Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

All right. Thanks, and good morning, everybody. We're resuming with the transportation track. We're very excited to have Norfolk Southern joining us for this next session. So joining us from the company, Alan Shaw, President and CEO; we have Mark George as well, who's EVP and Chief Financial Officer. So gentlemen, thanks so much for joining us. We really appreciate it.

Chris, great to be here.

So I think you guys are going to start with a couple of slides. So Alan, I think I'm going to turn it over to you, and then we'll leave plenty of time for Q&A. And obviously, we want this to be interactive as well. So if you have questions, raise your hand, we'll get a microphone to you. But Alan, with that, let me get it over to you.

Right. Chris, thanks for hosting. I'll be making a couple of forward-looking statements today. As you know, those are subject to risks and uncertainties. And then Chris, I would ask your audience to take a look at our website for a filing of our relevant risk factors. Before I start today, I want to address the news of yesterday of the shareholder activism. I'm not going to really talk about it much. I can tell you that we've had conversations with the shareholder, just like all of our conversations with shareholders, they're private. Our Board is -- and management team are very, very focused on engaging with all of our shareholders, and we certainly value all their perspectives on how we can drive long-term shareholder value at Norfolk Southern. We've got an ongoing and highly successful Board refreshment process. And I'll note that in the last 5 years, we've added 6 new highly qualified Board members to Norfolk Southern, which bring new ideas and challenge us to challenge the status quo. We're -- we've issued a press release on it, and I would invite your audience to go out there and take a look at that as well. We're making a lot of progress on our strategy, and I think we're going to talk a lot about that today. And our Board is intently focused on holding management accountable to executing that unique strategy that we laid out in my first couple of months as CEO of Norfolk Southern. Let me talk about where we are. And I want to bring everyone back to my prepared remarks in our earnings call just a couple of weeks ago. What we laid out there is a Norfolk Southern specific opportunity to drive productivity and drive margin improvement. And it's specifically pointed at the merchandise network, right? What we talked about is a commitment to driving greater speed and greater car velocity through the merchandise network. And as you know, car velocity is one of the key tenets of scheduled railroading. And we talked about double-digit improvements this year alone and AAR terminal dwell and manifest train speed. And we put those out there because we wanted our audience to be able to check our progress on a weekly basis. These are public metrics that are published every week. I would take a look at them over a 12-week runway because there are going to be fluctuations up and down. Those are going to yield productivity. And we do firmly believe that we've got a multiyear opportunity to drive productivity at Norfolk Southern. That's what's going to drive the 100 to 150 basis points per year opportunity of margin improvement at NS. It is really productivity focused, it's not volume dependent. And we're going to drive this through operating to our plan. And as you operate to your plan, particularly in the merchandise network, you've got the opportunity to shed a lot of costs. And I'm going to talk a little bit about that flywheel effect here in a second. It also allows you to continue to iterate your plan to look for more opportunities, to drive productivity and enhanced service and enhance capacity. We're really focused on reducing the complexity in our merchandise network and the number of car handlings. We're prioritizing our merchandise network. Now that we've got our intermodal product in a really good position. And frankly, we are flying in our bulk network. It's operating really, really well. These are not volume-dependent productivity measures. They are NS specific productivity measures. And last year, we overcame a lot. We had a lot of headwinds and despite those headwinds and despite the specific actions that we took to protect Norfolk Southern and our shareholders over the long term, we improved safety. We improved service, our intermodal service as we exited last year was the best it's been in over 3 years. And we started growing again. Our intermodal volume, which you know is the most service-sensitive on all our volumes is up 5% just in the fourth quarter alone. And you heard us talk on our fourth quarter call about onboarding more FedEx volume. Well, they're interested in pretty good service. And they pay for it, right? And so that's a double coupon for us. And so we really were able to focus last year on safety, service and growth. Now it's really about productivity. Our focus can narrow more, and it really is about productivity in that merchandise network, which is where about 2/3 of our train starts are and about 2/3 of our cost. We talked about this flywheel effect on the call as well. It's really important to understand that a faster network and one in which cars are moving with a greater area of velocity across the network is actually a less expensive network. You can really shed a lot of costs, which are reflected up and down throughout the income statement. We're going to see it, and we are seeing it in comp benefits in purchased services. Fuel efficiency will improve and it continues to improve as trains are moving from origin to destination on time. One thing that really juice up a lot of fuel is slowing a train down and then getting it started again. So if we can just continue running on track speed as we operate to our plan, that really drives fuel efficiency. Equipment rents will be shed because we'll have less cars online. That's another really important thing to look at. And then materials will be -- will improve as well as we have less locomotives and service, and we have to use less materials to repair of locomotives. So this flywheel effect is really important that's why we're really focused on that merchandise network where -- which is where about 2/3 of our operating costs live. And let me close by talking about our outlook for 2024. And Chris, this is not any different than what we talked about a couple of weeks ago. We see about 3% revenue growth this year. Pretty strong volume growth, pretty strong pricing, actually, particularly in the merchandise network. There will be some negative mix effects that are going to offset some of that volume growth. And then, of course, particularly in the first quarter, we got a lot of headwinds on the top line associated with storage -- intermodal storage services, associated with fuel, year-over-year pricing comps, export [ coal ] and then we have some comps associated with headcount too in the first quarter on the expense line. So we talked about 100 to 150 basis points of margin improvement every year through productivity. We're going to deliver that this year. First quarter is going to be kind of flattish associated or maybe even a little upside from fourth quarter because of normal seasonality. Normally, in the rail industry first quarter is a little worse than first quarter in terms of margin improvement. But as we lap those comps, as we get into the second quarter, third and fourth, you're going to see some pretty significant improvements in that operating margin, in that OR, which will yield for the full year, 100 to 150 basis points. And when we get a recovery in the market sometime in the next 3 years, although we're not projecting it, that's a lot of upside to that 100, 150 basis points a year target that we put out there. We do talk about CapEx this year, it's going to be flat with last year. I'll remind everyone that does not include the acquisition of the Cincinnati Southern Railroad, which is a strategic acquisition for Norfolk Southern. So I'll close by this, Chris. A lot of confidence in our ability to close that margin gap. We are committed to industry competitive margins. And then we're layering on top of that this powerful franchise that faces the fastest-growing segments of the U.S. economy and a strategy that's going to allow us to participate in upside, that's going to deliver top-tier revenue and top-tier earnings growth at industry competitive margins for our shareholders.

Great. Well, I appreciate the prepared remarks and it's helpful to kind of run through the setup here. And so listen, I think the question that a lot of us are asking ourselves is, is the 100 to 150 basis points sort of enough, right? So as we look out over a multiyear period, and I know you said if we get a cyclical upswing, there's upside opportunity to that. So maybe the question is, is there something more dramatic that maybe you feel like is an opportunity to do, but that could potentially disrupt the network and potentially put further growth at risk? I just -- we want to make sure we understand sort of the dynamics of the 100 to 150 basis points, which could be ahead of what some of your peers in the industry are doing this year in particular. But sort of -- why isn't it a little bit more?

Yes. Well, it's -- right now that 100 and 150 basis points is all about productivity, right? It's -- we have a balanced approach of safe and reliable service, continuous productivity improvement and smart and sustainable revenue growth that drives accretive margins, right? And so as the economy recovers, we're just not putting it down on paper, right? There is definitely upside to that. I think it's important to realize and think about kind of the cadence of what we've done over the last couple of years. I've been CEO for about 20 months, right? Our service was not good in 2022. We had to invest in improving service. And I invested in improving safety. Our mainline accident rate in 2022 was the lowest in 2 decades. Our service improved in 2022 throughout the year, faster than any other railroad. Because we invest -- we had to get that right. We added resources. We refreshed leadership at operations. We changed our operating plan, particularly in intermodal. And that yielded great benefits to us as we exited 2022, and we were cranking. Our service was really good in December of 2022, in January of 2023. Our customers were giving us more business. We were outperforming normal seasonality, and we were doing really, really well. East Palestine occurred. We had to take actions to protect long-term shareholder interest. And we really focused on further enhancements to safety. We continued to enhance our service product to overcome these network disruptions. And as we got through 2023, our mainline accident rate reduced 42%, okay? So that's -- I promised to make a safer road even safer, and we did it. We exited the year with a really good service product. We're picking up growth. Now it's a focus on productivity. And we're taking a very measured and a responsible approach to this balanced plan that we've talked about as service productivity and growth. And I'm committed to delivering top-tier earnings and revenue growth with industry competitive margins.

Chris, let me just add a little bit to that as well. Why isn't it -- why can't it be more this year? You have to remember, too, that we are facing some headwinds in mix this year in RPU. We've got a little bit more intermodal storage that is unwinding here in the first quarter, another reason why the comparison in the first quarter suffer a little bit more. And then the unwinding of energy pricing. So coal export pricing provides a headwind and fuel provides a headwind for us on the unwinding of the surcharge. So those things provide a little bit more headwind that we're going into that eats away at some of the upside. But I do want to just point out that in the back half, once we get past the first half, the back half margin improvement story is much greater. It can be a multiple of 100 to 150 basis points in terms of year-over-year improvement.

Yes. And I talked about that as a couple of minutes ago, right? Is the exit rate of our OR improvement in the back half of this year is going to be pretty solid and much better than the 100 to 150 basis points. We'll have a lot of momentum going into next year as well.

So I guess -- I don't want to get too into the stuff that we've heard. But I guess the question I think I have to ask is what do you think people get wrong, generally speaking, when they say, hey, CSX runs at kind of a sub-60 if we take out the quality carriers, if we try to look at it on an apples-to-apples basis. What are we getting wrong when we're sort of saying it feels like there's an opportunity that's maybe bigger than what you guys have put out there? And -- so how come you can't get to that level. So what's sort of maybe wrong about that analysis or that argument as it stands right now? Or is there anything wrong with that?

Yes. There is an opportunity for upside to this. I've been really clear about this. What we're putting out on paper in the 100 to 150 is just productivity. It's not volume-dependent. We've got a franchise built for growth. When the economy recovers, there's significant upside to that. There are some franchise differences. We've got a very powerful intermodal franchise, right? That has higher margins than -- or higher costs, lower margins than, say, coal or merchandise, that's acceptable, but it also grows a lot faster. And so that, with industry competitive margins as a whole, and better growth out of that will generate more EPS growth for shareholders.

Okay. So I guess I wanted to dig into the merchandise side of the house because I think that's the area right now that seems to be most in focus. So let's talk about sort of the specific goalposts or benchmarks that we can look at as we go over the course of this year. So you talked about some of the double-digit percentages in some of that. So how quickly can you begin to realize that? Is that something that we're going to be seeing towards the end of the first quarter? I know January had weather, so that was probably a little bit of a challenge from an operating perspective. But when do we start to see some of those milestones begin to get hit, so we can actually measure and see the improvement towards that 100 to 150.

Yes, we're seeing it now, Chris. Our train speeds are up year-over-year. Our dwell is better year-over-year. And we saw it in December. We saw it in January. Yes, we had some weather events in January. There's no doubt about that. But candidly, the feedback that we got from our customer base is we recovered better than other railroads, right? And so that shows you some of that resiliency and that shows you the improvements that we've made in our service product. That's allowing us to pull costs out, and we're doing that now. And so I think as you think about January and February, we had some -- we're going to have some headwinds in January associated with volume because of the weather event and the impact that had on us and on our customers. But candidly, we're making up for that right now because of the fact that we've got a much better service product out there and our merchandise network is moving much more fluidly.

Okay. And when you think about it from -- when you look around Alan, at the folks that you have from an operations perspective and otherwise, do you have the players on the field today that are sort of -- you have high confidence in, that are capable of making the changes that you need them to make?

Yes, I have a high degree of confidence. Like Paul Duncan joined us in March of 2022. And just chart our train speed improvements from March of 2022 forward relative to the rest of the industry, and it's a pretty powerful story. And what you saw us do in 2022, up until the rail in '23 is improvements in safety, improvements in service, customers were noticing. And then we had significant headwinds that we had to overcome last year. And Paul and his team have allowed us to continue to enhance safety. We recovered service, we're growing now, and now it's a real focus on productivity. But look, I've been at Norfolk Southern for 30 years, but candidly, I approach it like an outsider. I'm willing to make change. And I've refreshed the entire leadership team in operations in like the last 14 months. And about 1/3 of our management committee, which is VP and above is relatively new to Norfolk Southern since I became President and CEO. So I will continue to look for the best talent, both inside Norfolk Southern, inside the industry and outside of industry as well.

Okay. Okay. That's helpful. Reminder, if folks want to ask questions, raise your hand, we can get the mic to you. But in the meantime, I want to run through a few more things here. So let's just sort of take care of the demand environment and sort of the near-term stuff. You guys had a couple of comments on that I want to hit on. So first, from a volume standpoint, we know obviously, January from a weather standpoint, kind of depressed things a little bit. You're looking for some revenue growth this year as we're sitting here in February. We can see the carloads, there's been a degree of improvement. What's your sense on the state of demand right now?

It's pretty strong. It's actually right now, I think it's performing a little bit better than what we had anticipated. The truckload market remains weak. You and I talked about that beforehand, right? And there could be a tail to truckload pricing that goes on for a while. And so we see a lot of pressure in intermodal pricing frankly, throughout the remainder of the year. But we had a better intermodal product right now. And so that still is attracting volume and attracting growth for us. And so we can grow even in a weak environment, and you see that in our year-over-year comps. Export coal demand is still pretty darn high, which is a positive for us. And that is not as strong as it was this time last year. And so that creates some of those comps that Mark was talking about. And our merchandise network is moving faster. And what that does is that generates more volume opportunities for us as well.

Okay. And Mark, you had mentioned, I think, some normal seasonality to the first quarter from an OR standpoint when we chatted back in January. So I just want to get a sense, has that changed at all? I mean, you talked about flattish to up sequentially. I think when we were talking before, maybe it was plus 1 or 2 was like normal seasonality from 4Q to 1Q. Anything changed there? Is that sort of the general take that you have today?

No, that's pretty much still the outlook, Chris, for the first quarter.

Okay. And that handles even with what you've seen with weather and all that?

Yes, because, as Alan mentioned, we are making it up here in February from a volume perspective. So let's talk about volume a little bit the way it plays out over the course of the year, right? I think when we think about it on an average volume perspective, the way we exited Q4 of last year, those are probably the volumes we're envisioning over the course of this year. And just naturally, that provide some year-over-year growth of, call it, GDP type of volume growth. But it steps back from the fourth quarter and the first quarter and then it will build over the course of the year. So the year-over-year volume improvements start to look pretty healthy and pretty heavy as we had, especially into the back half, but even the second quarter will look pretty good because it compares in particular, in the second quarter, give us some favorable numbers there. And then I think you're going to see some adverse mix continue that eats away at some of that volume benefit on the top line. But frankly, the pricing is strong. Even despite the headwinds that we have on coal pricing, merchandise pricing very, very strong. And that's really what's going to lead us more to the 3%-ish type of revenue growth.

And pricing above inflation is part of our strategy as well, right? It's about driving productivity, a good service product that allows us to price above rail inflation. That's the value proposition.

So when we get to 2Q, 3Q, 4Q, I guess, by 2Q, I think year-over-year from an OR standpoint, that's where we need to start to see the improvement, right? On a year-over-year basis, that's when you'd have to start seeing it kind of coming out of the first quarter?

Yes. And you'll certainly see sequential improvements as well. And so that -- and the exit rate, as we exit '24 moving to '25 is going to be pretty strong.

Okay. You'll see a healthy sequential improvement from 1Q to 2Q and then the year-over-year improvements in Q2, Q3, Q4 are going to be pretty profound.

I guess I also wanted to kind of dig into what has changed in the business really from the '21, '22 time frame, maybe even going back a little further than that. But kind of running in like a 61-ish, maybe 62-ish type of operating ratio. I know service was an issue, and so there's been a reinvestment in that. Is that the right longer-term target for the business? Or were there other things like accessorial charges or things like that, maybe met coal pricing that were kind of an unnatural boost to that. So I guess I'm trying to think about sort of history and where you found natural homes in the operating ratio to think about the longer term maybe beyond the window that you've talked about?

We implemented our TOP21 operating plan in 2019. And we quickly got our operating ratio down into the low 60s. And then, of course, when we had the pandemic and the great resignation, and we had a bunch of folks to leave. And our service was not good in '20 and in 2022, and we were actively hiring T&E employees, engineers and conductors and mechanical forces, right? And we took a number of actions last year to protect our franchise based on some of the headwinds that we're facing. That elevated our cost structure and coupled with an extremely weak freight environment that is now entering its third year, right? That put a lot of pressure on our OR. Now we're in a position right now to really dig into productivity and drive that thing much closer to industry competitive margins.

Got it. Coming back to the merchandise, you talked, it's 2/3 of the train starts. Is that 2/3 is roughly the right proxy to think about from a network cost perspective from the -- for the merchandise business?

Yes, that's appropriate for fuel consumption, for comp and ben and operations, locomotive use and equipment rents, yes.

And what kind of -- the mainline was closed for a period of time. I think you guys prioritized intermodal, I guess, as you're thinking about merchandise and sort of reprioritizing merchandising and a couple of things maybe embedded in this question, I guess. What are the sort of service metrics that your customers are looking at to kind of come back to you guys from a market share perspective. Number one, you talked about pricing being pretty good, too. So what do you need to do in order to sort of capture that pricing? Is it there for you today even with the product that you have? Or is it something that we need to see improved for a bit before you get to that level?

Yes, it's there for us today. And in fact, Ed Elkins and his team and marketing exceeded our price plan of merchandise last year. And we've got a healthy price plan within merchandise this year as well. We've got a really consistent, really reliable service product right now within merchandise. One of the things our customers look is on-time delivery. And we've pointed investors in your audience to that as well, our public-facing metrics. So we are attracting business within the merchandise network. And there's a couple of different ways to look at it, right? If -- when we improve our car velocity, which we are now, that improves equipment availability. Every day, bloating dock managers want to ship rail versus truck. There's a lot of inherent advantages for rail. From a safety standpoint, from a sustainability standpoint, rail is less expensive than truck. And so in a capacity standpoint. And so if a boxcar is there or a multilevel is there, the customer is going to want to use that. As we improve our car velocity, which is why we're so focused on that throughout the merchandise network, it presents more opportunities for customers to load any given day business in the Norfolk Southern railcar as opposed to shift it to truck. Then over the longer term, as we prove that reliability and that consistency, customers will build Norfolk Southern into their supply chain. And so it's a near-term opportunity, which we're taking advantage of right now, and we're building credibility with our customers so that they will invest in long-term growth on Norfolk Southern. And frankly, you saw that last year as we had 61 different customers announced investments totaling $3.2 billion for expansion on Norfolk Southern's lines. That shows you the confidence that our customers have in Norfolk Southern.

So -- and I apologize, I keep coming back to this, but I want to make sure I'm clear on this as I'm kind of thinking through and the things I wanted to get accomplished over the course of this conversation. Industry competitive margins. What does that specifically mean to you guys? So I guess that's one thing I'm kind of curious about. Is that 60? Is it sub-60? Because other folks are going to be there. What is industry competitive margins?

Well, it's kind of wherever the industry is, right, we're going to be in that ballpark. And then layer on top of that top-tier revenue growth, that will yield top tier earnings growth for our shareholders that's -- that is our strategy for driving long-term shareholder value. That's what you call it the value creation framework.

It's -- if you can't be the lowest margin railroad out there because franchise-wise, maybe we won't be the lowest rail margin OR road there, we have to be the fastest growing. So -- and that's the point. We're trying to be a top-tier revenue grower to compensate for the fact that we may never be the lowest OR road that's out there. But we need to be in the ballpark. We need to be in the acceptable range and the most optimal range in order to be able to drive growth.

And that's our strategy, right? And so that's -- frankly, that's what we're doing in 2022 when we had record revenue in Norfolk Southern.

But we're not going to give explicit, this is what the ballpark means, 200 basis points, 300 basis points, it's sort of generally in the range is the way to think about it.

Yes. That's correct. Recognizing there are some franchise differences, which impact the margin comparisons but also provide us a much greater opportunity for revenue growth.

Okay. Got it. Yes. No, you certainly don't want to wall off revenue growth just solely for the sake of operating ratio. Price cost is something that's come up in the rail industry, and I want to talk about it because you guys have been maybe a bit more optimistic than some of your U.S. peers about the pricing opportunity in '24, particularly as it pertains to the merchandise business. So maybe you can talk a little bit about that relationship between price opportunity and cost inflation dollars, I guess. So we talk oftentimes all out that for margin expansion growth. But what gives you that opportunity to be a little bit better than what maybe we're hearing from some of your peers on pricing?

Well, certainly, as you provide a better service product, right? We're going to price to the value of the product that the Norfolk Southern service creates in the market. So that's an opportunity. It's a double coupon first us, right? It's an opportunity for more volume and people are going to pay more for it as well. We talked about how in intermodal, there is a lot of pressure in domestic intermodal, right? That's really truck competitive. And so that truck pricing, we think, is going to be sideways for this year. So that's going to create negative year-over-year comps for us, particularly in the first couple of quarters of this year. Premium and international intermodal are a little less exposed to truck pricing. And so we see year-over-year growth in pricing there as well. And then in the merchandise network, we see a lot of strength, a continuation of what we were able to deliver last year. And we do believe and we are confident that we will deliver pricing in excess of rail inflation. Last year, our rail inflation was about, what, 4%. And this year, we anticipate it's going to be about half of that.

And when -- so 2% is the rail inflation number that you guys are thinking about?

Our inflation, our cost inflation. More in that 2% range. So it's half of -- almost a little more than half of what it was last year.

And as you think about that, is that a productivity adjusted number, I guess, as I'm thinking about sort of the labor environment...

It's wage increases, it's purchase service increases. The inflation that's embedded in our cost structure. And productivity is a takeaway from that. So that's where the margin improvement opportunity is in the face of inflation.

So even with the labor contracts and sick leave dynamics that kind of pushed the labor piece of that higher, you think the overall is lower in that 2%-plus range.

Yes. So that's -- you get margin improvement even in a relatively flat volume environment. You get margin improvement from productivity and you get margin improvement from pricing in excess of inflation.

Can you get -- so given that dynamic and given where pricing is, if volumes end up maybe underwhelming this year because the macro is as uncertain as it is, there is still OR opportunity in 2024 for you guys because of that dynamic?

Yes, there is. Volume is a component of the productivity, and we are projecting marginal revenue increase this year of around 3%. That will help but it's -- there are a lot of productivity opportunities for us that are independent of volume.

Okay. You do need a certain amount of revenue growth to also be able to deliver that bottom line margin. I mean you can't have revenues going backwards, that's for sure. So there is some need for some level of revenue support in order to get your margin improvement to show up at the bottom line.

That the 100 to 150?

Yes.

Okay. Got it. That's very helpful. If folks do have questions, let me know about that. Let's talk about the CSR. I wanted to kind of talk about the dynamics for 2024 in that respect. So there is a degree of cost avoidance, I think. Talk about the sort of competitive dynamics and what you think it brings to you? What are the benefits that NS will achieve by having this in your portfolio as opposed to part of the leased portfolio?

So that's a line, core network between Chicago and Atlanta that we've operated on for over 140 years. And the lease was up -- was due to expire in 2025. We entered into negotiations with City of Cincinnati several years ago on this because we really weren't -- we didn't know for sure how much the lease expense would go up. And given that it is such a key component of our core network, it made more sense for us to own it. So we'll execute the purchase in March of this year. That is going to provide some lift to us on rent expense. It will provide a little bit of a lift to us on depreciation expense because assets on that line, we can depreciate over the longer term. Below the line, it's going to create some headwinds for us on interest rates. But here's an opportunity to invest in something that's core to us and has no execution risk at all because we've been operating on it for 140 years.

And so from a -- how do we think about buyback this year? Does that have any impact on that? I know there's incremental interest expense. Will there still be cash flow dynamics available for buyback this year?

Right now, we're not projecting any buybacks because of the CSR purchase, although we are looking at the opportunity to increase the dividend in the second half of the year.

Okay. Okay. Got it. That's helpful. That's helpful. And then I guess, maybe a little bit more broadly, as you think about the operating environment as you see everyone sort of maybe making that pivot or more of the U.S. rails sort of talking more about growth opportunities, a little bit less about OR opportunities. Where do you see sort of the best revenue or volume opportunities for you specifically. Is it with the existing customers? Or is there just more of this prospecting and so that needs to be more of a truck to rail conversion dynamic? I'm kind of curious about that.

Yes. Let me talk specific to Norfolk Southern, right? We do need to improve our margin. We are focused on getting that operating ratio down to industry competitive margins, right? We do believe, over the long term, we've got unique opportunities for growth. We've got the most powerful intermodal franchise in the East. We serve over half of all U.S. light vehicle production. We serve over half -- we serve more short lines than any other railroad in North America, which provides our customers a lot of flexibility and really extends our reach beyond the boundaries of our network. And we have a best-in-class industrial development team. And where we operate in the Southeast and the Midwest is kind of the center of this manufacturing super cycle and investments in manufacturing and onshore in the United States. And so we certainly see GDP plus opportunities for growth in our intermodal franchise pulling trucks off the highway. And then the merchandise franchise, I articulated earlier, a better service product and what we're delivering right now is going to generate kind of industrial production type growth for us as well. And then in automotive, we see GDP plus opportunities as well. There's a lot of runway for us for growth going forward.

Do you think that customers -- rail customers need to see a sustained degree of service performance and improvement at these higher levels that we've been recently able to achieve in order to kind of come back to the space? I guess, what's the temperature you get when you talk to the customers about their appetite for incremental rail market share?

Well, you're seeing some of it now in Norfolk Southern, right? As our velocity has improved both in intermodal and then merchandise and in our bulk network, you're seeing year-over-year growth for us. Longer term, yes, customers want that to be confident that they can build Norfolk Southern into their long-term supply chain needs. And that's frankly one of the key components of our strategy, right? Because we know that no company is going to grow over the long term if you provide your customer with a lousy service product once every 3 years. So we are going to continue to invest in a responsible and measurable way and our resources and our leadership and our plan to provide good service throughout the economic cycle, which gives us an outsized opportunity for growth than the upturn. And it also allows us to continue to invest and continue to focus on productivity.

I do think that they want to see us perform through a normal cycle, the cycle that typically would have put us down whether it's a surge in volume or some other environmental impact that results in bad service for the typical 18-month period. Once we can demonstrate through resiliency that we can avoid that, then that next batch of volume comes from those customers who are waiting to see can they trust us. And that was the premise of the Investor Day message we sent in December 2022.

Yes. If you think about the 3% revenue growth outlook, which obviously has positive volume kind of embedded in it, given some of the yield headwinds that are out there that you guys have talked about, I guess in terms of the workforce that you have from a headcount standpoint, is what you have today sort of capable of handling what you think you're going to get within that 3%?

Yes. I think we've got the right level of workforce. We'll continue to invest in our mechanical employees in the field. We announced a voluntary separation package which is really targeted at folks in our headquarters and so we believe that year-over-year headcount is going to be flat. And so we'll be able to absorb additional volume with flat headcount, which is more productivity for us.

Chris, I would go as far as to say we have probably a couple of years, maybe a few years depending on the size of volume growth of capacity out there with our existing workforce. I mean we've got trains we can build out and fill. So I think that you could see a scenario where we could handle even 10% more volume with the same kind of T&E workforce levels that we have while we get more productive at the same time.

And then Chris, that's why we talk about a multiyear pathway to productivity improvement.

All right, gentlemen, Alan, Mark, thanks so much for joining us. Really appreciate your time this morning.

Thank you, Chris, good to be with you.