Norfolk Southern Q3 2023 Earnings Report

Norfolk Southern EPS Results

• Actual EPS: $2.65
• Consensus EPS: $2.74
• Beat/Miss: Missed by -$0.09
• One Year Ago EPS: N/A

Norfolk Southern Revenue Results

• Actual Revenue: $2.97 billion
• Expected Revenue: $2.94 billion
• Beat/Miss: Beat by +$28.65 million
• YoY Revenue Growth: N/A

Norfolk Southern Announcement Details

• Quarter: Q3 2023
• Date: 10/25/2023
• Time: N/A
• Conference Call Date: Wednesday, October 25, 2023
• Conference Call Time: 8:45AM ET

Norfolk Southern (NYSE:NSC) is a major U.S. freight railroad company that provides rail transportation and related logistics services. As a Class I carrier, the company operates an extensive network across the eastern United States and offers scheduled freight service for a broad range of industries. Its core operations include long-haul and regional rail freight transportation, intermodal services that move containers and trailers between rail and other modes, and terminal and switching services that support efficient rail shipments for industrial and port customers.

The company transports a variety of commodities, serving sectors such as coal and energy, automotive and automotive parts, chemicals, agriculture, metals and construction materials, and consumer goods. Norfolk Southern’s service offering is oriented toward shippers and supply-chain partners, combining rail haulage with routing, scheduling and terminal operations to move bulk and unitized freight. Intermodal operations are a significant component of the business, linking inland markets with East Coast and Gulf ports and facilitating cross-border flows through interchange with other North American railways.

Norfolk Southern traces its lineage to several historic railroads that developed freight corridors across the southeastern and mid-Atlantic United States, and it expanded through a series of mergers and network acquisitions in the late 20th century, including participation in the division of Conrail assets in 1999. Today the company’s network connects many major industrial regions, ports and metropolitan markets in the eastern U.S. and integrates with the broader North American rail system via interchange with other carriers. Norfolk Southern is governed by a corporate board and senior management team responsible for operations, safety, regulatory compliance and strategic planning.

Norfolk Southern Q3 2023 Earnings Call Transcript

Key Takeaways

• Operating ratio pressure: Q3 operating ratio deteriorated year-over-year and sequentially due to abnormally low volumes, higher fuel prices, historic labor wage increases and strategic investments.
• Service and volume gains: Third-quarter service levels improved both year-over-year and sequentially, with the last four weeks averaging over 136,000 carloads—a level not seen consistently since Q2 2022.
• Eastern Ohio derailment costs: NS accrued $118 million for site remediation and $70 million for legal expenses in Q3, with total derailment-related charges now at $966 million and ongoing protracted recovery expected.
• Revenue outlook cut: 2023 full-year revenue is now expected to decline closer to 4% year-over-year, reflecting lower fuel surcharge and intermodal storage revenues amid a soft freight market.
• Intermodal expansion and innovation: NS launched new partnerships with CN and FEC Railway, invested in DrayNow for first/last-mile visibility, and on-boarded customers on projects adding 7,800 annual carloads to enhance network growth.

Presentation

[Operator]

Greetings! Welcome to the Norfolk Southern Corporation's third quarter 2023 earnings call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Luke Nichols, Senior Director of Investor Relations. Thank you, Mr. Nichols. You may now begin.

[Luke Nichols, Senior Director of Investor Relations at Norfolk Southern Corporation]

Thank you. Good morning, everyone. Please note that during today's call, we will make certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or future performance of Norfolk Southern Corporation, which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for a full disclosure of those risks and uncertainties we view as most important. Our presentation slides are available at norfolksouthern.com in the Investors section, along with our reconciliation of any non-GAAP measures used today to the comparable GAAP measures. Turning to slide three, it's now my distinct honor to introduce Norfolk Southern's President and Chief Executive Officer, Alan Shaw.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Good morning, and welcome to our discussion of third quarter earnings. Here with me are Mark George, our Chief Financial Officer, Paul Duncan, our Chief Operating Officer, and Ed Elkins, our Chief Marketing Officer. I want to begin by thanking my Norfolk Southern colleagues for working safely, serving our customers, and driving our strategic plan forward. When we charted a new course in the industry, we understood unlocking the full potential of our powerful franchise would require an enhanced focus on resilience and operational excellence across every aspect of our business. Our transformation into a more customer-centric, operations-driven service organization reveals opportunities to strengthen our franchise. We saw some of that in the third quarter with two technology outages. The first, on August 28, was caused by a defect in the vendor software. The second, on September 29, involved a firmware maintenance issue.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

These incidents were unrelated and were not cybersecurity issues. We are taking measures to prevent a reoccurrence, and importantly, we are not stopping there. We have launched a top-to-bottom review of our technology infrastructure with the assistance of leading third-party experts. Operations-driven means pursuing operational excellence in every aspect of our business, and that includes IT. Demonstrating our progress in building resiliency, our strengthened operations leadership, enhanced operating plan, and greater crew capacity enabled us to manage the technology incidents with limited disruption to our customers and grow volume through the service recovery. Throughout the third quarter, we continued to do exactly what we said we'd do when we announced our strategy. We are making smart investments in safe, reliable, and resilient service.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Although the macroeconomic environment of abnormally low volumes is an unwelcome headwind, it has not changed our approach or diminished our confidence that our strategy is a better way forward. The market will recover, and we will be poised and leveraged to capture growth with strong incremental margins. Mark will provide detail on other cost drivers in the quarter, including fuel prices and higher labor costs as a result of last year's historic wage increase for our craft colleagues. These costs, combined with investments in our strategy and the backdrop of historically low volumes in the quarter, contributed to significant pressure on our operating ratio, which deteriorated year-over-year and sequentially. We are clearly not satisfied with these results. We will recover from these short-term impacts to our operating ratio. As we articulated when we launched our strategy, continuous productivity improvement is a core element of our balanced approach.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

We are committed to achieving and maintaining industry-competitive margins over the long term. Our focus on productivity is unrelenting. Under the strong leadership of Paul and his team in operations, we have an increasingly stable network with a high degree of plan compliance, allowing us to iterate the plan for service and productivity. As Paul will describe, we are reducing our pipeline of conductor trainees through year-end to more normal levels, among other steps. Balanced against the challenges of the quarter, there were several encouraging developments that demonstrate progress on our strategy and point to growth and profit improvement in the quarters ahead. Notably, service in the third quarter improved both year-over-year and sequentially, allowing us to onboard more business. Volume improved as well and appears to have turned a corner, with each of the last four weeks running above 136,000 carloads.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

That's a level we haven't seen consistently since the second quarter of 2022. In part, this was a function of customers awarding us new business. Our customers see the commitment we are making to deliver more consistent, reliable service, and our marketing team is creating innovative solutions to amplify the value of that service, even in a weak freight environment... Ed will talk more about this later. In addition to service and volume gains, we delivered improvements in safety as well. Our mainline train accident rate is down more than 40% year-over-year, as we strengthen our safety culture and performance. In East Palestine and the surrounding communities, we continue to deliver on our commitments. Mark will provide an update on costs associated with our ongoing efforts to make things right.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

I visit regularly as we make significant progress cleaning the site and investing in the community's future. I'll now turn it over to Mark.

[Mark George, CFO at Norfolk Southern Corporation]

Thank you, Alan, and good morning, everyone. I'll start on slide five with an update on our accruals related to the Eastern Ohio derailment. We are pleased to report that we will be completing soil removal from the derailment site shortly, but expect that there will be ongoing testing efforts to ensure continued safety of the air, soil, and water through April of 2024. As such, we accrued $118 million in Q3 to account for this timeline extension. Additionally, we recorded another $70 million for legal and other costs incurred in the quarter. Of note, we did file our initial claim for reimbursement with our insurers during the third quarter and will continue to file claims as costs accumulate.

[Mark George, CFO at Norfolk Southern Corporation]

We did receive notification of our first reimbursement under our policy of $25 million, and accordingly, recognized this as an offset to the costs incurred in the third quarter. The cash was actually received last week. While we're encouraged by the speed of this initial reimbursement, there are dozens of parties sharing exposure at 10 layers in the insurance tower, so we expect this cost recovery process to be protracted. Also, of the $966 million recorded as expense thus far, just more than half has been paid through September thirtieth. Of the remaining $450 million, I'd expect roughly half to be spent in the fourth quarter and the rest to be spent in 2024. I will remind you that this situation remains fluid and we will continue working through these issues for many quarters to come.

[Mark George, CFO at Norfolk Southern Corporation]

We expect that there will be additional costs that have not yet been incurred related to future settlements, fines, and penalties, as well as legal fees, and we cannot predict the amounts at this time. Moving to slide six, where we illustrate the impact of these third-quarter costs on our results. Our GAAP results are in the first row, while on row two, we isolate the accounting to our Q3 financials related to the incident and our response. At the bottom of the chart, you'll note the comparisons of the adjusted financial results to the prior year. I'll be talking about our adjusted results for the remainder of the discussion. Revenues were down 11%. Adjusted operating expense was down modestly. The adjusted operating ratio for Q3 was 69.1%, which notably includes 270 basis points of headwind from net fuel price impacts.

[Mark George, CFO at Norfolk Southern Corporation]

On an adjusted basis, operating income was down 28%. Net income and EPS were down 37% and 35%, respectively. But recall last year, we enjoyed a benefit from a state income tax change of $136 million, distorting the year-over-year comparison. Let's turn to slide seven for an overview of our operating revenues, and it's a quick look at the drivers of the revenue change from last year in advance of Ed getting into the market details. The biggest driver in the year-over-year revenue decline is the meaningful reduction in fuel surcharge revenue. Volumes were down 2%, which equates to a $74 million revenue decline, and we are highlighting here the reduction in intermodal storage revenue of $71 million, as we are now back to more normal levels and will continue to have tough compares through Q1 of 2024.

[Mark George, CFO at Norfolk Southern Corporation]

Ed will talk later about the traction we have on pricing as well as mix dynamics in the quarter that collectively inform the positive $27 million of rate mix and other. On slide eight, let's drill into the operating expenses. Adjusted operating expenses for the quarter were down $19 million or 1% on a year-over-year basis. Fuel expense was down $94 million or 25%, driven mainly by lower fuel prices. Comp and ben was down $20 million or 3% year-over-year, as higher pay rates and employee levels were offset by a favorable comparison with Q3 last year from the $85 million charge we took related to the retroactive wage accruals. Depreciation expense was up in line with our earlier guidance. Purchased services was up due to higher costs associated with engineering activities on our network, as well as technology spend.

[Mark George, CFO at Norfolk Southern Corporation]

The increase in materials and other was up $42 million and driven primarily by an adverse comp on a favorable legal settlement last year, as well as higher consumption of materials for locomotive repairs. Property sales were also lower this quarter. Moving to slide nine. While we expect costs related to the past service issues to begin unwinding in the third quarter, additional service challenges in the quarter resulted in a delay with only moderate easing. We expect the unwind to accelerate here in the fourth quarter. Now, offsetting these fourth-quarter savings will be an increase in incremental costs related to building resiliency in a couple of key areas that will pay dividends in the years ahead....Firstly, there are investments in the continuation of our hiring and locomotives in order to support both future growth and faster recoveries.

[Mark George, CFO at Norfolk Southern Corporation]

Second, are the investments in our craft workforce, including the quality of life enhancements like paid sick leave. These investments overall should allow for the accommodation of higher volumes that will help cover these costs, along with more productivity. On slide 10, let's talk to a couple P&L items below operating income. Other income was up $42 million in the quarter, driven by favorable returns from our company-owned life insurance. The adjusted effective tax rate was 22.7%, in line with what we normally guide. Turning to free cash flow and shareholder distributions on slide 11. Through the first nine months, free cash flow was $1.1 billion lower than prior year, with half due to derailment-related expenditures and the remainder from a combination of lower core operating results and higher CapEx.

[Mark George, CFO at Norfolk Southern Corporation]

Shareholder distributions over the same nine months were $1.4 billion, thanks to our solid dividend and continued share repurchase activity. I will remind that the citizen vote in Cincinnati to approve the proposed $1.6 billion purchase of the CSR asset will take place in November. So we are reserving capital capacity for that potential transaction, which would close in mid-March of 2024. I'll now hand off to Paul to provide an update on our operations.

[Paul Duncan, COO at Norfolk Southern Corporation]

Thank you, Mark, and good morning, everyone. At Norfolk Southern, everything starts with safety, so let's turn to slide 13 for an update. In the quarter, we have made significant strides. Our injury rate is up slightly versus last year, but has improved 30% from where we were just three years ago. Our accident rate is trending down from where we have been the past two years, and we also continue to maintain a significant reduction in our mainline accident rate through the many efforts and initiatives we have put forth, including the enhancements to our train makeup rules implemented earlier this year. While those enhancements required a significant period of operational adjustment earlier this year, they are now paying off in terms of our mainline accident rate improvement. We also remain very focused on reducing exposures and improving outcomes in our yard and terminal operations.

[Paul Duncan, COO at Norfolk Southern Corporation]

We have made further investments in our people, including enhancements to our training and PPE programs, as well as leadership development. On all of these fronts, the results are encouraging, but we are not satisfied and will continue to drive towards our goal of being the industry leader in safety. Turning to slide 14 for an update on service. This is another area where we have made sustained progress this last quarter. Train speeds have resumed the improving trajectory they were on before our challenging second quarter. We have also pushed to reduce dwell and improve schedule rigor in our terminals, with dwell now improved to its best level in two years. We're sustaining this progress in October while bringing weekly car loadings up to their highest level since Q2 2022, and while developing new service offerings that Ed will outline.

[Paul Duncan, COO at Norfolk Southern Corporation]

As part of our scheduled railroad model, though, we will drive further progress. We have to continue to minimize car dwell, maximize velocity across the railroad, sustain safe, reliable, and resilient service, and drive productivity. On the next two slides, we will cover how we plan to accomplish this. Turning to slide 15, our locomotive velocity was flat year-over-year. Now that we are seeing improvements in train velocity and terminal dwell, this is an opportunity we are focused on driving further velocity and productivity in. As our terminal discipline initiatives take further hold and as network velocity takes the next step above 21 miles per hour, we expect to see this metric improve, along with fuel efficiency, as we bring additional tonnage onto the network.

[Paul Duncan, COO at Norfolk Southern Corporation]

We now have a qualified teaming workforce that is sized appropriately in aggregate, although we are still investing to get them all in the right locations. We're on track to have our conductor trainee pipeline below 600 by year-end, as indicated last quarter. As our initiatives take hold and as GTMs increase, this measure of productivity will improve from here. Moving to slide 16 to discuss how we are driving service improvement aligned with our scheduled railroad model and how it will translate it into additional gains in resilience, productivity, and ultimately, growth. First is disciplined terminal execution. This starts with strict adherence to the operating plan to ensure trains are arriving on plan to balance terminal flows in both our merchandise yards and intermodal facilities. We're minimizing dwell by switching cars within 6 hours of arrival.

[Paul Duncan, COO at Norfolk Southern Corporation]

At our intermodal facilities, it's ensuring we're driving precision execution to the trip plan of containers and leveraging our high-frequency intermodal model. It involves maximizing connection performance, getting the right cars on the right train, and departing our trains on time. The second bullet point, we are driving a culture of strict compliance to the operating plan, both at the train, car, and intermodal unit level, and expect that this will drive further reductions in dwell and even greater consistency in our terminals. Next, we are investing in our people and modernizing our workforce to become more resilient and productive. For example, 250 conductors are receiving locomotive engineer training this year. This gives us resilience and flexibility to fill assignments, whether the need is an engineer or a conductor, while protecting future growth with an investment today.

[Paul Duncan, COO at Norfolk Southern Corporation]

We are moving forward with the first phase of extra board consolidations, cross-training 260 employees at seven key terminals across the network. Let me explain what this is. As railroads and labor agreements evolved and merged over the decades, territorial boundaries remained that prevented certain employees from working assignments that were within their geography. At many of these locations, we've worked collaboratively with labor to remove those boundaries, but have yet to get folks qualified to work all potential assignments. With our new focus on resilience, we're investing in our craft employees and getting them qualified to hold more assignments, providing them with greater work opportunities, and offering Norfolk Southern enhanced operational flexibility and efficiency.

[Paul Duncan, COO at Norfolk Southern Corporation]

To complement these labor modernization efforts, we are implementing predictable work scheduling, a groundbreaking work-life balance initiative negotiated with our craft colleagues, which will also streamline our back office crew management functions and drive further productivity. Lastly, we are kicking off a system-wide initiative that will drive productivity and enhance our first mile, last mile service. This is a substantial initiative aligned with delivering reliable service, productivity, and most importantly, driving additional growth to the network. To close, running a safe, reliable, and resilient scheduled railroad using these principles is going to improve service consistency, generate greater productivity, and create capacity for growth. I'll now turn the call over to Ed.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Thanks, Paul, and good morning to everybody on the call. Now, before we get into the numbers, I want to call out the collaboration between our teams in marketing and operations as we improve service and innovate solutions to deliver value for our shareholders and for our customers. I'll talk about it more as we move along here, but I think it's important to recognize the steady progress that we're seeing deep in these organizations that's starting to pay off. Let's start on slide 18 and review our results for the third quarter. Norfolk Southern volumes and revenue was down 2% and 11%, respectively, year-over-year in the third quarter. Revenue declines outpaced volume due to lower fuel surcharge and intermodal storage revenue compared to the prior period. Within merchandise, weakness in several energy markets was the leading driver of a 3% decline in total volume.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Crude oil shipments were challenged by unfavorable fuel price differentials that discouraged crude by rail to East Coast refineries that we serve. Also, low natural gas prices negatively impacted shipments of sand and NGLs. Helping to offset those declines in energy markets was strength in automotive, where volume increased 7% year-over-year in the third quarter. Growth was driven by continued strength and demand for finished vehicles, as well as high shippable ground counts. Merchandise revenue was down 7% due to lower revenue from fuel surcharge and lower volume. However, revenue per unit, excluding fuels, set a new record as it improved 3%, showing sustained price and mix improvement. This quarter marks 33 out of the last 34 consecutive quarters where we've been able to achieve year-over-year growth in merchandise revenue per unit, excluding fuel.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Moving on to intermodal, volume was down slightly compared with last year as growth in international intermodal largely offset declines in domestic. On the domestic side, persistently abundant truck capacity and weak freight demand challenged volume, while on the international side, volume improved as customers continued to return freight to IPI service. Intermodal revenue was down 22%, as revenue per unit, excluding fuel, declined 15%. Lower intermodal storage fees represented more than two-thirds of this decline, followed by adverse mix effects from strong international volumes and the impact of persistent competitive pressure in a loose trucking environment. We're also seeing negative mix effects within the international business. First, shippers are returning to lower-yielding short-haul lanes that shifted to the highway during the pandemic. And second, growth in lower-yielding empty shipments is also outpacing loaded shipments.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Intermodal storage has returned to a normal level, and we expect to lap this headwind in the second quarter of next year. Lastly, within coal, volume dropped 9% year-over-year, with weak conditions in our utility markets, which more than offset strength in our export markets. Utility coal volume was down roughly 26% from prior year levels, driven by high stockpiles and low natural gas prices, and prolonged customer and producer outages. Export volume increased year-over-year, driven by strong Asian demand. Coal revenue declined 8%, primarily due to lower volume. Revenue per unit, excluding fuel, set a new record, and revenue per unit also increased as positive mix and stronger than expected seaborne coal pricing and modest liquidated damages more than offset a decline in fuel surcharge revenue. Turning to Slide 19. For the fourth quarter, we expect to see slow volume recovery amid uncertain economic conditions.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

September presented us with some encouraging data that the contraction in manufacturing is slowing and onshoring to the U.S. is on the rise. However, we remain cautious in our optimism as uncertainty surrounding future Fed actions, strike outcomes, and geopolitical tension is very pronounced. Although the macro environment is unclear, we are steadfast in our business development initiatives, and I'll talk about those in a few minutes. Our merchandise markets have upside potential in the automotive and metals markets. We expect growth in automotive as we continue to work through the backlog of shippable vehicles, improve our cycle times, and grow our fleet size. We also still see unmet demand in our metals market, which we should realize as improving service should drive year-over-year growth.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Offsetting anticipated growth in the fourth quarter will be sustained, soft conditions in energy markets as the headwinds that pressured crude, NGL, and sand volumes in the third quarter are expected to continue through the remainder of the year. Automotive production is a key driver for many of our merchandised markets beyond automotive, so the duration and scope of the ongoing UAW strike is a downside risk to our overall merchandise volumes. Our marketing and operations teams are collaborating to deliver incremental business wins across the portfolio of carload markets that we serve by identifying and solving business challenges for our customers at an accelerating pace. This innovation and collaboration will be a driver of future growth for NS. Intermodal volume is expected to improve year-over-year in the fourth quarter from sustained service recovery and improving market conditions.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

We're encouraged by the momentum that we're seeing in our domestic market. Our customers are seeing improvements in bid compliance and demand, which has us trending positively in October. But we continue to see a relatively muted peak season, which will temper overall volumes. International markets will benefit from strong East Coast import demand and favorable ocean rates, driving demand for IPI. We expect the negative mix effects from the shift back to short-haul lanes to persist in the fourth quarter, and we continue to experiment and develop new services for our intermodal customers, and I'll talk about that in just a minute. Coal volumes should be stable in the fourth quarter, with upside potential in export markets as new production comes online.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

In addition, recent trends in seaborne coal prices suggest higher prices throughout the remainder of the year due to supply constraints out of Australia, as well as continued strong demand out of China and India. Domestic coal shipments should improve sequentially in the fourth quarter on improved service and fewer outages, but headwinds from low natural gas prices will continue to be a limiting factor. And while uncertainty in the economy continues to persist, we're confident in our ability to collaborate with our customers to drive incremental volume and to continue providing value in a manner that drives growth in the future. Now, before I turn it back to Alan, I would like to expand briefly on how we're providing value in ways that drive growth in an unfavorable market.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Slide 20 features key examples of new service offerings we developed this quarter, aimed at making Norfolk Southern the preferred option for freight transportation and driving modal conversion. It's important to recognize the collaboration and teamwork invested by both marketing and operations to bring these projects to life. In October, we partnered with CN to expand intermodal service and connect customers in Atlanta and Kansas City with markets on the CN in Canada. We also partnered with Florida East Coast Railway to expand both domestic and international intermodal services in Florida. These new services are designed to give our customers flexibility, expand the reach of the NS intermodal network into key growth markets, and give more ways for our customers to reduce their supply chain greenhouse gas emissions. Early in September, we also announced an investment in DrayNow, a company focused on modernizing technology solutions for intermodal.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

DrayNow is revolutionizing intermodal's first and final mile journey through an app that provides customers with real-time shipment tracking and document capture of drayage shipments. Norfolk Southern is the operator of the most extensive intermodal network in the Eastern U.S., and together with DrayNow and our best-in-class customers, we will drive more transparency into a fragmented supply chain and increase the ability to best serve our intermodal customers. And lastly, our persistent industrial development efforts paid off as both new and expanded industries turned on additional volume in the third quarter, including a new cement transload, an ethanol terminal, and a containerboard warehouse, as well as expanded rail operations at an established grain elevator. We'd like to thank our customers for locating on our network and allowing NS to serve their market needs.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Together, these diverse projects will generate over 7,800 new carloads annually at full production. We're aggressively pursuing project-oriented growth to enhance the NS network in a fragile freight environment. We're not sitting back and waiting for carloads to come to us, but rather, we are proactively making enhancements to our service portfolio to become a preferred service provider for our customers and drive sustainable and smart growth in the future. Concluding on slide 21, let's look at our 2023 outlook. Based on lower Q3 revenue, which included significantly lower fuel surcharge, we're now expecting 2023 revenue to be down closer to 4% year-over-year. With that, I'll turn it back over to Alan to bring us home.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Closing on slide 22. Although this year has presented a number of challenges, we are emerging a stronger company due to our response and our decisive action to effect necessary improvements. I am more confident than ever that our innovative strategy is a better way forward. We are already seeing the benefits from leadership changes, plan refinements, and resource investments as we drive towards our strategy. We are achieving wins with our customer base, and we are incorporating operational discipline that drives consistency and enables productivity enhancements in the quarters ahead. I am extremely optimistic about our future. We will now open the call to questions. Operator?

[Operator]

Thank you. We'll now be conducting a question and answer session... If you'd like to ask a question at this time, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Due to the number of analysts joining us on the call today, we'll be limiting everyone to one question to accommodate as many participants as possible. Thank you, and our first question comes from Chris Wetherbee with Citigroup.

[Chris Wetherbee, Senior Research Analyst at Citigroup]

Hey, thanks. Good morning, guys. I guess maybe we want to start on, on slide 9. Mark, you laid out some of the temporary service costs and the incremental resiliency investments that you're making. I guess want to make sure I understand how to think about that as, as we move into the fourth quarter, and then also really more 2024. I guess, you know, are, are you able to absorb these costs and generate sequential OR improvement in the fourth quarter? And then as you look out to next year, you know, how much of this cost kind of sticks around? How much of it actually will go away? And, and any thoughts around the cadence of that. So thanks for that.

[Mark George, CFO at Norfolk Southern Corporation]

Hey, thanks, Chris. Yeah, so if you start first on the service costs, you know, we saw a slight reduction here in the third quarter. We were hoping for a little bit more, but obviously, we had some disruptions to the network that delayed that. We do expect the reduction to continue here in the fourth quarter, and eventually, this should unwind over the next couple of quarters as fluidity on the network improves, as we qualify more of our T&Es and in the right critical locations as well, and we start to build some solid processes around delivering service as opposed to putting the band-aids on like we are today with overtime, et cetera. So those will start to unwind here in the next couple of quarters.

[Mark George, CFO at Norfolk Southern Corporation]

The right-hand part of that slide, those are—I think you need to think about those as structural cost increases, and those are really around developing and building resiliency. That's the whole point. A lot of this is related to the T&E ramp-up that we've seen, as well as the investments in our locomotives. There are also costs related to the quality of life improvements that we've announced with our craft workforce. And I'd say that of these costs, you know, 75% of those will probably reside in the comp and benefits line, and then after that, you'll see, you'll see costs sitting in purchase services and also in some materials.

[Mark George, CFO at Norfolk Southern Corporation]

But, in terms of cadence as we go into Q4, like I said, service costs will start to come down, but that will be offset by another increase there in the structural, resiliency costs. And then I think at that point, we should probably be moderating, going forward into 2024, but we'll give you more 2024 guidance when we reconvene in January.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Chris, one way to look at this is, you know, our investments in resiliency are investments in the elimination of the service recovery costs, and it's also an investment in top-tier growth and in industry competitive margins. That, that's our vision for the future, and that's, that's what we said we were gonna do when we laid this out in December of last year.

[Mark George, CFO at Norfolk Southern Corporation]

Yeah, ultimately, these are gonna get paid for by the elimination of those temporary service costs, but also by accommodating more volume than we typically would be able to, as well as, you know, pricing and productivity. So it's exaggerated here because we're in a down cycle.

[Chris Wetherbee, Senior Research Analyst at Citigroup]

Does this give you the ability to improve OR in fourth quarter still, sequentially?

[Mark George, CFO at Norfolk Southern Corporation]

Yeah, I think we're at a trough. I think we're at a trough right here. Yep.

[Chris Wetherbee, Senior Research Analyst at Citigroup]

Thank you.

[Mark George, CFO at Norfolk Southern Corporation]

Thank you, Chris.

[Operator]

Our next question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.

[Amit Mehrotra, Managing Director at Deutsche Bank]

Thanks, operator. Hi, guys. Maybe first question, can you just give us the liquidated damages in coal and where we think coal yields can trend from the high 3Q levels? And, you know, Alan, just a bigger picture question, you know, every rail right now has a cyclical challenge. Everybody has a fuel headwind. You guys are still reporting margins that are 600-700 basis points worse, you know, than your direct competitor and just generally industry. I look at that as an opportunity because obviously with TOP SPG, you've fixed the network, you're improving the service, the volumes are coming, so there's obviously progress made there.

[Amit Mehrotra, Managing Director at Deutsche Bank]

But is there an opportunity to look deeper inside the cost structure of the organization to say: Listen, you know, we're dealing with all these headwinds just like all our competitors are, but we're still, our cost structure is still seemingly very, very high, and what's the opportunity there if you're looking at it and, you know, how you're going about addressing those differences? Thank you.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Yeah, Amit, thank you for that question. Why don't I address the second part of your one question first, and then I'll turn it over to Ed to talk about coal yields. Look, we're committed to industry competitive margins. We said that from the get-go. We've also said that returns follow the investment. We're investing over the long term, and we're not gonna chase short-term OR targets. We illustrated very clearly, Mark had a chart, I believe, at Investor Day that showed during a economic trough, right, our margins would get a little worse as we can invest it over the long term. But as you evaluate this through an economic cycle, this is the better way forward for Norfolk Southern to invest in long-term growth, deliver top-tier growth, industry competitive margins, and drive long-term shareholder value.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Look, we're not happy with our cost structure right now. As we drive operational discipline into our network, as we refresh our operations team, as we drive a high degree of plan compliance, it allows us to continue to iterate the plan for productivity and service, and that's exactly what we're doing right now... Ed, you want to talk about coal yields?

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Sure. Yeah, yeah, I think you asked about LDs in the quarter, and the. I think I said in the prepared remarks, these are episodic. We don't expect them to continue. It's high single digits in terms of $ millions. And, you know, when we look out into the fourth quarter, and again, restating what I said in the prepared remarks, we're forecasting prices to be sideways through the end of the quarter and the year. And that's really predicated off the continuation of strong demand out of India and China for export.

[Amit Mehrotra, Managing Director at Deutsche Bank]

Thank you very much.

[Operator]

Our next question is from the line of Ken Hoexter with Bank of America. Please proceed with your question.

[Ken Hoexter, Managing Director at Bank of America]

Hey, great. Good morning, and solid job on the new lanes, interesting stuff. Alan, I just want to follow up on that question maybe a little bit more, right? So you have a lot of temporary costs and restructuring costs. Do you think you need to bring in, you know, PSR expertise to handle some of that network resiliency? You know, that seems to be the thing that PSR does, right? It allows the quick snapback, at least for some of the peers that have implemented that process. And I'm a little confused on the resiliency investments. It sounded like when Mark went through some of them, is it paid sick leave, or is there more on the resiliency expenditures?

[Ken Hoexter, Managing Director at Bank of America]

I just want to understand what's outside of agreements or costs that you've already implemented on the resiliency side. Thanks.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Yeah, thank you, Ken. Look, I've been CEO for a year and a half. We've been kinetic here. We've refreshed our operations leadership. We've implemented a new operating plan. We've launched a brand-new strategy, something that's never been done in this industry. We've revamped the marketing organization. We've brought in a number of outsiders in leadership roles, outsiders to the rail industry, outsiders to Norfolk Southern. I believe we've got the right team going forward. We will continue to look for opportunities to improve our strategic talent base. With respect to the resiliency costs, you know, some of that has to do with predictable work schedules. Some of that has to do with the historic wage increase that the rail industry and labor came to agreement on last year. Some of it has to do with hiring or investing in additional resources.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

And as a result of that, what you're seeing is third quarter service is better year-over-year and better sequentially. Our safety figures improved in the third quarter, and our volume growth right now, our volumes the last four weeks are at levels that we haven't seen in the last, say, second quarter of last year. So we are making progress. We're doing exactly what we said we were gonna do. This is the better way forward for Norfolk Southern to drive long-term shareholder value.

[Mark George, CFO at Norfolk Southern Corporation]

And Ken, just to put a fine point on the resiliency expense, about a third of that cost in the third quarter is related to the quality of life benefits, which are essentially paid sick leave. That has a cost to it. And the rest is really around the headcount additions for primarily T&E, but also some mechanical staff. And then the rest is, you know, locomotive investments as well, to be able to accommodate and accelerate the network. Thanks for the question.

[Ken Hoexter, Managing Director at Bank of America]

Thanks, Mark. Thanks, Alan.

[Operator]

Our next question is from the line of Scott Group with Wolfe Research.

[Scott Group, Managing Director at Wolfe Research]

Hey, thanks. Good morning. Mark, I wasn't sure what you were trying to say on overall cost, ex-fuel in Q4 versus Q3, so do you have any color there? And then, Alan, I just want to go back to that big picture question, right? You've been clear and you know, consistent with your message, we're not going to chase short-term OR, but long term, we want to have industry competitive margin. I guess my question is: What does 2024 look like in that short-term versus long-term view? Like, are we committed to margin improvement next year? Are we committed to starting to narrow this margin gap next year? Because, you know, it is getting pretty wide right now. So I just want to know, when do we start to see it get to industry competitive again?

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Mark, do you want to address the first one?

[Mark George, CFO at Norfolk Southern Corporation]

Oh, yeah, sorry. Scott, look, I think the way you look at cost, ex-fuel, to answer your specific question, it should be largely sideways. And then, you know, you sprinkle in the nice uptick we've seen in volumes. You know, I think we've definitely probably troughed here in Q3, and we should see sequential margin improvement. You know, model out what you think that volume is gonna be as we navigate through the quarter, and we report our volumes, and you can pretty much assign traditional incremental, incremental margin rate to that. So I think we troughed here in Q3, and it should improve from there.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

And Scott, with respect to industry competitive margins, we are committed to it. We're committed to it over the long term. Now, what we'll see is that as service continues to improve, we'll have greater opportunity to eliminate the service recovery costs. We'll have greater opportunity to drive productivity throughout our organization as we standardize our operating practices. We'll have greater opportunity to generate more volume. We'll have greater opportunity to generate more price, reflecting the value of the product that we sell. And all of those things will contribute to improvements in our margins and industry competitive margins, and I think we're gonna see improvement in that next year.

[Scott Group, Managing Director at Wolfe Research]

Okay, thank you.

[Operator]

Our next question is from the line of Tom Wadewitz with UBS. Please proceed with your question.

[Tom Wadewitz, Senior Equity Research Analyst at UBS]

Yeah, good morning. So I think it seems fairly clear that, you know, the it's not so much a cost story, but it's much more, you know, volume and a revenue story that you need to drive that margin improvement. And, you know, correct me if you think I'm wrong on that. But the question is really, what do you think is necessary to really get that revenue story improving? I think we look at the intermodal revenue per car was pretty weak in the quarter. I know there's some mix, but, you know, how do you think about that intermodal revenue strengthening? Is that mix gonna improve over a couple of quarters? You know, do we really need to see some tightening in the truckload market?

[Tom Wadewitz, Senior Equity Research Analyst at UBS]

I know you, a lot of your business is truck competitive, so is that something that truck rates are key? Just maybe if you could offer some thoughts, I guess, intermodal on that, that revenue per car, but broader thoughts on 2024. You know, what, what should we be looking for to really potentially drive that revenue story stronger?

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Yeah, Tom, to be clear, this is a balanced approach. It's not just about revenue growth. We will continue to drive productivity into our organization. I'm committed to that. Our improved service product is gonna help us with productivity. Our improved service product is gonna help us attract more volume. Our improved service product is gonna help us price to the value of our product. So there's a lot of value in there as we continue to invest in network resiliency for the long term. Ed, why don't you talk about what you're seeing in the market itself?

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Sure. And it's a really important question that, you know, I appreciate you asking, and we want to sort of unpeel the onion here and make sure that everybody understands. First of all, let me say, year to date, we are positive in our core pricing in every single market we serve, okay? Now, let's dig into intermodal. The largest impact, once we strip fuel out, was a decline in our intermodal storage revenue. We knew that that was gonna happen. And as I think I said in the prepared remarks, that storage figure accounts for over two-thirds of the RPU decline that we saw in the quarter. And then we had a couple of other things that were very important for folks to understand. We had substantial negative mix in the quarter, and that comes in two forms.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

The first is, international shipments grew, while domestic shipments were very anemic, given the amount of pressure that's out there in the truckload market. Our domestic shipments have a higher yield than international, so this was a substantial headwind. We also saw negative mix in two different ways within our international business. First of all, we're seeing much higher growth in short-haul lanes, and those are lanes that really shifted to the highway during the pandemic and then are now rolling back to us. You know, 85% of the growth in the third quarter in international came from those short-haul lanes, and those are intrastate lanes, so it's very important to understand that. Lastly, the amount of empties that we moved is frankly much faster pace growth than the loads that we saw.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

That is another decremental pressure on RPUs. So a lot going on there. You know, the truck market continues to be loose. I think the Cass Rate Index has been down for 21 straight months. Contract rates on the highway peaked in March of last year. There's a lot of downward pressure, but here's what I'm confident of. Number one, I'm confident that the market, in general, will rotate back to growth. It always does. The excess capacity that's on the highway will evacuate. It always does. And Norfolk Southern is gonna be really well-positioned, exceptionally well-positioned, to take advantage of not only the volume increases, but also the opportunity to reprice. Thank you for the question.

[Operator]

Our next question is from the line of Brian Ossenbeck with J.P. Morgan. Please proceed with your question.

[Brian Ossenbeck, Managing Director and Senior Analyst of Transportation at J.P. Morgan]

Hey, good morning. Thanks for taking the question. Maybe a two-parter for Ed. Can you just give us an update? I think last time you mentioned that the $650 million headwind in the back half of the year for coal and accessorials or intermodal storage fees is that sort of still tracking in line with expectations? And then secondly, to your point about core pricing, can you just give a little more color on, you know, where that is relative to inflation? I think we have seen a decent disconnect in terms of just the core pricing realization, you know, for Norfolk and for some of the industry in terms of how that trended versus inflation, which is higher than expected. So when do you expect to really sort of catch up with that?

[Brian Ossenbeck, Managing Director and Senior Analyst of Transportation at J.P. Morgan]

Is this something structural that's been keeping it lower than what we would have anticipated, or is this more a matter of timing with contracts, repricing, and service? How do you expect that rolling forward?

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Well, let me try to answer both of those. First one, I think you were asking about some of the known headwinds that we had coming in the second half and if they're intact. And I would say yes. You know, we've seen the storage revenue really normalize to pre-pandemic levels, and that's persisted, and it's been very consistent throughout most of the year. We all know what fuel is doing. On that storage piece, we expect to lap that probably second quarter of next year, and so that's gonna be a headwind until then. You know, coal pricing has surprised to the upside, and we'll see where it goes from here. So that's sort of the known pieces of this.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

On the core pricing side, you know, I think it's probably worth reviewing, you know, what our strategy is, and that's number one, we're always compelled to deliver a competitive price in the marketplace that our customers can recognize value in. But we define that by long-term contract pricing, not by what's going on in the spot markets. That recipe over time has generated above rail inflation pricing for many, many quarters now. We're confident that it will in the future. Okay, it's a very unusual truck market right now. We know that. But on our merchandise business in particular, we recognize high or mid-single-digit pricing in this quarter, and again, we're positive for price year-to-date across the board.

[Brian Ossenbeck, Managing Director and Senior Analyst of Transportation at J.P. Morgan]

Thank you, Ed.

[Operator]

Our next question is from the line of Justin Long with Stephens. Please proceed with your question.

[Justin Long, Managing Director of Equity Research and Transportation at Stephens]

Thanks, and good morning. Last quarter, you talked about $175 million-$200 million of lost revenue from the operational disruptions associated with East Palestine. Any updated thoughts on the timing of when this revenue can be recovered? I'm, I'm curious if that's something that could be driving some of the improvement in volumes. And then on the two tech outages, any way you can quantify the impact you've seen from those thus far?

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Ed, why don't you talk about revenue outlook and the cadence?

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Sure. You know, as service improves, and it is improving both sequentially and year-over-year, our customers are very encouraged by that, and they're telling us that. That improvement in service is gonna bring freight back to Norfolk Southern. We know our customers are very sophisticated supply chain managers and purchasers, and when we're not on plan, they have to make other plans to keep their factories running. Some of our customers are gonna see that value faster, and as we cycle equipment faster, they're immediately gonna be able to load more revenue onto Norfolk Southern. I think of markets like metals, like automotive, even though there is a strike right now, I think of that in the construction market, in the aggregates market.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

In some of the more flexible freight markets, we have to demonstrate persistent value in the form of, you know, reliable, sustainable service over a longer period of time. But we're making sure that our customers are well aware of our progress.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Yeah, with respect to the tech outages, really, the revenue impact was largely inconsequential. It was more of a service issue and a cost issue associated with the slower network and the recrews. Really, what it does for us is it reaffirms the importance in investing in the resiliency of our network, so we can weather anything that comes at us.

[Justin Long, Managing Director of Equity Research and Transportation at Stephens]

Got it. Thank you.

[Operator]

Thank you. Our next question is from the line of Jonathan Chappell with Evercore ISI. Please proceed with your question.

[Jonathan Chappell, Senior Managing Director of Transportation at Evercore ISI]

Thank you. Ed, you know, Alan pointed out you've had 4 weeks now of volumes that have been back to the 2Q 2022 levels. But it seems like you still have a lot of red traffic lights or yellow traffic lights on, you know, the freight categories that you laid out in your slides. How much can we see acceleration if some of those traffic lights turn in your favor? You know, this run rate that you've had the last four weeks seems to be kind of a catch up and service related. But if you get a macro tailwind behind you, you know, what can those levels go to with the service operating at the levels that they are—that it is today?

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

We'll try to be very tight with this answer. Number one, we're really glad to see a peak season happen this year, and we're encouraged by that. Our service is allowing us to deliver that. You know, this network is built for a lot more freight than we're handling right now, and as our, as our customers recognize and are able to deliver that value to their customers, we're gonna be, we're gonna be able to handle a lot more freight. I'm confident in that. You know, the fact is, and this is the last thing I'll say on it, economic uncertainty and geopolitical uncertainty are very high right now, and I think we see that in the headlines every single day. And it's just something that we have to keep in mind. That's probably why some of those lights are colored the way they are right now.

[Jonathan Chappell, Senior Managing Director of Transportation at Evercore ISI]

Thank you.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Thank you.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Thanks, John.

[Operator]

Our next question is from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

[Allison Poliniak, Director and Senior Analyst at Wells Fargo]

Hi, good morning. Just want to go back to intermodal and the, I would say, the share recapture there. I know you talked about service, and you talked about sort of that, that time to sort of regain that confidence. You know, is that something you're starting to see now or hear now from your customers, where we could see that start to accelerate in the next few months, despite what's going on in the overall macro intermodal market? Just any thoughts there on your opportunity set for that.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Well, you're right. We are seeing volume come back, and you know, I can't say enough about the quality of the customers that we have in our portfolio. We're very lucky to have our customers. They are certainly best in class. They are out on the street every day converting freight from the highway to Norfolk Southern, and it's because we're able to offer value that they can demonstrate to those customers. So yes, I think that we have the opportunity here to deliver additional value to our shareholders in the form of more volume, more revenue, particularly from the intermodal market. We have a network that's really built for that.

[Allison Poliniak, Director and Senior Analyst at Wells Fargo]

Thank you.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Thank you, Allison.

[Operator]

Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.

[Brandon Oglenski, Director and Senior Equity Analyst at Barclays]

Hey, good morning, and thanks for taking the question. Alan, I think in response to a question earlier, you talked about, you know, standardizing operating practices across the network as you look into next year. Maybe I'm mischaracterizing what you said, but I guess, can you put that in context for us? I thought the op plan had been set. You guys had learned the changes from the train makeup rules, but maybe there's more to come?

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Yeah, that's been an ongoing effort by Paul and his team to standardize the operating practices within our terminals, which allows us to drive further productivity and further capacity improvements and further service improvements. And that, that's just part of, you know, the PSR principles.

[Paul Duncan, COO at Norfolk Southern Corporation]

Okay, thank you.

[Operator]

Our next question is from the line of Jordan Alliger with Goldman Sachs. Please proceed with your question.

[Jordan Alliger, VP and Equity Research Analyst of Transportation and Logistics at Goldman Sachs]

Yeah, hi, just a follow-up. You know, with velocity and dwell recovering so well of late, is there a way to assess, you know, how much of that comes from the better operations, the changes you've made there, versus adding the headcount to get it closer to where you need to be? And do we think about headcount sort of flatlining from here on out, roughly? Thanks.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Yeah, Jordan, as we've always said that, you know, service is a function of leadership, plan, and resources. We've refreshed our leadership within operations. We've implemented a new plan, and we're driving a high degree of compliance to the plan, and we're investing in resources, whether that's additional T&E employees, cross-training conductors to become engineers or, you know, investing in quality of life issues. Those are all generating results for us, and you can see that with the service metrics. You can see that with the volume metrics as well. Mark, you want to talk about overall headcount?

[Mark George, CFO at Norfolk Southern Corporation]

Yeah, I mean, the headcount certainly helps. I mean, we've augmented in a lot of our critical locations the staffing in order to improve our fluidity there. So that, that's a big driver. We've invested money in locomotives, so we have more locomotives available as well. And frankly, Paul, why don't you talk a little bit about the process changes that we're making in the terminals, which really are sticky and fundamental drivers for running a scheduled railroad?

[Paul Duncan, COO at Norfolk Southern Corporation]

Well, you're spot on. I mean, we are seeing results from refreshing our operating leadership, resourcing up, and executing the plan in both volume, train speed, and terminal dwell. And as Alan highlighted, you know, matched to our premise of running as a scheduled railroad, it's a focus on running the plan. Right car, right train, right day, enforcing a high degree of compliance to the plan. Again, that is a fundamental tenet of running a scheduled railroad. It's driving that accountability. We expect to see further consistency as the year progresses.

[Paul Duncan, COO at Norfolk Southern Corporation]

Certainly expect to see dwell continue to improve, train speed continue to improve, and as we have seen these metrics quarter-over-quarter velocity improve, we're gonna layer on productivity initiatives as we talked, and that's gonna be a focus of us in 2024, running reliable service and layering on productivity.

[Mark George, CFO at Norfolk Southern Corporation]

Jordan, you asked about where headcount's going. Let me just put a fine point on that. I do think that our conductor training pipeline really starts to taper down here in the fourth quarter, and I'd expect that we'd probably end the year just under 600. We have enough qualified T&E here, probably in the fourth quarter, to start capturing meaningful growth that might be on the horizon. And it's really about balancing where those T&E are among our hiring locations. And we wanna make sure that we're not just adequately staffed, but we're at resilient levels in those critical locations. But, probably, I would say, the other area of headcount, we're gonna need some more supervisors now as you add a lot more T&E.

[Mark George, CFO at Norfolk Southern Corporation]

So that's probably the remaining pickup you'll see in some of the resilience investments that we're making in the fourth quarter, is really around the area of field supervision. But in terms of overall T&E, I think we're cresting here, and now we'll be able to handle more volume and start driving productivity to also take another step up in volume absorption. So that's kind of the roadmap on T&E.

[Jordan Alliger, VP and Equity Research Analyst of Transportation and Logistics at Goldman Sachs]

Thank you.

[Operator]

Our next question is from the line of Jason Seidel with TD Cowen. Please proceed with your question.

[Jason Seidl, Managing Director at TD Cowen]

Thank you, operator. Alan and team, good morning. Wanted to follow up a little bit on the automotive side. You guys mentioned that there's a backlog of sort of finished vehicles that you can move. Can you give us a sense of sort of how many weeks you think that backlog is for you guys, just in case the UAW strike drags on longer than most people would want? And then you made a comment about nearshoring and how that is looking really good for you potentially down the road. Do you have any numbers from your industrial development projects? I mean, if you can compare them to prior years, that'd be great. Thank you.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Sure, and thanks for the question. This is Ed. You know, on the automotive side, yes, there are—there have been high shippable ground counts at a lot of places that we originate from. The strike duration is, you know, probably longer than I want it to be right now, to be honest with you, and those shippable ground counts are gonna dwindle over time. And we'll see where it goes. I really can't be more granular than that because of the nature of the strike, which tends to move from place to place. On the industrial development side, you know, there's over 600 projects in the pipeline right now. We've seen tremendous investment, mostly in the Southeast and the Midwest, which is very beneficial for our network and for our customers.

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

I highlighted a few of those during the prepared remarks, and, you know, just to be more anecdotal about it, in September, we had three new lumber shippers that either originated or started receiving traffic just that month. And that's, that's really highlighting, number one, the strength of that, what I would call non-res or manufacturing construction economy, which is, I think, higher now than it was during the entire 2000s, for the U.S. Most of that is focused east of the Mississippi River, and, and most of that is focused again, in the Midwest and the Southeast. So, so we think we're really well teed up, really well positioned for a, what I, I think Alan has referred to as, as a manufacturing super cycle, in, in the coming decades.

[Jason Seidl, Managing Director at TD Cowen]

Well, well, I, I certainly hope so. Could you-- you mentioned 600 projects. How does that compare to, say, pre-pandemic?

[Ed Elkins, EVP and Chief Commercial Officer at Norfolk Southern Corporation]

Still elevated from pre-pandemic level. You know, the EV supply chain is really a new frontier that's out there. And I think in one of our previous calls, I mentioned that there's been over $70 billion invested into that, and about 30% of that is on our lines. Whether it's the Infrastructure Act, the Inflation Reduction Act, the CHIPS Act, there are a lot of compelling reasons, along with geopolitical instability and affordable and reliable energy, to make the U.S. a very compelling place to be.

[Ben Nolan, Managing Director of Research at Stifel]

Thanks, Ed. Appreciate the time.

[Mark George, CFO at Norfolk Southern Corporation]

Mm-hmm.

[Operator]

Our next question is from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question.

[Ravi Shankar, Executive Director and Head of India Equity Sales at Morgan Stanley]

Thanks, everyone. Just to follow up, the comments on the customer preference for short-haul moves and the empty moves is pretty interesting. Do you have a sense that this is cyclical, or could this be structural, given evolutions of supply chains? And when the upcycle comes, kind of, are you confident that, you know, shippers will not, you know, choose to prefer, you know, faster, shorter-haul truck moves over rail moves?

[Mark George, CFO at Norfolk Southern Corporation]

Thanks for the question. You know, on the international side, we saw those lanes suffer the most during the pandemic, where steamship lines were basically moving port to port and then allowing customers to pick it up there. That naturally is the part that has reverted back the most, and I would say it's naturally reverted back most strongly because of the capability that we have in some of those markets, like from Savannah into the Southeast, like from Charleston into the Southeast, like from Norfolk into the Midwest, and even from the Port of New York into the hinterland markets. We have a really good portfolio of intermodal services, and I'll remind you that over 100 million Americans wake up every morning within 50 miles of one of our intermodal terminals.

[Mark George, CFO at Norfolk Southern Corporation]

That is a compelling strength, that we think is gonna allow us to succeed both on the international and the domestic side.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Yeah, look, this is a positive for us, right? This shows that we can add value into the market and even short-haul lanes, where rail traditionally has not been competitive, and we can do that because of our focus on productivity. We can do that because of our focus on the value of our service product. In the East, that's why we're very confident, right, that we've got a franchise that faces the fastest growing segments of the U.S. economy.

[Ravi Shankar, Executive Director and Head of India Equity Sales at Morgan Stanley]

Great. Thank you.

[Operator]

Next question is from the line of Bascome Majors with Susquehanna. Please proceed with your question.

[Bascome Majors, Senior Equity Research Analyst at Susquehanna]

Mark, thanks for all the detail you gave us on the Eastern Ohio spending, and the plan forward. Can you talk about, without necessarily quantifying, the timeline of any major charges or outflows that you have a little bit of visibility into that are still ahead of you? You know, is there a point where your ongoing spending tapers off, but the insurance and legal recoveries are still coming in, and your response to this incident shifts from a cash flow burden to a cash flow tailwind? Thank you.

[Mark George, CFO at Norfolk Southern Corporation]

Okay, Bascome, thank you very much for that, for the question. You know, we're certainly pleased that we're winding down the site remediation work, which obviously has been costly, as you've seen from my chart and the impact there. But I do think we've got issues that we're gonna be working through for several quarters to come, and it's really impossible right now, Bascome, to predict the amounts or the timing. And, you know, there could be a lot more developments that lead to additional costs and in particular, with regard to litigation matters, fines, penalties, legal fees, and these could end up being material. But at the same time, we do have insurance recoveries that have started.

[Mark George, CFO at Norfolk Southern Corporation]

We actually got our first cash recovery, that $25 million I cited, that we recorded in the quarter. We actually got the cash last week for that, so that's good. But I don't think that you should expect to see significant, meaningful cash recoveries from insurance in the near term. I think these things are really gonna become protracted. So it's hard to even match the timeline of those inflows with what potential future outflows might be. I think with regard to insurance in general, I think, you know, just bear in mind, it would be reasonable to expect you know, significant premium increases going forward as a result of an incident of this size. So hopefully that's helpful, Bascome. Thank you.

[Bascome Majors, Senior Equity Research Analyst at Susquehanna]

Thank you.

[Operator]

The next question is in the line of Ben Nolan with Stifel. Please proceed with your question.

[Ben Nolan, Managing Director of Research at Stifel]

Yeah. Hi, appreciate it. I wanted to go back to some of the development that you're seeing from some of your customers, and specifically, it's sort of a little bit of a mixed signal. It sounds like there's a lot of people moving forward, but then the lights are not all green. And I guess I was curious if you've seen any... As a function of higher interest rates or ambiguity in the market or whatever, any of those projects that make up that $600 on your book here, have any of those shifted to the right, or is there any reason to think that maybe those aren't all full steam ahead?

[Mark George, CFO at Norfolk Southern Corporation]

Yeah, and well, let me start by reminding everybody, you know, those lines are just for the fourth quarter, so to speak, near-term outlook. You know, here's what we've seen. We've seen an acceleration in projects associated with manufacturing, probably seen some tail off or deceleration in projects associated with warehousing. And I think that's a direct function of some of the pressure that's coming from interest rates out there. But you know, you think about whether it's aggregates, whether it's lumber, whether it's structural steel, there is a lot of pent-up demand out there to move product into these building sites.

[Mark George, CFO at Norfolk Southern Corporation]

You think about any energy-intensive industry around the world, if you wanna be in a place that is not only, ecologically responsible, but has reliable, stable, predictable, affordable energy and, great infrastructure to connect you to the rest of the world, the U.S. is compelling. The Eastern U.S. is very compelling with its customer base, and the Southeast is exceptionally compelling for those. Thanks, Ben.

[Operator]

Thank you. Our final question is from the line of David Vernon with Bernstein. Please proceed with your question.

[David Vernon, Managing Director and Senior Analyst at Bernstein]

Hey, good morning, guys, and thanks for the call today. So Mark, I wanted to go back to one of your earlier comments about sort of expecting average incrementals, you know, when volumes do turn. I'm just trying to figure out how I can get comfortable with that, thinking about, you know, costs being structurally higher and some of the mix headwinds that Ed's pointing to in terms of both the short-haul intermodal bringing back more international empties into the network and seasoning some of these new intermodal services. Is that, you know, average incrementals, is that sort of the day one when volume turns, or should we be thinking about that more as the middle part of the cycle when we think about incremental margins? Thank you.

[Mark George, CFO at Norfolk Southern Corporation]

Yeah, look, I think we've had a challenging mix environment here the past couple of quarters that have been consuming a lot of the positive pricing, core pricing that Ed and his team have been capturing. At some point, that mix headwind will reverse. It usually does. But as we think sequentially, going into Q4, you know, we're gonna have some of the structural headwinds for sure, but that should be offset by you know, the temporary costs related to the service. So I think we're kind of neutral there. And then, we're not gonna have the same type of fuel headwinds that we had in the third quarter. In fact, I don't think, I think it could be probably flat neutral, maybe slightly positive. So really, we're talking about volume dropping through.

[Mark George, CFO at Norfolk Southern Corporation]

We have seen a nice uptick sequentially in volume, and that should drop through at those normal incrementals of, you know, call it 60% or, or plus. So that's, that's the way I think about Q4. And then, longer term, things should play out that way. I mean, every in any given quarter, obviously, you know, mix is playing a role, and hopefully, it's not adverse going into 2024, the way it's been here these past couple few quarters.

[David Vernon, Managing Director and Senior Analyst at Bernstein]

Thank you.

[Mark George, CFO at Norfolk Southern Corporation]

Thank you.

[Operator]

This concludes the question and answer session. I'll now turn the call back over to Mr. Alan Shaw for closing comments.

[Alan Shaw, President and CEO at Norfolk Southern Corporation]

Yeah, we certainly appreciate your participation and your questions this morning. Thanks for joining.

[Operator]

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.

Participants

Executives

• Alan Shaw, President and CEO
• Ed Elkins, EVP and Chief Commercial Officer
• Luke Nichols, Senior Director of Investor Relations
• Mark George, CFO
• Paul Duncan, COO

Analysts

• Allison Poliniak, Director and Senior Analyst at Wells Fargo
• Amit Mehrotra, Managing Director at Deutsche Bank
• Bascome Majors, Senior Equity Research Analyst at Susquehanna
• Ben Nolan, Managing Director of Research at Stifel
• Brandon Oglenski, Director and Senior Equity Analyst at Barclays
• Brian Ossenbeck, Managing Director and Senior Analyst of Transportation at J.P. Morgan
• Chris Wetherbee, Senior Research Analyst at Citigroup
• David Vernon, Managing Director and Senior Analyst at Bernstein
• Jason Seidl, Managing Director at TD Cowen
• Jonathan Chappell, Senior Managing Director of Transportation at Evercore ISI
• Jordan Alliger, VP and Equity Research Analyst of Transportation and Logistics at Goldman Sachs
• Justin Long, Managing Director of Equity Research and Transportation at Stephens
• Ken Hoexter, Managing Director at Bank of America
• Ravi Shankar, Executive Director and Head of India Equity Sales at Morgan Stanley
• Scott Group, Managing Director at Wolfe Research
• Tom Wadewitz, Senior Equity Research Analyst at UBS