Norfolk Southern Corporation (NSC) Earnings Call Transcript & Summary

Thanks for joining us today for the Norfolk Southern fireside chat. I'm Daniel Imbro, transports analyst here at Stephens. Really pleased to be joined up here by management from the company, I have new CFO, Jason Zampi; and then EVP and CMO, Ed Elkins. Thanks for joining us, guys.

Thanks for having us. Thank you for having us.

Thank you for having us.

So this will be a fireside chat. I'll kick off Q&A. Please ask questions as we go as you have them. But yes, I really want to start off, maybe, Jason, just congratulating you on the new role, kind of move to the organization. We'll discuss a lot today, but I would love to start with what have you learned so far during your time as CFO. It's been a pretty transitional time for the company. And then what are some priorities that you have brought to kind of lead the organization from your seat now?

Yes. Thank you for that, Daniel. So I've been with the company about 13 years, in the CFO seat for almost 2 months now. So -- but I've had the opportunity to work alongside Mark George for the last 5 years. He's an outstanding leader. I've known Ed for a long time. Ed and I back in 2011 actually went through a leadership rotational program. So I've known him for a while. And now we're bringing in some really good talent with John Orr, Aneel Bhatt; Jason Morris, our Chief Legal Officer. So what I'm really most excited about and energized about is this team that we have. And I think the focus and the priority is really just a relentless focus on delivering results. I'm fully committed as is our whole team to hitting the financial targets and goals that we've laid out there. And as you've seen, we've got a lot of great momentum. So just really excited about the team we have.

And so you mentioned the newer kind of executive team, it has been a big transitional year for the company. So maybe love both your perspectives on how is just the broader team responded to this, how is retention, how's team morale. It's typically tough to keep organizations go in that direction during a lot of change. So how has that been this year?

I'll start. First of all, thanks for having us here. Everybody says they have a great team, right? It doesn't matter what conference you go to or who you're speaking with. But I can tell you that the cohesion that we're seeing, it's really exceptional, at least in my experience. And I've been with the company for 36 years, 31 of which were very boring, but the last 5 have been more exciting than I wanted them to be. But I will say that the cohesion, the 3, 4 has really been, to me, and I have a very limited viewpoint, exceptional. And when you ask about how is the team doing? It's an everyday challenge for us. And for me, I would say, I have to remove the biases that I've built up over the past 4 or 5 years where we've had service that was good and bad, and we're able to meet customer demand, then we disappoint them. And so I personally built up biases around what's possible. And so every day now, the entire team, which includes Jason, myself, John, Mark George, we're all testing those biases and trying to get them out of the way because what's possible is different now than what it was for us for the past 4 or 5 years, and we're demonstrating that. And that makes people excited. It makes you uncomfortable, to be clear, but we're becoming much more comfortable with being uncomfortable, so to speak, and really challenging ourselves to do things that we didn't think were possible. I don't know, Jason, you...

No, I think that just like your last point there, Ed, really challenging what is possible. And it's thinking about not doing things differently than the way we've always done them. And so I think that has really energized the team, and I feel like everyone has really rallied behind our strategy and is really looking forward to this momentum.

Agree. We'll jump a little bit more towards near-term trends. Quarter-to-date, we know what the volumes kind of running. I think they're in the mid -140,000-ish range. I think [indiscernible] I'm curious how that shaped up relative to how you thought the quarter would look and kind of how you've seen any strength or weakness in relative markets through the quarter?

Sure. I mean it's been an exciting year with lots of things going on, the latest of which, I guess, was a 3-day work stoppage at the ports, which doesn't sound very impactful. But when you think about global supply chains shutting down the port for 3 days, very impactful and rerouting a whole lot of cargo globally is also very impactful. We're generally pleased with where volumes are. We knew coming into the quarter and that, Jason, I think you were actually talking about it at a different conference earlier this year that automotive was sort of developing into a volume challenge for the industry. And the same is true for steel, probably as an upstream byproduct to that. We've seen both those things sort of play out, but we're encouraged. And what we're really focused on as a team on the marketing side is going out and finding additional volume in the form of share that we lost over the past 4 or 5 years that we can bring back immediately as well as generating new revenue streams from customers who have freight that maybe hadn't moved on the railroad or any railroad in a long time. And the most important thing that we have going for us is really and truly number one, the quality of the service that we're able to deliver. And when I think about what's our mission, it's pretty simple. We want to produce service that our customers can count on every single day, and we want it delivered by people that they can trust. And that's what my team is focused on. That's what John's team is focused on and what Jason is focused on. So I'm encouraged. We're still seeing those same headwinds and coal price is something I'm sure someone will ask a question about, it's been kind of a headwind, too. But we knew all those things going into the quarter. And I think we are working really hard to backfill every place where we see that kind of weakness. I don't know if you want to add anything.

Yes, I would just add on from an overall OR perspective, I think that's really good background, Ed, from a top line. But just kind of reminding everyone about the sequential uptick in operating ratio from third quarter to fourth quarter, we're thinking that's around 100 basis points of seasonality, some of what Ed talked about, coal pricing, obviously, is impacting that. And then 3 other components, one being we had some fuel recoveries in the third quarter that we don't expect to recur again and as well as just fuel price, right, the headwinds from fuel price. We had some land sales in the third quarter, about $20 million. Those may moderate a little bit as we go into the fourth. And then we have some hurricane-related expenses. So if you take all 4 of those components, they're incremental to one another, and that's kind of how we're thinking about where the quarter is going to shake out sequentially. But we're very confident in our second half guidance [indiscernible] in the range that we provided.

So still in the second half guide and then kind of going into next year on solid operational footing.

Absolutely.

Maybe to go back to the volume side, I think an area of strength in recent weeks, intermodal is picking up nicely, which makes sense getting further away from the hurricane and the strike. I guess are we seeing any particular strength in domestic? We've heard anecdotes of that picking up. And I'm curious, are you seeing that in the Eastern network? Is that starting to have a mix shift change just what we're seeing?

Yes, we have. We thought going into the second half that we would see some volume recovery in terms of secular recovery in terms of demand. And there's still probably too many trucks on the highway, so to speak, which is keeping price pretty flat sequentially, right? But what we are seeing is more and more customers are trusting us to deliver their products. And we can save them some money, we can deliver a product that they can trust. And we had a very successful bid season in 2024 with our key intermodal players on the domestic side. And we're seeing volumes, frankly, that we haven't seen since the fall of 2020 when it comes to domestic intermodal volume.

It feels like we are seeing truck pricing get a little bit off of that, not a ton to get excited about, but it's not going down, which is a nice change. How long do you think we need to see that before we did see more support for intermodal pricing?

Yes. Well, I think we're doing okay right now in terms of earning freight from our beneficial owners. I think what we will see, though, as we move into 2025, I want to see that spot price come up, which will drag up the contract price. I expect that to happen in 2025. No one ever predicts a big boom, so I'm not going through either, but I do expect it to be at least modestly up. And what that's going to do is allow us to continue to be very aggressive on demonstrating the service that we can deliver and win more bids going into 2025 because what we've seen is we have customers now that have experienced months and months of good intermodal service from us through their various carriers and that's given them confidence to turn over more and more of that book of business.

And I just add to that, from a profitability standpoint, even when prices are low, really doing a lot there to attack that intermodal profitability, whether it's the lane rationalizations in our intermodal business that we took on earlier this year, about 15% of our lanes to the reservation system that we've just put in place. So I think John's team, Ed's team really working closely there during this downturn to make sure we are operating as profitably as we can. So...

And Ed, you mentioned there was a few days strike maybe start of this quarter that wasn't really finalized, but we pushed out to January. I'm curious as you're talking to customers and they're planning for the new year, I mean, any insights you have on how those negotiations are going? Do you think we replay the same playbook to start 1Q and then we have another kind of disruption? Or how should investors be calibrating their expectations, if any?

I don't know. And I'll be clear about that. I have got little to no insight into what's going on with the carriers and the ILA. I will tell you that talking to shipping managers, whether they're in Los Angeles, Chicago or Shenzhen, everyone is kind of baking in some uncertainty going into that January deadline. So I expect what I would call distorted trade patterns that we're seeing now to continue. No one is going to run back to the same places that they were before, pull on because you don't know what's going to happen yet. That's my perspective on it. Now I'm acting like that's the only thing going on and it's not because we got a new administration coming in, which I can't really predict what that's going to do to trade patterns. Although when I read the Wall Street Journal where they're talking about a pull forward of imports in anticipation of some tariff action. So we'll see how that manifests itself. It's a pretty long supply chain coming from Asia. So it's going to be hard to pull forward very much, honestly.

And you can tell us what this all looks like on tarrif side, we'd love to get a clarity too. So who knows, but that's going to end up shaping into. You touched on 2 on the merchandising side, weaker categories earlier, autos and maybe derivative metals staying softer. From an industry standpoint, I guess, when you talk to your big shippers like how long are you guys expecting those markets to remain weak? It's an inventory issue they're working through, but is this a first half '25? Can that recover as we move through the year? What are your all expectations for the end markets?

Well, I kind of have a pre-election expectation and post-election expectation. I don't know which one is right or either one of them is right. I would say that the best data that we have right now is predicting finished vehicles in the U.S. to be down slightly next year, like 0.1% or something like that. And that's really a combination of -- there are a number of challenges in some markets like with EVs. There's also what I would call pretty disciplined inventory control in the part of most auto manufacturers, which is going to suppress some of the surgery stuff. I think we'll have to wait and see what happens with some of the tariff action that's going to happen or not and how that manifests itself because those are both markets that you could see a lot of what I would call disruption from those manifestations.

How about just overall merchandise carload growth? One of your peers talked a lot about investment in the eastern part of the country, that should be a good thing for overall where you mentioned is bringing more customers onto rails. So are we in an environment now where merchandise carload group can begin to grow or outgrow GDP? How do you think about the right level of merchandise color growth in the network?

Well, there's 2 -- there's -- I'm going to leave all that other stuff I just talked about side. Two things that I think are really going to propel merchandise growth over what I would call the medium to long term. And I think it is somewhat idiosyncratic story for Eastern railroads and for railroads that are particularly located and strong in the Southeastern and Midwestern United States, right? The first is there is a lot of share that left Norfolk Southern in the merchandise space over the past 5 years for a variety of reasons. And that share had to go find alternative means of moving itself through those supply chains. So we are working really hard right now to identify exactly where that share exists, who's moving it and what it will take to get it back, right? In some cases, simply having good service and being able to demonstrate good service, we'll immediately bring some freight back. In other cases, they're going to have to unwind contracts or supply chain alternatives that they've built, but we're working hard to make that possible. So there's share recapture that I think is strongly evident both in terms of the East, in particular, but Norfolk Southern specifically, where we are going to go after share that should be writing on Norfolk Southern. The second is, and really from an industrial development perspective, the U.S. is becoming a more and more attractive place to locate industry, North America in general. For the U.S. really advanced manufacturing. And I think for the Southeastern United States specifically and some Midwestern parts, it's going to become incredibly attractive. So we have a nice pipeline of industrial development projects that are out there. And most of those will land in the next 2 years. That's what I have line of sight on that I feel good about. And I don't see anything other than acceleration in that pipeline, given what little I know about what the next 3,4 years might look like.

And then Jason, you guys have talked for a couple of quarters about the share recapture. I guess any way to quantify what your expecting? I mean in this year's guide, we can talk about as you guided, I guess, like how much are you expecting of that volume to be share recapture versus other growth in the market? How can you quantify that so we can [indiscernible] expect?

Yes. I'll actually throw that to Ed.

Okay. Well, I think probably the first order of business is share recapture because we can deliver value to those customers immediately, right? There is some natural order in terms of which routes you want to move on as a shipper. And we've -- because of the poor service we've delivered or erratic service we delivered over a fairly long period of time, customers had to find other ways, which probably aren't as efficient as the way that they might prefer to move it. So we're focused on that, delivering value immediately to that freight that's out there. The second piece of this is the U.S., I think, is going to do well. We see industrial production for manufacturing coming up around 2% next year, at least that the forecast. That would be really good when you consider it was flat to down for the last 18 months or so. So we see organic growth but also that share recapture piece. Share recapture is probably first.

No way to help size up how much share capture you're kind of assuming [indiscernible] the rail?

Sitting here, I don't have that number. I don't want to give you wrong.

Appreciate that. Maybe move it over to coal. You knew someone will talk about it, and here we are. Maybe first, just on the volume outlook. It feels like a bit of a mixed bag. Nat gas prices are coming up, but they aren't quite up high enough yet or maybe it matters. Just kind of curious how you guys are seeing the demand backdrop for domestic coal shaping up in the fourth quarter.

For domestic coal, I think it's going to be challenged because of that gas price. I think for next year, I believe the forecast is it gets up to around $2.90, $3, and that's really predicated off continued growth in exports of LNG. And if that happens, we'll see maybe decent bounce in our steps, so to speak, when it comes to utility coal. But I think really what we're really focused on in terms of opportunity is on the export side, both for steam and for met. There's a lot of demand globally. The U.S. is a very efficient producer, and we're doing our part to make it efficient in terms of getting that coal to the ports.

And I think we've seen coal pricing stabilize, not at a great level, but at least be stable here for a little bit. Can you just remind us, Jason, in the guide, like what you're expecting for coal pricing? Is this kind of what's embedded in the outlook? Or what were your expectations when you set that guidance on the OR side?

So for this year, yes, I think it's probably a bit lower than what we were expecting. Next year, like Ed said, still a little bit of a mixed bag there, but definitely lower, creating a headwind for us this year.

Yes. I mean we've seen it come off. It's like $190 for met on the seaborne side. And I think it's going to stay somewhere around that number going into next year. I don't know what else folks have heard. I think that's a price that will continue to keep U.S. producers in the ballgame, so to speak. And we always take a conservative outlook when it comes to building our OR for -- and our own plan for -- throughout year. So I expect it will be okay there going forward.

And then can you just remind us maybe how these contracts were [indiscernible] floors and ceilings in these coal price contracts. We don't see them. But from this $190 level, I mean, are we closer to the floors or there's going be less downside absolute if pricing did go the wrong way? Or is there still a risk on the downside of pricing to fall in these contracts?

Well, we're close to the bottom than we were at $200. But it's -- I would say that we do have some floors on those contracts. They're still downside risk. But I think the downside risk is you got to moderate that with what you might see in terms of global demand.

So the floor isn't limit. Helpful. But maybe just having back a little bit, service has made a big step higher, I think. And U.S. worked really hard to get John and the team have got the network running well. How are shippers -- you're having the conversation with front lines every day. Like how are those conversations going? Are they seeing that? And when you ask them -- I feel like when you ask shippers when service wasn't great, how long it would take, some said years, some said a couple of years, some just gave a long enough answer that you can check back later. Now I'm curious now that it's later, how are those going? And how much longer do you think you need to prove out service before they begin to reward you with more of that business?

No, I think there's a couple of things going on. For some of our shippers, we're seeing them convert some truck lanes today. And when I think about a market like steel, let's say, where there's some macro weakness, and there's still -- there is still steel moving on trucks in some of these lanes and we can go out and try to recapture that, and we are. So we're seeing some share recapture, so to speak, from the highway. I don't know if that's [ version ] freight or reclaimed share, but it's share that we're taking. And on the other hand, we have existing customers, and I was just talking to Jason about this yesterday. I conveniently have an anecdote I can use. But we -- I was talking to a customer yesterday who was a very large agricultural shipper, and I were just talking about stuff, he's like, I think I need to take my fleet down. And like what he means, well, you're running about 20% faster than you were for all of last year, I've got too many cars. And he said, I think I might be able to take my fleet down and still handle the same business and maybe grow some. And he -- what he was really wanted to know was I confident that we were going to continue to deliver this kind of service and I said, hey, you're singing my song. I think that's exactly what you should be doing to save money for yourself and to make the railroad less congested. So that's real-life manifestation of what Jason and I debate all the time is, is it real? And I think we're starting to see that, no?

Yes, absolutely. I think customers are seeing it there's -- I'm sure a lot that want to make sure that it's going to be sustained, which we're putting the right processes in place to make sure that's true. But I think even from like a resiliency perspective, when you think about the storms that we've had recently, how quickly we were able to rebound from those. And that's not something that we've been able to do before. Our customers probably were not accustomed to that. And so we're hearing that, that they're really we're appreciative of that resiliency and how quickly we bounce back. So I think that's another great proof point that this good service is real.

And maybe on the flip side of the ledger, when customers aren't bringing share back yet, is there a common thread of the answers as to why not yet? And I'm curious like when you look at the network, I mean, you always find room for more opportunity, like where are there still opportunities to improve service that you see as the most near-term and achievable?

I think what most of our customers want, and you probably heard me say this before, almost all of our customers just want a conveyor belt that runs at the same speed all the time. And we can debate what speed that is, but the first thing you got to have is a steady state. And so we've been able to deliver that. And so now we are actually going in and when I think about resiliency and agility, one thing that we've been able to do this fall is go after spot movements in some of these markets like ag, for example, where we have operational agility that's created because you're moving cars faster, you're using less assets and you've got this, I'll call it, a battery of resiliency that you can go out and deploy. And so -- are there places where we could do better on service? Probably are around the network, but one thing that I'm really excited about, and we spend an hour, 3 days a week with the ops team and the marketing team talking is how can we redeploy this agility and resiliency to go after a piece of business that we know is going to be available for a short period of time that we haven't planned for. And so that's a really exciting conversation.

I think investors have asked us a few times throughout the last few months. But when we look at the network today, we're running mid-140s on our loans, like with the assets you have today and the efficiencies, how much could the network handle without having to add more assets to it?

Yes. I think from any resource you want to look at, we've set down 500 locomotives stored 8,000 railcars. We've got our headcount about where we need it. So I mean, I think from any way you look at it, we are absolutely prepared to handle more volume with the current set of resources we have. And that's because of this capacity that we've driven through this great service product we're offering. And it's not just us that it's benefiting. As Ed mentioned, it's benefiting our customers and their asset utilization as well.

And I think it was pre-COVID, I was looking you made mid-150s. I think [indiscernible] is that? Could you get back to that without having to put locos back on and take railcars out of storage?

Yes, I think we can. I mean, obviously, it depends where that volume comes in, but -- and what type of business. But yes, I mean, there's for sure capacity.

Yes. And one thing I'm certain of is that any of the share recapture that we go get or any new business that we take off the highway, there's very high incrementals associated with that because we're not putting on a new train. We're adding boxes to a train or cars on the end of a train. So it's a very compelling value statement.

Great. And I think another common theme you've heard from investors, I'm sure, is merchandise pricing. So merchandise carloads is great and he has a winning business. But how is the pricing backdrop evolving out there? And hopefully as service gets better, pricing is less and less of a discussion leading it. But I'm curious just how you see the backdrop evolving as we kind of get into next year?

I'll start and then Jason can backfill and correct everything that he needs to. But let me start with this. You look at RPU and people see it move around and they associate that with price change. And I think we probably just need to take a minute and unpack that, right? There is a price component, yes, but there is a huge mix component as well, right? The mix between intermodal carload business, autos, et cetera, et cetera, et cetera. And so even within that mix or the merchandise component, let me start there. We've had a really good run of pricing in our merchandise product. And I think I won't quote myself, but I think it's like 27 of the last 28 quarters, we've had year-over-year RPU growth in our merchandise business. I'll have to go back and correct myself on that later. But we have a nice strong track record of success and delivering value to our customers and then producing value for our shareholders in the form of price. As our service gets better, stays consistent and we're able to deliver even more value like I just talked about a minute ago, that's going to open up even more opportunities for us on the merchandise side. So I feel very good about our price story in the merchandise markets, and I think that will continue. On the -- coal is kind of a different animal, right, where it's really predicated by seaborne prices, global prices for that commodity. And we're there to take advantage of that when the markets allow. And then on the intermodal side, really, it's a market that's dominated by truck pricing, which has been severely depressed for the past 26 months, something like that. And as those markets rotate and they will, capacity is coming out and demand will increase, we are really well positioned to take additional advantage of price when it presents itself in those markets. So that's the way I kind of unpack that whole mix story from the price story. So let's talk about mix for a minute. You mentioned that we've been really successful at delivering value and taking share in the intermodal market space. And that just naturally creates a share headwind for us. But what we're doing is delivering that incremental load to a train that's already out there running. So we feel really good about that piece, too. Fuel, even when I talk about fuel, it's been a headwind for 2 years, and that's predicted to be another headwind next year in the form of what we can charge as part of our RPU.

Yes. I mean, I think that's right, Ed. You got to think about separating price and mix and fuel out of that RPU story and piecing that apart. And for sure, fourth quarter, we've got some mix headwinds. We've got fuel that we just talked about. Coal price, for sure.

How those mix headwinds evolve versus how you thought the quarter would? We mentioned earlier volume, feels roughly it's weak where we thought it would be weak, but any mix headwinds we should be aware of as the quarters played that we should -- as we're thinking about the road to growth?

I think international has done pretty well in the wake of the port strike and international is sort of a headwind -- have been a headwind when you think about intermodal pricing. And coal pricing is what it is.

Still mix within mix, twofold. Well, maybe moving over to the cost side a little bit. Jason, and you all talked about this, but you parked out 100 locomotives. I want to say productivity was up something like 18% last quarter. From a network standpoint, how much more room is there to part more assets or get there? Do we pull forward what we thought it might go in next year? And from here, it just grow volume and don't add back assets?

Yes. I think to your point, right, I mentioned it, parked the locomotives. We've got freight cars that we've parked as well. So really great productivity on that front. I think that there's -- John always talks about the kind of the next crank in the operations as they tighten down standards and continue on their initiatives. So I think there's -- asset efficiency is definitely going to continue to be a big part of our productivity improvements as we move forward. And really, when we finalize the revenue plan for 2025, we'll really have a look at what's there and what we need from a resource perspective. So I think more to come on that.

And next year, I think you've said you're expecting about [ $150 ] million in savings, and you've done this before, but I'll ask you again. Can you may just bucket it out as you sit here today and looking into next year, where you see those savings coming from? What is the -- easy is not the right word. What are the maybe most achievable in the near term? What are the ones that are harder to get to?

Yes. So you remember this year, for 2024, we talked about $250 million in savings, and we're on track to obtain that. So some of those costs, if you think about it, is getting rid of the kind of cost of poor service, right? So those have come out and that's great. Some of the initiatives we're putting in this year are put in later in the year. So now we'll get the full benefit of those as we move into 2025. But I kind of think about the buckets from a labor productivity standpoint, fuel efficiency standpoint and then when we think about our purchase services. So back to labor productivity, there's a lot of focus on probably T&E productivity, but it's really across the board, right? So we're focused still on our engineering and mechanical workforces and being more productive there, even within G&A productivity, our G&A head count is down almost 10% year-over-year. So labor productivity is going to be a big story. Fuel efficiency, we're making great progress on there. John has brought in some folks that are really focused on that right now. I think that there's more room within fuel, not just within fuel efficiency, but fuel procurement and management that we're going to look at. So that stuff is going to take probably a little bit longer. And then purchase services. We know we've got some work to do there to bring that category down and everyone is fully focused on that. Within purchase services, I think about it and kind of bucketizing these things. I think about it from an intermodal perspective, intermodal and automotive. So our -- primarily all of our intermodal and automotive facilities are outsourced. So the cost of those hit that bucket, and that's -- so that's the very volumetric category for us. Another big bucket within purchase services is our operations, other operation spend. So we're -- John and his team are focused on being more productive there. And then the third is technology. And we talked a little bit about that on our third quarter earnings call, but that is an area where we're really going after every dollar there as well to make sure that the projects are being delivered on time, creating value and things that are not, we're stopping immediately. So that's kind of how I think about those buckets of where we're going to be in 2025.

Yes. It makes a lot of sense. And maybe just double-click on labor productivity. There's always the 2 side of that you reduce headcount more or you grow the business on the same headcount. I guess you've made good progress on headcount this year. How are you feeling about the absolute level of that? Is there still improvement we can make on that actual level? Or do we need to grow on this headcount base?

Yes. So I think it's probably a little bit of both. So the most recent public numbers just came out year-over-year. Headcount is down 4% in October, and 0.5% sequentially. So we're still making good progress there. And that's really -- we're able to do that through the efficiency gains that the operations team has done as well as attrition, right? We're working down that balance. So we thought we'd finished this year about -- down about 2% from where we were ending 2023. It might be a bit better than that, but a bit lower than that. And there's always going to be places, individual locations or individual crafts where we may have to add some headcount. But overall, I think we're pretty good. And the key is, again, back to capacity. I think we've got the capacity with our current workforce to continue to add more volume.

And not to be an annoying sell side, I was thinking about them all in my head. But thinking about comp per head, you guys have locked in labor next year with some of these union agreements. And as I think about what the offsets are to drive that level down, I guess, how should we be thinking about just the overall output of the compensation per head with all the changes you're making in the network, understanding that union agreements have been made now?

Right. Yes. So it's a great point. It's -- we've got 10 of our 13 unions have signed tentative agreements, 5 of those are ratified, so that's about 30% of our union workforce. So it's really great to get a lot of that behind us, right? It's a distraction to the employees. We want them to be engaged. And then the next step is working on local rules that benefit both us and the employees. And so that's kind of the next piece of this, that we'll begin to work on. But getting the wage inflation component kind of lockdown really helps us in addition to the benefits of the employees getting paid right away and again, taking away that distraction, obviously helps us from a planning perspective, helps us from a pricing perspective to have some certainty there to know what those are. So I think the next steps will be the local rules that we -- and work rules we work through with them with our union employees and made good progress this year and really end of last year with more sick pay benefits and things like that. So we're making good progress on that front. And then just looking forward to continue to find those win-win opportunities for us.

Makes sense. Maybe just you mentioned fuel efficiency is a big bucket of savings over time. Curious what the actual investments you're making are? Is it just the modernization of the locomotives that are getting more efficient as you get those out. I'm curious of what the investments that you're having to put in to get out fuel efficiencies. I think that can be a black box for investors sometimes, they just see the output of it. Curious what you're actually doing to drive that.

Yes. I think some of it is -- it's process related, how we're using our locomotives, the DP configurations, things like that. And just you think about things as we move into the winter months, about locomotive idling and things like that. So having more strict adherence to what our rules are. So some of it is that -- and then to your point, Daniel, some for sure is technology based, right? And think about technology on the locomotives to help us operate as efficiently as we can. So it's kind of both sides of the equation there. And then obviously, taking these locomotives off-line really helps with fuel efficiency as well, right, because you're moving more freight with less locomotives.

So when you think about those tech investments you could make on locomotives, I guess, could you -- I mean, we're talking about CapEx and then about next year, but could you ramp that? Like could you do more of that to make the network more efficient? Or how do you think about the cadence of those programs?

Yes. And I think some of it is to, right, the -- we're able to -- with storing these locomotives, we're able to take the locomotives that may be older, less fuel-efficient and park those, right, and continue to run some of the more fuel-efficient locomotives. So we're moving fast on that front. And like I said, John has brought in some kind of experts into his team to really make sure we're focused on that.

Got it. It does dovetail nicely into cash flow and just thinking about from your seat now in the CFO role, you guys have been vocal, I think CapEx should moderate next year, maybe hurricane recovery calls notwithstanding. Kind of curious, any updated thoughts on that recovery costs so we can calibrate that expectation and how you see capital spending kind of developing?

Yes. So from a CapEx perspective, that definitely will come down in 2025, both in terms of absolute dollars, but also percentage of revenue, just a kind of shorthand way to think about that. So that will be coming down in 2025. To your point, we will have some hurricane recovery-related costs. That could be anywhere in the $50 million to $100 million range that will play out over a couple of quarters here. We're still assessing some of the damage actually that's in some of the areas up in North Carolina that were really unfortunately impacted. But as I think about that spend, the way we're able to reduce that CapEx spend is because of the operational improvements that we've made, right? We're utilizing our assets better. We're creating capacity. So we don't need to maybe spend as much on locomotives or freight cars or infrastructure, things like that. However, we're always going to make sure that we're maintaining our track assets and investing in safety. So it allows us to prioritize more of our dollars there and maybe not as much on the growth side this year because of all the capacity we generated.

Makes sense. And as we look at next year, you mentioned the 4Q OR headwinds earlier, I think like 4 of them, the recoveries, the lower gains, the seasonality, the network is running smoother than it has in a while. And I think what is normal -- what's the right way to think about seasonality at least from 4Q to 1Q then? Because we go into 1Q at a higher base than we thought maybe [indiscernible] 3Q results. So we're going to have step up in 4Q, like what is the right way to think about typical 4Q to 1Q off at that high level?

Yes. So we'll definitely give more information in the fourth quarter. But I think historically, first quarter is higher OR just due to some onetime expense type things that hit the way revenue and volumes come in, fourth to first. So we'll give more clarity there on what we're looking at, but that's historically how it's...

What are the seasonal costs to step up just prior [ verification? ]

Things like, for example, payroll, taxes, those step up from fourth quarter to first quarter as people have maxed out on payroll taxes at the end of the year, stock-based compensation and things like that. So there's some costs like that, that hit earlier in the year.

And we are coming up on time. So maybe I'll squeeze one more in, just I think last quarter, Mark mentioned share versus potentially starting next year as CapEx moderates. Curious, I don't know if you guys thought about when or kind of what makes sense? Is there a balance sheet level you're trying to get to? Like what is the trigger for when you think that makes sense to [ share going? ]

Yes. Yes. So we work closely with the rating agencies and making sure we're focused on getting back in balance with our ratings there. We had a couple of really big impacts over the last 18 months. So outflows related to the Palestine incident, profitability contraction. And then just earlier this year, we purchased the Cincinnati Southern for $1.6 billion. So we had a lot of cash out the door. Our focus in 2024 has really been balance sheet repair. And if you think about that, we've really done a great job. It's profitability that we've kind of shown throughout the year. We've done a great job on recovering some insurance from the EP incidents. So we're up to about $650 million of recoveries through the third quarter. We just had 2 really significant line sales, one in Virginia, one in North Carolina that generated about $400 million of cash proceeds. And then finally is the piece we just talked about, about reducing CapEx as we move into next year. So all of those really help with that balance sheet repair. And that's what gives us the confidence that we will be back in the market in 2025 with share repurchases.

Great. Any last questions in the room as we wrap up? Awesome. Well, Ed, Jason, thank you so much for the time today, and appreciate...

Thank you for having us. Great.

Thanks, everybody.