safety in all of the industry, and we're going to be the gold standard of safety in the rail industry. We continue to invest in our people. We were the first railroad to have paid sick leave for all of our craft colleagues. That's important to me. Employee engagement is really important. Our employees are a critical component of our success moving forward. One of the other things that we promised is that we were going to fix service as we moved out of the second quarter. And we've done that. Our service metrics have improved dramatically, whether you look at train speed, terminal dwell, cars-on-line. And I told everyone pay attention to the cars-on-line, that's where you're going to start to see the real improvements. Now, we took a step back in the second half of July. I'll admit that. I'm not going to make any excuses. We're getting that fixed as well and we're addressing it. And so I'm confident that we're on the right trajectory for continued service improvement. And what you've actually seen is that started to create a little bit of lift in volume for us, right, because that's frankly the cornerstone of our strategy, right? You -- if you're a service organization and you improve your product quality, demand for your product is probably going to go up, you might even be able to charge more for it, too. So it's a double coupon for us. And so as I take a look at volumes, there's certainly a lot of strength in automotive. We see a lot of strength in international intermodal as well. We're actually -- we're taking share away from truck and international intermodal right now, despite the loose truck market. The domestic market in intermodal is really pressured by the loose truck market, although we see that spot rates have kind of flattened out, so maybe this is coming [ taking ] off a little bit, so Mark and I were talking at our breakfast that, that could provide us a competitive advantage relative to trucks moving into the fourth quarter. Metals and construction is performing relatively well. I mean, frankly, anything associated with construction right now is white hot. And I'm sure we'll have an opportunity to talk about that. The real drag right now on our volumes is anything that's energy related, whether that's utility coal, domestically, export thermal coal or NGLs, frac sand, any of the crude oil products and our chemical franchise. There is a lot of uncertainty as we move through the second half of the year. So we're going to we're going to pay real close attention to this as you will. I think it's -- our volumes are going to be dependent upon how quickly we can spin our assets, and we're seeing improvements there. And then just the demand in the truck market going forward. We've talked about our strategy a number of times. It really is about leveraging the unique strengths of the Norfolk Southern franchise. We serve about 60% of the consumption in the United States, 50% of the manufacturing. We serve over half the U.S. light vehicle production in the United States. And we've got the most powerful intermodal franchise in the east, and we serve more short lines than any other railroad in North America, which expands our reach and gives our customers even more flexibility. And then you couple that with some macro trends that are in place, such as more e-commerce. E-commerce is 3x to 4x more intermodal intensive than regular brick-and-mortar retail. So that's a growth driver for us, particularly our franchise or position of inventory next to the consumer. That's what we serve. With our intermodal franchise and in our footprint in the East sustainability is becoming more and more important to our customers, and certainly, rail is 3x to 4x more carbon efficient than truck. So that's another plus. And then onshoring, investment in manufacturing this year is up 75% year-over-year. And new factory builds are at a run a clip right now that's 3x what it was in 2010 through 2020. So we're on a manufacturing super cycle. And a lot of that is in our service region in the Southeast and in the Midwest, 9 of the top 10 states are doing business in the United States that serve by Norfolk Southern. And so there are a lot of macro factors that are pushing business up against Norfolk Southern's unique franchise strengths. And so we've got a franchise that's built for growth and that faces the fastest-growing segments of the U.S. economy, and that's what we fully intend to leverage with that new strategy that we outlined last December, which is all about safely delivering reliable and resilient service, continuous productivity improvement and a smart and sustainable growth. With that, I'll open it up for question.

So one of the things that's interesting -- and by the way, if anybody wants to comment or question, it's a pretty informal setting. So please just speak up whenever you like. One of the things that was interesting that when you guys had your last -- when you became CEO of the company, I feel like the model for the industry was maximize the incrementals on the way up and minimize decrementals on the way down, which kind of define the laws of physics a little bit in terms of leveraging the cost structure on the way up and then minimizing the cost structure on the way down. Of course, labor is the lever to do that. And obviously, the industry kind of suffered service as a result of that. So I feel you at that Analyst Day, Alan, kind of started on just saying, "Hey, listen, like, we're going to run a little bit heavier on costs in a weaker market, but it's going to cycle over cycle, give us an opportunity to win more business, preserve that service and the NPV of that over time is positive. So you've invested heavily in labor countercyclically, which is very new for the industry. And I feel like Norfolk has kind of led that. Where are you in that right now? Are you at a place where you feel good on labor? Do you think you need to add more headcount? Or are we now fund for delivering a really good service product when the cyclicality of the model kind of is more accommodative?

What we're seeing is a history, right? And what we've seen is over the last 25 years, rail has ceded share a truck with only one reason, what rail is less expensive than truck, offers a sustainability advantage to truck, is safer than truck, and it offers a capacity advantage to truck as well. The one reason that rail has lost share to truck is service. And again, we think of ourselves as a service organization and decide we're going to compete based on service. It's not only that physical delivery of the goods. It's like that overlay of best-in-class consumer-oriented experience for our customers as well. We know we can grow, particularly with our franchise. That's why this works from Norfolk Southern. And so -- we also know that if you give your customers a lousy service product every 3 to 4 years, you're never going to be a growth franchise. We are a growth franchise. And so we're investing in that through the economic weakness or softness because the numbers are really compelling. Yes, we could furlough -- we could furlough 1,000 employees and save about $90 million. But I also know it costs $50,000 to recruit, hire and train a conductor, right? And so that kind of cuts that savings in half. In every 3 to 4 years, we will lose $800 million to about $1 billion of revenue because our service wasn't in place to handle it. And then we would also have service recovery costs, what, tracking about $50 million a quarter. And so yes, the math is compelling. You do have to invest to get the return just -- and just like every other investment, the investment comes before the return.

So when we talk about the volumes now down little over 2%, 2.5% quarter-to-date, they're down 3% year-to-date. So you made up some graph. And you're kind of at this like high 120s, below 130s, depending on the kind of weekly carloads. The service has gotten better. There's a little bit of a blip like you mentioned in late July, East Palestine now, at least in terms of the detours and the extra congestion is now -- we're back online. Is there a volume that's sitting on the sidelines that can move? I mean when do we get like a real -- or are we at the point now where, listen, we're more susceptible to these cyclical factors from where we are today? Or is there still volume to be moved that is yet to show up in the weekly carloads because of what we went through East Palestine?

I think that as our network continues to improve [ at slow rate ], we'll pick up more automotive volume. I don't know there's been a strength of ours, but we got to get the multilevel network spending a little bit faster. There's some volume in the agriculture markets that we can handle with improved service a little bit within our metals franchise as well. I think within coal, within intermodal, it's all macro related. But I am confident that we are going to continue to enhance our service product to help us pick up the business. And then the rest of it is macro related.

And there's always something that comes up in this industry in terms of now you have the UAW and there's a lot of noise around what happens with the Big 3 auto production from September. You have a big auto franchise, as you talked about. It's a growth driver for you right now. What's your kind of latest thinking? I know a lot -- we hope there's no strike, but what are you hearing? What are you thinking in terms of how that franchise can perform over the next couple of months.

So if there is a strike, and I'm not going to call that, right? That's -- there are other people more qualified to talk about that. There's ground product -- there's product on the ground right now that we could handle for we can have finished production that's waiting to move. If it were throughout the whole industry, so just the big -- for all the Big 3, it would probably impact our volumes maybe 30%, 40%. We're in a pretty good position because of our best-in-class investor development team that we've got a really diverse portfolio of OEMs on Norfolk Southern. So throughout our geographic network. And so we're not just solely tied to the Big 3.

30%, 40% of your auto volume is tied to the Big 3. What's your ability to kind of protect the network if something like that would happen, flex down the cost structure to the best of your ability? And then kind of protect the network when that volume ultimately comes back on the back of a resolution.

Potentially that won't happen anytime we see a downturn in volume or in upturn in volume. Now we'll immediately take a look at our train plan, make sure that we're handling the volume that's out there, but try and be as variable with our cost structure as possible.

Can you talk about the service right now? I mean, just maybe give a little bit more color kind of what happened in late July and where we go from here. There's obviously always further room for improvement in service. You guys have made tremendous improvement over the last several months. But maybe just give us a color on what happened in late July and where we go from here.

Yes, we had some weather disruptions. And candidly, I don't even like talking about that because that's an excuse and a resilient railroad doesn't make excuses. And so I'm really focused on getting ourselves back to where we need to be. Paul and his team have done a fantastic job turning our service around this year. It is East Palestine, and the impact of getting that track back, but it's also process improvements, right? It's continuous improvements throughout our terminals and execution -- it's strict adherence and execution to our plan and then iterating that plan. And this team is really focused on. I'm focused on it. First place I go every morning when I'm in our building is a network operations center, our mission control even before I even go to my office because I want to get my finger on the pulse of the network. We talk about being customer-centric and operations-driven which means there is an expectation and a standard of care expected for our operations.

And where is the [indiscernible] now in terms of where you are right now?

Our customer-facing network -- our customer facing -- pretty close to the -- our targets. We can do better. And one of the things that we're doing because we've got our eye on the future is we're sitting down with our customers, including some of you're going to talk to tomorrow and saying, what kind of service product do you need 5 years from now, not just today, but in order to really grow on Norfolk Southern and incorporate Norfolk Southern's franchise into your long-term supply chain needs. What service product do you need 5 years from now, 10 years from now? And you might even define it if...

Second quarter was really tough for you guys. And you talked about it way back in May. So that wasn't a surprise to anybody. It was tough for everybody, trucking, rail, everybody. I think for you guys, though, there are some reasons where it gets better from here. And so not where you want to be, but relative to where you were in the second quarter from OR perspective, it gets better, I would imagine. Volume is kind of a wildcard. But maybe, Mark, you can talk about or Alan, in terms of what's the right calibration for our expectations, profitability expectations move from 2Q to 3Q?

Yes. We would expect that we'd do better in the back half and certainly, we did here in the second quarter. But as I laid out on the call, I mean, there are some unique RPU challenges going into the back half that are really going to provide some headwinds for us as we look at the operating ratio. But we were pretty optimistic that we'll have volume growth return in the back half, principally in the fourth quarter. We just got to remain a little cautious on that. And I think there is a new variable out there, which is the increase in fuel costs that over time, I think fuel going up is probably accretive to our operating income and supportive of our OR. But I think as it's going up, we have a lag effect, especially as it turns like it has been third quarter, in particular, we'll probably face the impact of the higher fuel cost, but you don't get the revenue surcharge, except on a couple of month lag usually. I mean there are some lines of business where you might get it within a couple of weeks. But by and large, lag is closer to a couple of months.

And when we think about yield because that's obviously such an important factor. You've got fuel stepping down, call it, 8%, 10% sequentially. So with a sequential yield headwind on fuel. I'm talking about on a 2-month lag. So there's a sequential step down. Coal is another negative guy pricing is positive.

The core pricing is positive.

Price is positive. And so then we're talking about mix. And so as you think about mix, not just mix in general, but then there's like mix within mix -- it's also a little bit. Maybe talk about what your expectations are for mix. I mean does yield on an absolute basis come down sequentially in 2Q to 3Q.

There are a lot of headwinds associated with yield as measured by RPU, right? Certainly, you mentioned fuel surcharge, you mentioned export coal pricing. It's accessorial as well. And then it is mix within mix and you just pull apart our markets, the domestic utility market is pretty weak right now, export thermal is pretty weak. Export met is pretty strong, but the pricing is pressured, but export -- we really got this export met prices are still like $250 a metric ton. I mean that's -- historically, that's a really, really good number. This is not $450 like it was this time last year, right? And then you look at our intermodal franchise, and that's probably where we're seeing the biggest mix impact because as I know, we're still -- we are securing share from truck and international intermodal. International Intermodal tends to be a little shorter length of haul, the boxes 40 fleet instead of 53-foot and it's a private box instead of [indiscernible]. So it has a lower RPU than domestic. And then as intermodal will outperform some of the other markets, that has a negative mix as well. And then if you walk into our merchandise network, you see negative mix there as well when you see chemicals effectively leading the decline in the merchandise market.

And just on pricing because normal was such a big piece of your carloads maybe not a big piece of what you see as a revenue. But I mean, the pricing environment there has got to be tough vis-a-vis truckload. And I think [ switching ] intermodal contract this year, you pulled it forward. I believe you secured it as of July in terms of a new rate. Is pricing in intermodal is very pressured right now and even if you're being disciplined on pricing, compliance is low, you're not moving as much. How do you kind of think about that on the intermodal side because it's such a big piece of the carloads?

Yes, look, it is pressure, right. We've got to respond to the market. We have been disciplined in our approach and pricing relative to truck since the last 7, 8 years, right? And since I become a CMO in that we're not going to really follow that spot market. That's at 20%, 10%, 15% of the volume that's out there. That -- we've got long-term relationships with the best channel partners in the industry, including J.B. Hunt and Hub. You take a look at their strategy, the same as ours, right? They're investing in long-term growth. And so I'm much more interested in a long-term approach with them as they are with us, which includes a long-term approach to pricing, which is why you've seen continued quarter-over-quarter-over-quarter RPU less fuel increases for us in intermodal and in merchandise. That's been our approach. And I'll tell you, Ed's team has done a really good job this year. In many markets, we're actually exceeding our rate plan. And as we improve the quality of our product, as I noted before, there will be more demand for our product, we'll be able to place more value into the market, and we'll be able to price accordingly.

So volumes kind of down year-over-year, but kind of flattish, let's call it sequentially -- yield pressure sequentially. So revenue kind of flat to down sequentially. The only other lever that translates to EBIT as costs. And I know that you guys were running a little heavy. There was -- you [ ring-fence ] some of the East Palestine thing, but there's a lot of stuff you can't make sense -- think of like peanut butter, it's a cost everywhere. And so Mark, you've done a great job kind of giving us a sense of like the ex fuel costs and how those trend and how much can unravel -- maybe you can just help us out with that? .

Yes. I think when you look here going into the back half, you're going to see [ comp and ben ] sequentially tick up. We've got the wage rates that go into effect this...

Offset 35,000. I thought that with some of the other...

On a per employee. Yes, employees are going up. So the absolute dollars, you'll see climb. And I basically lump together all the other costs because there's puts and takes in there. And so [indiscernible] ex fuel, I kind of see them sideways in the back half. There'll be puts and takes within the different P&L line items. But I see those going sideways. And feel like we just talked about, that will tick up, obviously, in the third quarter based on the new rates that we're starting to see.

Usually flattish as the second quarter.

Correct. Right -- got it.

So then really, it's just about volume.

So it is. How much volume do we see come back on the road because we know the RPU headwinds, we just kind of laid them out -- so it really gets down to volumes.

And then as we move into next year, service recovery costs start down line.

Yes. And some of the service recovery costs are in that decline. Well, like I said, there's some puts and takes, P&L line item by line item between equipment rents, between purchase services, materials. We're going to start seeing some of those service costs here unwind in the third quarter and accelerate down in the fourth quarter. But then there's other increases that kind of mitigate some of those as well.

So if employee costs are going up, fuel costs are going up and everything else is kind of staying flattish. The OR -- and revenue is kind of flat to down. I mean, OR is flat to worse, right, sequentially 2Q, 3Q? .

It depends on volume.

Could it be -- could it improve?

Yes, it should improve modestly -- but it's really going to depend on the state of volume. And we started off July frankly, a little bit later than we wanted. So we'll see what's out there. And certainly, in the fourth quarter is where we're expecting a better year-over-year volume in our outlook. But I think we're increasingly cautious now.

Great. And can we just talk about competitive. I want to talk about pricing for a minute later, but because that's obviously very important. But I want to talk about the competitive environment because CSX and CP are kind of joining hands. I mean, it's funny [indiscernible] earlier today. I think he by accident mentioned in the Meridian Speedway like it was TSX of course, it yours. And so just talk about -- you guys have a lot of confidence in your service and you should because the metrics have been great. So we compete on those merits. But just talk about what the risks are from a competitive perspective where 2 of the legendary service, CP and CSX, top-tier service providers are getting together to move more volumes from Mexico to the Northeast and kind of in your backyard, especially with that auto franchise and Meridian Speedway.

We're engaged with our other rail partners as well including CP. Yes, opportunities to provide different service products out there to attract business. It's an important component of any rail franchise is working with all the other railroads because 50% of our business either originates or terminates offline. We've got unique franchise strengths. And that's what gives me so much confidence in our franchise going forward. That's why our strategy fits for us. I can't comment on anybody else's franchise. I have never been more excited about the future of Norfolk Southern than I am right now.

And I think a lot of those conversations that are happening with our interline partners just like the one you referenced, it's really about taking freight off the highway. So we're having the same conversations with all the other interline partners, including CP on what opportunities are out there for us to take freight off the highway.

Yes, you know what candidly, our interline partners see our franchise strengths to. They want access to that as well. And that's one of the -- frankly, that's one of the reasons you see folks from other railroads to [indiscernible] Norfolk Southern.

Any questions for Norfolk, the audience. Can we talk about pricing in terms of where we are? Is the book kind of fully based from a pricing perspective this year? And now looking to 2024. Where are we at in the pricing...

Yes, usually, the pricing calendar for us is kind of like a barbell, right? So first quarter, fourth quarter is where you negotiate most of your deals, the coal pricing, particularly export is linked to indices and so that will adjust throughout the year. So as we move into fourth quarter and in the first quarter of next year, there will be more opportunity to negotiate price, which is one of the reasons that I'm encouraged by our recent improvement in our service product. And our ability to demonstrate to our customers, just like you said at the opening, and we're keeping our promises. We're doing exactly what we said we're going to do. And that buys us a lot of credibility.

And I'll tell you, I think Ed and his team are doing an excellent job on pricing this year. They really are. So we're having a very good year. It's just being eaten up to some degree by some of the other [ RP ] structures we're seeing.

When we talk about regulation. It's been a long time, February, right, since these ballasting developments happened. I remember when PTC got legislative it was like 10 days after the accident. So every day [indiscernible] I mean, and I think the numbers kind of -- if you look statistically, rail is by far the safest. There's just not for quarters outside of every trucking accident on the highway, I would say. So we got a lot of attention, but I think specifically, there's not a lot of argument to say that rail is unsafe. But nonetheless, there's legislation that maybe argues for some more oversight [indiscernible]. And I don't know what you see the latest and greatest on that is, what do you think the -- I know you're a proponent of a safer railroad and legislation to [ cash ] that. But there's risk here that maybe legislators overstep where there is no regulation needed. I don't know what your opinion on that is and what you think the implications are from these overviews.

Yes. Look, we are fully supportive of the legislative intent to make rail safer, right? And we're really pushing for bipartisan legislation here. If you take a look at the NTSB report, it's the NS who did exactly what they're supposed to do, wayside detectors worked as planned, there are no track effects. They're focused on catastrophic failure of a wheel bearing of a car that new railroad owns and touched 3 railroads before and touched us. So that tells me it does require an industry-wide solution which includes railcar owners and customers and certainly railroads, right? So you see me on the hill vocally advocating, frankly, ahead of the rest of the industry on many of the provisions that are in the various railway bills that are in the House or in the Senate. But we're not waiting to act. We implemented a 6-point safety plan. We hired the Atkins folks. We created a VP of Safety in Norfolk Southern, and we're making real improvements in our safety culture. As I look at the bills, there's a lot of merits to many of them, and I don't think that the provisions that are out there would be too onerous on either the rail industry or on our customers.

Other big chunky cost mark that you've helped us kind of ring-fence second quarter you've added to it. I mean are we mostly through -- I know the insurance is still on to come. But obviously, our spending before the insurance payments happen. What do you look at this kind of additional outlays from an expense perspective relative to where you're going through?

So we've accrued based on our view that a vast majority of cleanup effort should be done by mid-October.

It's $800 million...

Yes [indiscernible] which cleanup is probably -- environmental cleanup is the largest proportion of that cost. So we believe that the cleanup efforts should be completed largely by mid-October. And that's going to obviously require alignment with the EPA, and they too validate that we are, in fact, done. So beyond that, there will be continuing legal costs as we deal with the fallout and litigation matters. We don't know what fines and penalties may be out there on the come, and we can't estimate that, which is why we haven't recorded that. And there will be some ongoing -- we haven't taken care of the medical funds yet as well. The other funds we've recorded amounts for. But if the cleanup efforts are done really like we anticipate by the fourth quarter there, mid-October, I think the big ones that are could move on us really relate to that legal world and fines and penalties.

And is all that covered on the umbrella [indiscernible] kind of insurance policy?

So I think a large proportion of what we reported does get covered under insurance. We believe so, for sure. And we have to start entering those dialogues with the insurance companies here starting in the third quarter when we start filing the claims. Because remember, you make the claims only after you incur the cost from a cash perspective, not when you accrue. So that's why there's a lag there. And that will take time probably to settle not months, probably not even quarters. It's going to take years, probably to settle all of this. And then the timing of when we learn if there are any other fines and penalties levied is hard to predict or anticipate. Sorry, those would not be covered under insurance any kind of fines and penalties to answer your question.

And potential third-party recoveries as well.

So you would have seen that in the second quarter, we started our efforts to recover money from other third parties. .

Yes. In the earnings call, someone was asking about margin improvement. And I believe I'm just paraphrasing, but the answer was -- there's not much you can do on costs, and there's not much you can do on price and so you need the volumes to come in over the top. So is that just like it now? Or are there things we should think about for next year and beyond that would change that equation?

Yes, that's [ announcement ], right? It's -- pricing is effectively what it is for the rest of the year. Mark outlined our cost structure where it is right now. As our network stabilizes, gets healthier, we're able to really iterate on productivity. And take a look at opportunities to pull additional cost out. So that is -- that was a reaction to a question specific to what's going on in the third quarter.

Yes. And bear in mind, I mean, this is a year where we're also investing a little bit more to build some resiliency in our network. We had talked about the fact that our 95 different hiring locations, not all of them were up to minimum standards in terms of staffing levels. So we were still on a quest to get to the point where, okay, we're staffed appropriately to handle the appropriate volumes in all of our locations. And then a little bit more for resiliency, so you can handle things like we even saw here in July, a little bit of disruption, knock you off a little bit and starts to show visible signs in your network. We've got to get to that point of being more resilient. And then to be honest, there is a lot of productivity opportunities out there. And what Paul Duncan and his team are doing, we created this performance excellence team where we're marching around the network, looking for productivity and efficiency opportunities to run the railroad smarter, better, where we do things we don't need to be doing. And I'm super encouraged that some of the early findings here that I know will start yielding results in the quarters ahead. So definitely, actions around cost are still part of the equation going forward. But you're in a year like now, we are investing a little bit. And we've had to invest a little bit more even on some of the safety solutions that we've decided we need to do the 6-point safety plan that we have launched that results and adding some additional costs and there's plenty of other examples like that. But I think the point here is there's a lot of volume we can start to absorb on this network without adding a whole lot of costs. Intermodal will have mix cost that volume variable. But by and large, a lot of the merchandise volume. There's almost no incremental cost to it. So we're excited about the leverage on the upside, and that's really part of that strategy we talked about...

If I look at like the employment data, and I look at like nontrade and engine employees relative to [indiscernible] employees, it's quite high as a percentage of non-T&E versus 2 T&E relative to your direct competitor. There's a lot of like [ wage ] in that data, so I don't want to say like that's definitive. But is there an opportunity to kind of take your biggest head count item in terms of nonproductive labor, every employee is productive, I don't mean it like that. The non-T&E employees...

Nondirectly...

Yes, correct. Is there an opportunity there? Or is there something in that data that's not correct?

We're looking at it. That's an area where we are actively benchmarking. We do know that there's a couple of things. There are contractors as an example, where different companies can take different approaches to how you do it okay, whether you use subcontract or third-party labor versus in-house like. So that's definitely an element and one of the areas would be in the world of IT and technology development, how much in-house versus how much contracted labor do you use and even on the customer service side or intermodal terminals. So those are areas actually where we have a team doing some benchmark in to look...

So is there [indiscernible] to trim there on the labor side, the non-T&E side? Or is that part of that noise around how things are reported?

We're going to continue to look at that -- we're -- actively we are. I will tell you that we are hiring more supervisors in the field, and we're hiring more folks in mechanical. Elsewhere, we're going to take a really hard get it.

Okay. Any final questions. Ben?

As you aim to take more truck share, what's the best way for us to model this in? How should we think about the freight profile in terms of 500-mile plus, 1,000-mile plus. These are customers that are used to paying maybe 3x as much, but they get there quicker. How should we think about all of this in terms of freight profile?

Yes. Our average length of haul in intermodal is pretty close to like 600, 700 miles, right, which is what -- if you take a look at the population centers in the East, it's 600, 700 or 800 miles part, which -- so that's a real sweet spot for us. But we've actually proven that we can be really efficient and really effective with really short-haul business, whether it's Savannah to Atlanta or Charleston up to Greer to service the inland port up there. And the merchandise network, there's a lot of opportunity for stuff that's anywhere over 250 miles. And I think one of the things that really excites us about all of this is it's not new train starts. It's 5, 6, 7 more intermodal boxes on an existing intermodal train, and it's a couple more box cars on an existing merchandise trends. So it really is all about revenue density on existing train starts, which creates a lot of good incremental margin leverage...

I hate to pivot back to the [indiscernible] question. But Mark, you talked about your outlook sort of embedded in your outlook, just a return of volumes in 4Q. Can you remind us if that's what's driving that? Is there a comp issue that we should be aware of? Or like why are you optimistic that volumes should match?

I think it's an anticipated demand return in the fourth quarter, right. It's a little bit of intermodal. It's a little bit of industrial products, and it's probably, yes, necessarily, the network velocity allows for us to take on some more demand unless there's softening in the macro. So that's what we don't know. .

And you see it, right? If you take a look at our volumes, year-over-year comps relative to the rest of the industry since our service started to improve in late April, we've outperformed. So service sells, it might take a while, but service absolutely sells, which is why it's so important to have that standard of care for operations that I talked about...

[indiscernible] returns, you can move more...

It's looking at a faster railroad, I think less expensive railroad..

If we can get our turns up, you'll see a lot more automotive volume, and you'll see a lot more steel volume because the demand is there.

A lot of reasons, even in this economic environment, people want to shift business from truck to rail because we're less expensive. They want to save money, too.

Let's end on that positive note. Alan, Mark, Luke, thanks so much for taking the time. Appreciate it.