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Lawyers who successfully argued Musk pay package was illegal seek $5.6 billion in Tesla stock
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Norway's hospitalized king gets a pacemaker in Malaysia after falling ill during vacation
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QQQ   445.61
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Sports analytics may be outnumbered when it comes to artificial intelligence
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In Senegal's capital, Nicaragua is a hot ticket among travel agents as migrants try to reach US
Norway's hospitalized king gets a pacemaker in Malaysia after falling ill during vacation
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Norfolk Southern Q2 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Meghan Achimasi
    Senior Director of Investor Relations
  • Alan H. Shaw
    President and Chief Executive Officer
  • Cynthia M. "Cindy" Sanborn
    Executive Vice President and Chief Operating Officer
  • Claude E. "Ed" Elkins
    Executive Vice President and Chief Marketing Officer
  • Mark R. George
    Executive Vice President and Chief Financial Officer

Presentation

Operator

Greetings, and welcome to the Norfolk Southern Corporation First Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Meghan Achimasi, Senior Director of Investor Relations. Thank you. You may begin.

Meghan Achimasi
Senior Director of Investor Relations at Norfolk Southern

Thank you, and good morning, everyone. Please note that during today's call, we will make certain forward-looking statements, which are subject to risks and uncertainties that may differ materially from actual results. Please refer to our annual and quarterly reports, filed with the SEC, for a full discussion of those risks and uncertainties we view as most important. Our presentation slides are available at nscorp.com in the Investors section along with a reconciliation of non-GAAP measures used today to the comparable GAAP measures. A full transcript and download will be posted after the call. It is now my pleasure to introduce Norfolk Southern's President, Alan Shaw.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Good morning, everyone, and welcome to Norfolk Southern's First Quarter 2022 Earnings Call. I am joined today by Cindy Sanborn, Chief Operating Officer; Ed Elkins, Chief Marketing Officer; and Mark George, Chief Financial Officer. I would like to start by recognizing the contributions of Norfolk Southern's employees, who have worked safely and tirelessly to serve our customers in a challenging supply chain environment. I sincerely appreciate the commitment of our employees to Norfolk Southern and our customers. Norfolk Southern delivered solid financial performance in the first quarter with record first quarter revenue, earnings per share and net income, while our operating and marketing teams worked around the clock with our customers to address current network challenges and a dynamic supply chain. We know we need to improve service and are committed to increasing network fluidity and restoring service to levels our customers deserve. Cindy will share updates on our accelerated hiring and progress of our new operating plan, TOP|SPG. Viewing the results for the quarter, you'll note that revenue increased 10% as a 16% increase in revenue per unit more than offset a 5% volume decline. Expenses grew over $200 million or 13% year-over-year, due primarily to a sharp increase in fuel price. Higher fuel costs, along with slower network velocity and reduced volume contributed to an increase in our operating ratio, which was up 130 basis points versus last year's first quarter record. We remain confident in our ability to improve service while simultaneously delivering productivity and growth. Our outlook is bright. I'll now turn the discussion to Cindy for an update on operations. Cindy?

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

Thanks, Alan, and good morning, everyone. I'm going to talk to you all today about the outlook for our operations. During the past quarter, resource levels have challenged the fluidity of our operation, yet we have continued our momentum on increasing train size. We are in the very early days of seeing the fruits of our hiring initiatives and are working every avenue to improve service levels as quickly as possible. I'll provide an update on our Thoroughbred operating plan initiative, as well as what we're doing with technology to make the railroad safer and more productive. First, turning to slide six, is a recap of our operational activity metrics in the quarter, GTMs were down slightly, outperforming the unit volume decline as mix shifted modestly towards our heavier merchandise and coal segments. Our crew starts were down 5% in the quarter, which is a good news, bad news story. Resource levels prohibited us from operating some starts that we would have preferred to operate, and our recovery mechanism was challenged as a result. However, on the positive side of the ledger, we continue to drive very beneficial road train consolidations across our segments, most pronounced in our boat franchise as we move similar coal tonnage with 6% fewer train starts and saw train weight up across the board for intermodal, merchandise and bulk. In an effort to improve resiliency, we kept a portion of the surge locomotive fleet active, yet we still achieved another quarter of fuel efficiency improvement. Turning to network performance on slide seven, train speed and terminal dwell closely resembled the levels they were at in the fourth quarter. Qualified T&E levels continued to decline throughout the quarter, culminating in what we expect to be the trough in March.

As we start to see relief in certain areas, we are prioritizing crew starts that can have the most impact on customer service levels, and we are redeploying our Go Teams when possible. I want to reiterate that improving service levels is our top priority. And turning to slide eight, I will provide more detail on where we are with our hiring efforts. As we progress through 2021, we quickly identified the need to increase hiring within our transportation workforce. We were met with a very challenging labor market that made our ramp-up time longer than expected, but we responded with a robust plan to streamline our preemployment process, deploy a variety of financial incentives and mobilize additional onboarding resources. These efforts have paid off in a big way in 2022, and we now have over 800 conductor trainees on the property. As a result, we now expect our qualified T&E headcount to begin growing sequentially throughout the remainder of the year. We are laser-focused on utilizing these additional employees to improve service levels and provide a solid platform from which to launch TOP|SPG, which I will discuss on slide nine. As we did last quarter, I want to reiterate the approach of focusing on service, productivity and growth as equal pillars in our latest evolution of the TOP plan, which we envision launching in late second quarter. Let's talk about service quality and resiliency first. Several key elements of PSR are having a simple and executable operation as well as having a balance. You heard us talk about some of these PSR fundamentals when TOP21 was rolled out, and we now need to revisit a few of them with a renewed focus, while ensuring they are embedded in all of our segments, including intermodal. One of the greatest strengths of our network is the quality and positioning of our intermodal franchise.

And as we've performed the zero-based review of how we link together our major markets, we found opportunities to simplify how we connect those terminals while providing more capacity than what we have today. This will include ensuring we have assets flowing across our network in a balanced fashion, so that less intervention is required for resources to be in the right place at the right time. Let me be clear, TOP|SPG is another lever we're pulling to improve our service and represents an evolution of our current operating plan. This pathway towards enhanced service will allow us to better plan forward and execute longer trains. Additionally, going back to the idea of encompassing all business segments, while we've made great progress on enhancing book train sizes within coal, there is more runway ahead. Other facets of the bulk network such as grain, will see benefits as we develop the capability to run longer trains through those parts of the network, such as the Midwest. This productivity dividend is very complementary to the service pillar as it will give us more flexibility to handle commodity volatility. These improvements in train productivity have obvious benefits of reducing labor intensity but will also propel further fuel efficiency improvements. Finally, these efforts will ensure that we grow capacity within our terminals and along our main lines, including the initiatives I've discussed with you before, to bolster our infrastructure with targeted siding extensions that are actively coming online. We are going to provide the capacity our customers want to grow with us, organically while still creating the flexibility to respond quickly and effectively to new opportunities.

Moving to our safety update on slide 10. We have seen improvement in both FRA train accidents per ton miles moved as well as the FRA injury index year-over-year. However, we will not be satisfied as long as there is a single injury or accident. Which is why we continue our efforts to get better in this area every day. First, on the engagement front. In 2021, we conducted our first annual safety survey, which was across the entire workforce. This has provided us with insight on what and where we need to focus our engagement efforts. We've expanded our field training program to leverage outlets such as online training, classroom training and our signature safety train events, so that we empower our workforce to actively engage in our goal of continuous improvement, when it comes to safety. Lastly, we're making great progress building momentum with technology investments that are focused on safe and efficient operations, and I'll give a great example on slide 11 with an update where we are with one of our key technology pillars: automation. More specifically, we are using machine vision technology to detect component failures before they occur. We're in the process of deploying fully-automated inspection corridors, which will cover more than 90% of the cars moving across our network, using a variety of systems to detect signs and symptoms of pending failures before they occur.

Equally as important as deploying the hardware, is developing the next-generation AI algorithms that detect these failures with edge computing and procedures for intervening quickly. This is where we've made really exciting progress, and we are already actively preventing incidents. We are finding that the technology is enabling us to achieve better outcomes than the human eyes alone can achieve. One reason for this is the power of seeing how these components are behaving on a train in motion versus while stationary during a manual inspection. We're generating high success rates with very few false positives and detecting components that need to be replaced but had no outward indication to the human eye. The close and effective working relationship between our data scientists and field team is creating a feedback loop that is accelerating our progress. This is one of the most revolutionary technologies we are working on, and I'm extremely excited for what we are achieving with our relentless pursuit of safety first and productivity. I will now turn the call over to Ed.

Claude E. "Ed" Elkins
Executive Vice President and Chief Marketing Officer at Norfolk Southern

Thank you, Cindy, and good morning, everyone. If you would, let's turn to slide 13. Our results for the first quarter lagged challenges that we experienced on the volume side with supply chain constraints and network fluidity. These were offset by record success in revenue per unit. Overall, our volume decreased 5% year-over-year in the first quarter, driven by declines in our intermodal, automotive and steel franchises. But despite these volume declines, total revenue improved 10% year-over-year to $2.9 billion due to higher revenue from fuel surcharges and strong price gains. Within merchandise, volume declines were led by automotive and steel for chip supply and equipment cycle time challenges significantly inhibited our ability to drive growth. Partially offsetting these decreases were gains in agri fuels, feed and aggregates due to increased gasoline consumption, higher demand for Agriculture products and rising levels of construction spending. Higher fuel revenue and price improvement more than offset the headwinds from volume and mix that generate 4% revenue growth year-over-year, along with record-level revenue per unit. Revenue per unit less fuel was also a record for the quarter. Total intermodal shipments declined 6% in the first quarter, driven almost entirely by the international market, where tight drayage capacity, high street dwell for chassis and warehouse throughput drove customers to seek alternatives to Inland Point Intermodal, or IPI. Domestic shipments grew modestly year-over-year on sustained consumer demand that outpaced supply. However, as network velocity improves, and as TOP|SPG is implemented, we're confident that we will provide the capacity our customers need to grow. Higher revenue from fuel surcharges was the leading driver of intermodal revenue growth this quarter, followed by storage revenue, price improvement and positive mix, all leading the record quarterly revenue metrics for the franchise. Intermodal revenue per unit less fuel grew for the 21st consecutive quarter. Now moving to coal.

Total volume was down slightly year-over-year in the first quarter as gains in utility shipments were offset by declines in export coal. Utility growth was driven by higher levels of demand for electric power and the need to replenish depleted inventories. Our export franchise experienced a number of acute service disruptions that limited shipments for a period of time, resulting in a year-over-year decline. But despite these volume headwinds, coal revenue grew 25%, primarily due to price gains, underscoring the near-term market demand opportunities we effectively secured. Revenue per unit and revenue per unit less fuel reached record levels this quarter. Now let's turn to slide 14 for our market outlook for the remainder of 2022. In general, we anticipate continued, consumer-driven strength in demand and improvements in our service product. Both of these will enable us to deliver year-over-year volume and revenue growth in 2022. However, we are closely monitoring a base of uncertainty in the macro economy, including inflation at levels we haven't seen in over 40 years, rising interest rates and evolving post-pandemic labor market and ongoing global geopolitical conflict. Merchandise volume growth will be led by Agriculture, Forest and Consumer products, where we're seeing elevated demand for products such as soybeans and corn, as global food supply chains face ongoing uncertainty. The USDA recently increased their expectations for export soybeans from the U.S. amid declining foreign availability and highlighted rising demand for corn, both of which create opportunities for rail transportation. Also contributing to volume gains, will be automotive, for U.S. light vehicle production is expected to improve 19% year-over-year in the month of April through December on improving chip supply.

Total construction spending in the U.S. has been steadily increasing since mid-2020 and currently sits at the highest level on record, signaling opportunities for our construction-related markets. Within intermodal, our expectation is for a healthy and resilient consumer in 2022, based on a strong balance sheet, suggest an increased spending power from excess savings despite record-high inflationary pressures. Growth in the consumer-led economy will drive demand for our domestic intermodal service, which we expect will benefit from service improvements in the second half of the year and drive growth to offset the volume declines that we experienced at the start of the year. Sustained tightness in the truck market and rising diesel fuel prices are both contributing to an economic environment that encourages highway to rail conversion and provides a superior value proposition for our customers because of our fuel efficiency advantage, especially when compared to the highway. For our international franchise, we're working diligently to create the capacity our channel partners need to take advantage of the opportunities on Norfolk Southern. Our efforts are expected to boost volume recovery and drive year-over-year growth in intermodal this year. And lastly, turning to coal. Record-high seaborne prices continue in an already-strong market that is amplified by geopolitical tensions. This will provide opportunities in the near term. Pricing is expected to remain a tailwind in the export markets. Utility shrink continues with higher natural gas prices, though it will continue to be counteracted by higher coal prices. Inventories are still lower than target, heading into the summer season.

In our domestic met market, consumer demand remains high for domestic receivers. Coal supply availability and production remain tight in every market, which will be the determining factor in upside potential. Overall, we're confident in the growth potential for Norfolk Southern for the remainder of the year. And we expect to deliver revenue and volume growth over last year. I would like to thank our customers for their partnership and reiterate that we remain intently focused on improving service and driving value for our customers and shareholders. I will now turn it over to Mark for an update on our financial results. Thank you.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Thank you, Ed. I'm on slide 16. We delivered double-digit revenue and EPS growth in the first quarter. Both were record levels for NS. Starting with revenues, the 10% growth was despite the 5% volume decline, thanks to the strong RPU growth that Ed just detailed. Operating expenses were up 13%, driven in large part by a sharp increase in fuel prices, but also higher costs related to our network challenges. Despite revenue dollar growth exceeding opex dollar growth, we experienced a 130 basis point increase in our operating ratio. Recall that at the first quarter conferences, we previewed pressure on our OR compared to our original expectation of flattish sequentially due to lighter volumes that we were experiencing to start the year and also the rapid rise in fuel expense. The way it landed, fuel prices alone represented 100 basis points of OR headwind relative to our expectations, as well as year-over-year. We also booked an accrual adjustment within claims expense that created another 40 basis points of headwind. The volume shortfall also adversely impacted OR as we previewed, along with incremental service-related costs. These were only partially offset by the strong RPU improvements. OR side, the operating income and earnings per share were both Q1 records, growing 7% and 10%, respectively. Drilling into the breakdown of operating expenses in the quarter on slide 17, you'll see that 60% of the $206 million increase in the quarter was from higher fuel prices on a year-over-year basis. Purchased services was up $31 million or 10%, driven in large part from inflation and service-related costs that more than offset benefits, that would typically come from lower volumes.

Equipment rents increased $13 million or 17%, driven by slower network velocity and less equity earnings from TTX. The $20 million increase in materials and others is driven by a $13 million accrual adjustment in claims related to the 2017 through 2020 years, based on an actuarial study. Comp and benefits were up 1%, with compensation inflation offsetting savings from lower employee levels in several categories. Qualified T&E employees were down, mostly offset by conductor trainees. The unwanted attrition of qualified T&E employees drove higher overtime cost to move the freight. Shifting to slide 18. In a discussion of the P&L below operating income, other income was a $5 million expense in the quarter, driven largely by losses on the company-owned life insurance investments. Pretax income was up 5%, while net income was up 4%. Our effective tax rate in the quarter was 23%, in line with the 23% to 24% range that we guide. EPS was up 10% on the 4% net income growth, thanks to nearly 2.2 million shares repurchased in the quarter. We're moving nearly 1% of the outstanding shares. Closing with cash flow and shareholder distributions on slide 19, free cash flow was $605 million, down 19% from last year due to property additions in Q1 this year that are $124 million higher. Recall Q1 2021 property additions were quite low to start the year, due in part to weather. Free cash flow conversion in the first quarter was a healthy 86%. Despite a lower free cash flow year-over-year, shareholder distributions were nearly 7% higher, with a 19% higher dividend payment and modestly-higher share repurchases. We'll now turn it back to Alan for a wrap up.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Thank you, Mark. Turning to slide 20. We show multiple approaches on how we're building upon our record of sustainability leadership. With the launch of our next-generation carbon calculator in mid-March, we've made it easier for customers to do business with us, incorporating carbon into their freight decision framework with quantifiable benefits of utilizing the most efficient and least carbon-intensive mode of ground transportation. Also in March, we announced the continuation of our locomotive modernization program in partnership with Wabtec, which will improve our operational performance and reliability and help us achieve our science-based target emission reductions, up 42% by 2034. The pace of our sustainability initiatives has increased and is recognized in the industry as evidenced by several prestigious awards received in the quarter, including named as a Supplier Engagement Leader by Carbon Disclosure Project for 2021, recognized with the 2022 Green Bond of the Year award from Environmental Finance and earning the Responsible Care Energy Efficiency Award for Locomotive Fuel Efficiency from the American Chemistry Council. We are incredibly proud of our progress in this area, and we will continue to build upon our sustainability initiatives, which are good for business and the right thing to do for all of our stakeholders. Let me close by confirming our commitment to deliver our targets this year. Our confidence at this stage is based on our assessment of economic indicators, which at this time remain supportive of manufacturing and consumer activity, as well as our service recovery efforts associated with accelerated hiring and the successful implementation of TOP|SPG. These factors will support healthy volume growth in the back half of the year.

In fact, potential upside exists to our revenue outlook, and energy prices remain elevated throughout the year. As you've heard from our entire team, we are disappointed with our current service levels. We are laser-focused on restoring the quality of our product to a level that allows our customers to succeed and grow. We are confident that our decisive actions to restore service, including hiring and the launch of TOP|SPG, will create long-term sustained value for our customers and shareholders, leveraging our unique franchise strengths. Before we open the call to questions, I want to take the opportunity to thank our retiring CEO, Jim Squires for his tremendous leadership to our company over the past 30 years. During Jim's tenure as CEO, NS improved our operating ratio by more than 1,200 basis points, more than doubled our market cap and returned over $17 billion to our shareholders. He led our company through the challenges of our freight recession and global pandemic. Jim launched an industry-leading digital transformation strategy, elevated sustainability to a strategic business priority and personally championed diversity and inclusion. And Jim united our team and the new headquarters in Midtown Atlanta last year. On behalf of all NS employees, retirees and stakeholders, thank you, Jim. And we wish you and your family all the best in your well-earned retirement. We will now open the call to questions. Operator?


Questions and Answers

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question will be coming from the line of Jordan Alliger with Goldman Sachs. Please proceed with your question.

Jordan Robert Alliger
Analyst at The Goldman Sachs Group

Hi, morning. Sort of in thinking about your look ahead to sort of the second half and the sequential improvement. Can you may be getting that that service up and in turn, volumes, is it adding more heads? Is it the new top SPG plan, simply easier comps. Maybe just give some color around the critical factors as you would rank them? Thanks.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Good morning Jordan. The critical factors are already in play. We've ramped up our headcount and we continue to have a very robust pipeline of conductor trainees. We've got close to 900 as of this morning. And we've implemented a new operating plan, which is already providing some benefit for us and our customers in terms of improved fluidity and service to our customers. And so as we continue to add headcount, implement our plan. We are very confident about the ability to improve service, which will allow us to accept more volume and enhance our productivity, driving OR gains.

Jordan Robert Alliger
Analyst at The Goldman Sachs Group

Thank you.

Operator

The next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Brian Patrick Ossenbeck
Analyst at JPMorgan Chase & Co.

Hey good morning. Thanks for taking my question. Maybe just a follow-up on the service. We've seen the improvements in First Final Mile Tripla compliance, but they're coming off of really low levels. Is that improvement that rate of change? Is that enough to really see substantial volume recovery or do you think you need to hit a certain level to start to bring volume back sustainably onto the network? And then just a quick clarification. For Mark, can you talk about gain on sale in the quarter? It looks like it was about $31 million. I wondered to see if that was right and what your expectations are for the rest of the year?

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Cindy, would you talk about what you're seeing with service, please?

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

Yes. So it's a great question, Brian. And specifically to our measure around first mile/last mile. It's a very rigorous measure and we put that in place very specifically to make sure that we were understanding what the customer is feeling. And we've had it in place for a while now, probably two years and we look back to see where service was we had a really good level in 2019 and so that's what we're aiming towards. And while the number on the page is percentage-wise, challenging. It's a measure that we hold ourselves to real high accountability with. And I think Ed can talk a little bit about how the customer feels and how they see the measure?

Claude E. "Ed" Elkins
Executive Vice President and Chief Marketing Officer at Norfolk Southern

Sure and thank you, Cindy. The first thing I would say is our customers helped us develop our metrics and our targets here. Our customers want to do more business with us and they're starting to see some early green shoots here in terms of service improvement, and we fully expect that to continue throughout the year.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

And Brian, can I just clarify for you the gains. We got about -- last year, you may recall, we had $67 million of gains. We kind of called out $55 million as a more anomalous figure. And this year, right now, in Q2, we had $28 million of gains.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Brian, I'll add in addition to first mile/last mile, we're also delivering improvements in train speed and terminal dwell as well.

Brian Patrick Ossenbeck
Analyst at JPMorgan Chase & Co.

Mark, for the rest of the year, what should we pencil in for a normalized level of gain if you have one?

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Yeah, I'm not going to really give you much more than the normal usual quarterly cadence. It can be a little bit volatile and real estate gains, obviously, can move around, even if we expect them to happen this year, they can certainly slide. So if you look so far year-to-date, we're running at about in the low $30 million range. There might be a similar amount in the back half, but probably less than that because things are moving around a little bit on us.

Brian Patrick Ossenbeck
Analyst at JPMorgan Chase & Co.

Right. Make sense. Okay. Thank you for the details. Appreciate it.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

All right, Brian. Thanks.

Operator

The next question is from the line of Chris Wetherbee with Citi. Please proceed with your question.

Christian F. Wetherbee
Analyst at Smith Barney Citigroup

Thanks. Good morning. I wanted to talk a little bit about the operating ratio outlook and understand if there's a volume assumption underlying that, can you give us a sense of what you need there in terms of operating leverage to be able to hit the numbers? And then I guess you given us some clarity on opex going forward quarter-by-quarter, should we assume somewhere in the $1.9 billion is the right number ex-fuel going forward still or any help around that for the back half in terms of the operating ratio and volumes would be great?

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Chris, with respect to our outlook for volume, we have said we'll be flat for the year. We're down 4% year-to-date. So that suggests some sequential improvement as we move into the second half of the year, and that's going to be supported by our improving service product. Mark, do you want to comment on opex?

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Yeah. Chris, you're exactly right in your thinking. If you look at our Q2 opex numbers and take away fuel, because fuel is going to be what fuel is going to be as that moves. But you look at opex ex-fuel in the second quarter and even maybe excluding the items that I called out, the $16 million that was somewhat anomalous, we would project that that amount would be representative of what to expect in the last two quarters on average. So there could be some moves in within any particular account or line item in the P&L. But in aggregate, that's kind of the area that we're expecting. And if we have unexpected events, we'll call them out to you like we typically do in our quarterly calls.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

And then with respect to the cadence of OR improvement, Mark also highlighted in his comments, the 140 basis point headwind that fuel had in the first half of the year. We do not expect that to be the case in the second half of the year.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

We expect it to moderate as we go through the balance of the year.

Christian F. Wetherbee
Analyst at Smith Barney Citigroup

Okay, great. Thanks very much for the time. Appreciate it.

Operator

The next question comes from the line of Jason Seidl with Cowen. Please proceed with your question.

Jason H. Seidl
Analyst at Cowen and Company

Thanks operator. I wanted to talk a little bit about the coal RPU. I think you guys mentioned you're expecting it to step down here. I just wanted to get a little more meat on the bone. Is that just a sequential step down? Or do you think it could step down on a year-over-year basis as well?

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Ed, would you please address that?

Claude E. "Ed" Elkins
Executive Vice President and Chief Marketing Officer at Norfolk Southern

Sure. We stay very close to our customers. And of course, we're looking at these commodity prices every day. And the export prices have changed quite a bit. The fact is they're still historically high and there's still a lot of energy in the market, so to speak, but the coal inventories have dropped off as a result of the rise in coal inventories ahead of sanctions on Russia, but they remain near three-year highs. So when you think about production limitations, you think about constrained supply chains and really looks like steady demand, it should continue to support higher prices as a floor for both thermal and met coals. We expect to see contract and spot pricing outpace where we thought we were at the beginning of the year, but we don't expect to be in those same inflated atmosphere that we saw toward the end of Q1. So when I think about it, I do see sequential declines in the yield, that's about as far as I want to get.

Jason H. Seidl
Analyst at Cowen and Company

Okay. So it sounds like notable sequential declines, but at least for now, probably still above prior year?

Claude E. "Ed" Elkins
Executive Vice President and Chief Marketing Officer at Norfolk Southern

Yes.

Jason H. Seidl
Analyst at Cowen and Company

Okay. Thank you for the time, as always.

Operator

The next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

Scott H. Group
Analyst at Wolfe Research

Hey. Thanks. Good morning. I guess a couple of things. How much more headcount do you realistically expect to add in the second half maybe, Cindy, any thoughts on restarting some of these hump yards and if that's -- if there's more of them to do if that's permanent? And then Ed, I just want to follow up, your point about -- was that coal RPU is going to be down sequentially or is that overall RPU that you think will be down sequentially from 2Q to 3Q? Thank you.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Yeah, Scott, I'll tackle the headcount question and just say that I expect that we'll be probably about 1,000 heads higher at the end of the year compared to the end of last year and the preponderance of that is going to be in T&E first with trainees, higher training accounts, but then also qualified T&E employees as well. And you can see our targets that we gave to the SCB our target of 73.30 [Phonetic] I think, by November and that continues to ramp up on the qualified ranks as we get into next year. I think we've got a target out there of over 7,500 by the time we get to May. Let me hand it off to Cindy, do you want to talk about service.

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

Yeah. Thanks for the question, Scott, because I want to make sure I put that in my prepared remarks. So I could talk a little bit more about it. We reactivated these humps to give ourselves some additional capacity that we need in the two areas served by making in Bellevue. The way switching demand has evolved since 2020 there's enough critical mass to justify returning them to service as hump yards. And because we isle them, which was our plan always in 2020, and we didn't eliminate their capabilities. We do not expect any upfront or ongoing cost of any substantial nature. So we think that returning to hump yards is helping cars even for either short or long term as an example of resiliency, and it's important that we have that. And I do think -- and when you think about it, the productivity gains that we generated when we idle them the first time we're going to be able to hold on to most of those. That was a lot of the thinking that went into -- that was part of the thinking that went into returning them to service. And I do think we'll always evaluate. And there'll be times where we may see that we'll -- we'll idle them again. So it's meant to help us do our number one goal here, which is to return our service levels.

Claude E. "Ed" Elkins
Executive Vice President and Chief Marketing Officer at Norfolk Southern

Yeah. Let me talk about coal for a second. Yeah, we're going to see a sequential improve -- excuse men, sequential decline in the coal ARPU, that's going to be an inevitable drag on the overall RPU for the for the rest of the year. But we continue to see strong price opportunities in our other markets, including merchandise intermodal auto.

Scott H. Group
Analyst at Wolfe Research

Thank you.

Operator

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

Benjamin Joel Nolan
Analyst at Stifel Nicolaus

Yeah. I appreciate it. So you guys mentioned storage fees on the intermodal side. I'm curious if you could maybe put a little context around that and then how you see that playing out in the back half of the year?

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Sure. I'll take that. We had anticipated that supply chains would be improving as the year has progressed. And while we saw some improvement earlier in the year, we've seen more of the constraints really become more acute lately. So we are anticipating that supply chains will improve throughout the rest of the year. And as they do, and fluidity improves, then we'll see those storage charges decline.

Benjamin Joel Nolan
Analyst at Stifel Nicolaus

Okay. Any context as to how we should think about what that means in terms of order of magnitude at all?

Claude E. "Ed" Elkins
Executive Vice President and Chief Marketing Officer at Norfolk Southern

I think we'll see -- presuming and this is forecast in the future for things that don't control like supply chains. But if you see improvement, you'll see you'll see similar change in the rate of storage.

Benjamin Joel Nolan
Analyst at Stifel Nicolaus

All right. I appreciate it. Thank you.

Operator

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

Justin Trennon Long
Analyst at Stephens

Thanks. Maybe to start with one for Mark, just thinking about the full year OR guidance, it's 100 to 200 basis points worse than what you anticipated coming into the year. How much of that is fuel versus everything else? And then, Cindy, I was wondering if you could talk about what you're seeing with attrition rates right now versus normalized levels, especially attrition rates for new employees that you've hired in the last year?

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Justin thanks. This is Mark. Certainly, a portion of it is fuel for sure. But I think the real issue here is just the volume has not come the way we expected it to come. When we were talking about middle of the quarter there, about still having a path to our prior guidance, it was really going to require that we saw an upward inflection on volumes take hold pretty quickly and lead to some sustainable ramp, that obviously did not happen as we concluded Q2. And we're now projecting more of a gradual ramp in volumes as we're seeing service start to improve here. And then, yes, fuel you heard it, its 140 basis points of headwind now in the second quarter. It's bigger than we had expected. We do think it moderates as we go through the back half of the year. We're not -- we can't control that. We're not sure. We do take into account the fuel curves when we look at our projections for fuel. But certainly, fuel is an element of that change as well.

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

And Justin, as far as attrition rates, globally, we were seeing about the same as we've seen all year, both from a tenured employee perspective and a new employee perspective or a conductor trainee perspective, there are clearly markets in locations where it's more challenging than others. And that's also consistent with where we've been all year. I will say, that we just recently announced that we are increasing our conductor training rates, and we think that will have a very positive impact for us both in retention as well as attraction. So we're feeling good.

Justin Trennon Long
Analyst at Stephens

Okay. Thanks for the time.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Thank you.

Operator

The next question comes from the line of Jon Chappell with Evercore ISI. Please proceed with your question.

Jonathan B. Chappell
Analyst at Evercore ISI

Thank you. Good morning. Cindy, there's been this acute focus on labor, and it seems like you guys are doing a good job of ramping up pretty quickly, especially in July, and you're starting to see it in your service metrics. Norfolk specifically has had a little bit more issue with chassis over the last 12 months as well, and you guys kind of laid that out in the presentation. If we take the labor component out of it, what's the equipment situation like and what's your latent capacity that if you're appropriately resourced from a T&E perspective, you can actually meet this demand, we'll see more of an inflection in volumes.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

So let me just add equipment wise. We do -- we are -- I'll talk about locomotives and I'll turn it over to Ed to talk a little bit about chassis. You didn't mention locomotives, but it is important to make sure you note that in my prepared remarks, I did indicate that we're keeping our surge fleet fully activated throughout this whole process here as we recover service, and we're bringing on our DC to AC conversions, which is also allowing us some capacity from an equipment basis on locomotives from a chassis perspective, let me turn it over to Ed for some detail.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Sure. Thank you, Cindy. We have a couple of hundred in hand with more arriving each week, and we expect a significant tranche of improvement to land during the fourth quarter this year. So I think we're in pretty good shape when it comes to our chassis. We see the normal, what I would call normal course of business frac disruptions associated with chassis for both other domestic partners as well as [Indecipherable]. But again, I would consider that normal course of business. Outside the gate, we are seeing supply chains impacted by the congestions of First mile last mile on the street, elevated Street wells, as well as volume fluctuations associated with different ports, a lot of drayage capacity issues and, of course, available warehouse space. And if you read the papers the way I do, you see a lot of ships waiting offshore at a number of ports, which has really not shrunk very much.

Jonathan B. Chappell
Analyst at Evercore ISI

Yes, definitely. Okay, thank you guys. Thanks Cindy.

Operator

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

Kenneth Scott Hoexter
Analyst at Bank of America

Hey great. Good morning. Maybe, Cindy, I just want to dig into the hump returning a little bit here. Just why bring them back, isn't it more efficient to be flat, I guess, just from us being on the other side of the table years and years, it seems like all we heard was the first thing under precision scheduled railroading to do was to eliminate the humps to save on touching and time? And then, I guess, Alan, with that, would you consider bringing on any PSR expertise just as CN just did with Ed Harris on a consulting basis. Obviously, there's a couple of x, I guess, PSR experts out there that are available. Is that something you would consider?

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

So Ken, let me start with the hump. So, we really did take a really deep dive into this. And when you think about not only sort of traffic changes that have occurred since 2020, that had a big impact on it. But the other piece is the idea of switching cars beyond the hump yards and bypassing them reflect which to reduce demand, so that you can flap switching them, challenge has really been having the people to do that switching where we are moving them to serving our customers. So the value is really in being able to have a location that you can get to switching done, it may be short term and maybe longer term, we'll just see how it evolves, but that's the thinking behind it. And again, I do want to emphasize that we really consider the cost associated with it to make sure that we had a really good trade-off here. And we're really going to be able to hold on a number of the games that we have.

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

We're confident it's not going to add cost, more of the case to the humps is making sure that you're not running cars out of route just to have them hump. And so we saw that discipline when we closed these two hump yards during the pandemic and the volume outlook has changed. We've maintained our focus on a very efficient, balanced operating plan. We just installed a new operating plan and opening the humps just makes those switching operations more efficient. And we've got a great team. As you take a -- just look around the table of the folks on this call, we're fortunate to have two folks who join us from outside of Norfolk Southern, who contributed greatly to our success.

Kenneth Scott Hoexter
Analyst at Bank of America

Thanks, Alan. Thanks, Cindy.

Operator

The next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.

Thomas Richard Wadewitz
Analyst at UBS Investment Bank

Great. Yes. Thank you. I wanted to ask a little bit more on TOP|SPG and the schedule changes. I think, Cindy, you said something like 90% of the trains you reviewed and -- how should we think about the schedule changes that were made? And then also maybe if you consider that relative to the changes made a couple of years ago when you originally implemented TOP? I think of those changes as being fewer train starts, longer trains. How should we think about the train schedule changes made with top SPG? Is it also fewer train starts or where it sounds like in intermodal might even be more train starts and some different approach. I just wondered if you could offer more perspective on what you're doing with that in terms of train starts and other changes? Thank you.

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

Sure. Thanks for the question. So just to go to a high level here, our main three objectives on TOP|SPG were to balance the network, improve executability and increased train size. And part of the changes in the schedules were really to help us balance the network, balance the flows across the network, both cars and locomotives and make sure that we have realistic schedules that allowed trains to arrive and depart terminals. So we didn't have them bunched in or bunched out of a particular terminal. We also, as I noted in my prepared remarks, have increased our distributed power utilization and accounting for that as trains were departing and/or working in individual terminals is a lot of the work that we've done. And the 90% of the schedules doesn't mean that we've changed them dramatically, but we've adjusted them so that we can make sure that when we operate our plan, that we don't have conflicts that prevent us from being able to execute consistently. So that's really what we were trying to achieve there.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

It has substantially reduced the number of train meets on our network, which makes our operations more fluid and more executable by our team. And consistent with our no surprises approach, we involved our customers. Ed, do you want to give some perspective on the customer involvement?

Claude E. "Ed" Elkins
Executive Vice President and Chief Marketing Officer at Norfolk Southern

Sure. Absolutely. The first thing our customers want. And by the way, let me just say, we are so lucky to have a great coalition of partners that we do business with every day, and they really want us to have an executable train schedule. They want to have a predictable service product. And so they have been highly collaborative with us as we've gone through the TOP|SPG process. To look at the changes that were necessary to improve the executability of our product. And I can't say enough about the collaboration that we've had with them. And I think we're starting to see some early results. And I think that they would say the same thing. So we're encouraged by those results, but I am most particularly encouraged by the level of the collaboration that we've enjoyed with our partners.

Thomas Richard Wadewitz
Analyst at UBS Investment Bank

So just, I guess, to be clear, should we think of this as a reduction in train starts or an increase or kind of net, not a big impact, but just more rebalancing?

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

I think as we continue to roll it out, I mean we -- I noted that we started in the second half or actually it was in late second quarter. We still have some work to do to roll it out in the intermodal space. And what you'll -- what I would say relative to crew starts is we're going to improve service frequency in some of our core markets, and we're not going to be adding new starts. And we may have a small reduction in that lane or in those lanes. But it's -- we're still in the process of putting it on the railroad.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Tom, what it does is it really improves the executability of our operating plan, which means we're going to be more consistent, more reliable, more on schedule. Those are the principles of PSR. That will reduce the friction costs associated with slowness in our network.

Thomas Richard Wadewitz
Analyst at UBS Investment Bank

Okay. Great. Thanks for the time.

Operator

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

Amit Singh Mehrotra
Analyst at Deutsche Bank Aktiengesellschaft

Thanks. Hi everyone. Appreciate the time. Hey Mark, I just wanted to understand the cadence of the OR in the back half because volume out of the gate here in the third quarter is pretty weak? I think it's down like 3% or something like that. Typically, we do see maybe flattish to slightly worse OR 3Q versus 2Q. I don't know if -- I mean is the full year guide, the revised full year guide really contemplating kind of a big inflection in the fourth quarter or does the third quarter look a lot like the fourth quarter, if you can talk about that. And then just for the industry, maybe this one is for Cindy and Alan. The industry has been talking about better service and more labor for a long time over the last several months. And we've been kind of disappointed not just with Norfolk, but I think the industry as a whole, I think it would just be helpful to understand when do you guys actually think timing-wise, we see a more pronounced inflection. We've seen some green shoots, as you mentioned or maybe a stabilization. I mean, are we talking about September, October? When do you think you're at the point equipment and labor wise where we actually see some tangible inflection in the service metrics?

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Yes. I'll cover the service metrics first. We outlined our plan for the Service Transportation Board. It will be beginning of next year before we're at our targeted headcount, that's going to create a big lift. We've already seen improvements in our service product with the implementation of TOP|SPG and with the onboarding of new conductors. And I think that will continue to improve as the year progresses. It won't be linear, but we should see some lift as we move out of vacation season as well in terms of the availability of our crews.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

And Amit, so that leads to pretty much the volume profile as well. We'll probably see more of a ramp go into fourth quarter with more volume that should help the operating ratio, but of course, there are seasonal headwinds that typically take effect in the fourth quarter versus the third quarter that might neutralize some of that when we look at the OR progression. So, we're not going to give the quarterly guidance, but it does seem to be probably a little bit more of an upward -- I'm sorry, a little bit more of a gradual improvement in the OR as we go through the balance of the year, as volumes come on mainly in the fourth quarter. The volume growth, I should say, comes on mainly in the fourth quarter.

Amit Singh Mehrotra
Analyst at Deutsche Bank Aktiengesellschaft

So does that -- so does that mean we take a step back before we accelerate into the fourth quarter? I'm just trying to understand, is it a slope upwards in the back half versus where you are in the second quarter or is it a step back, is it a little bit of a J curve?

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Well, I think we're going to -- I would fully expect that we'll see sequential improvement from the second to the third quarter. I'm just -- I'm not going to tell you yet whether we'll also see sequential improvement from the third quarter or to the fourth quarter or if there'll be somewhat on par with one another.

Amit Singh Mehrotra
Analyst at Deutsche Bank Aktiengesellschaft

Got it. Okay. That's very clear. Thank you very much everybody appreciate it.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Thank you, Amit.

Operator

The next question comes from the line of Ari Rosa with Credit Suisse. Please proceed with your question.

Ari Rosa
Analyst at Credit Suisse Group

Yeah. Hi, good morning. So I wanted to ask just kind of a broader philosophical question. I think we've been dancing around it with a couple of questions that have been asked. But you're talking about obviously adding headcount, bringing equipment back onto the network, reintroducing some of these hump yards. Is there a point where service improvement maybe is at odds with OR improvement? And at what point do you think we can kind of see a resumption in OR improvement? And as we think about 2023 what kind of incremental margins might we be looking at as that service gets back to where you want it to be?

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

We fully believe that service and margin improvement are complementary. They support each other and our trajectory for service improvements and the attendant improvement in OR belies that fact, we're going to take a balanced approach. We've got balanced objectives of service, productivity and growth and our new operating plan, that provides some sort of insight as to how we're thinking about this thing. Our priority is to improve service as service and fluidity improve, you're going to see significant volume uptick and productivity gains, which will collectively drive margin improvement.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

And Ari, I also remind you, in a difficult service environment like we're dealing with, there's a fair amount of incremental costs that we're absorbing to have to cope with it, whether it's incremental overtime, whether it's recrews, whether it's train costs, you name it, training, travel, taxi, there's a fair amount of cost right now that we're absorbing in our P&L to deal with the current service challenges. So that starts to lessen as service improves, and I think you need to keep that in mind.

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

Yeah. And even in my prepared remarks, I talked about the fact that both train length and train weight are up even in difficult circumstances here. So think we'll hold on to that. And I'm very positive on being able to run a very efficient network that serves our customers extremely well.

Ari Rosa
Analyst at Credit Suisse Group

Got it. Okay. Thank you for that color.

Operator

Thank you. The next question is from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Brandon Robert Oglenski
Analyst at Barclays

Hey, good morning everyone, and thanks for taking my question. Cindy, this might send a little naive, but I know we always focus on conductor trainees. My understanding, though, is that for engineering or to be an engineer that trains a little bit more intensive or maybe longer duration. So can you talk about your qualified engineer ranks? And is that potentially a next bottleneck or again, is that just a naive question?

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

It's a great question. We are -- as you noted, conductors take promotion to engineers. That is our pipeline for locomotive engineers. Over the years, our investments part of the resiliency investments we've made is to qualify more people to be locomotive engineers as conductors step them up to qualify and then step them back down to acting and active working conductors. So we keep a buffer that is -- that we've used through this time where we can step up engineers and then backfill with conductor trainees. And I would say that we're already starting the process training some locomotive engineers will be next month. We will keep an eye on that and maintain that buffer that's going to be part of -- as we stabilize service levels and get our conductor ranks where they need to be, that will be one of the big areas that we focus on in 2023.

Brandon Robert Oglenski
Analyst at Barclays

Thank you.

Operator

The next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Ravi Shanker
Analyst at Morgan Stanley

Thanks. Good morning, everyone. Cynthia or Alan, can you help us understand how your customers right now are thinking about truck to rail conversion. Obviously, your service is improving, you're pretty in place TOP|SPG and that helps at the same time the truck market is loosening. And I think for now at least, shippers want like super tight fast supply chains with high turnover. So what's driving that incremental conversion and is TOP|SPG enough to do that?

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Mark, why don't you talk about what you're hearing from our customers...

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Sure.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

...with respect to opportunities?

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Absolutely. We're talking to our partners every day. And frankly, the truck prices are loosening, but our customers remind us every single day that those are from historically very high levels. And the contracts rates they have stabilized. There are a number of things that our customers want, but one of them is they want to do more business with us. Our customers have freight that they would like to put on the railroad and as our network throughput capacity improves through network velocity, they're going to do that. They have -- we have line of sight on freight that want to move on the railroad right now, whether it's in our industrial markets, our consumer markets or energy markets. And we're confident that as the network velocity improves, our customers are going to find additional value in the product that we're able to deliver to them, and that will manifest itself in additional volumes later this year.

Ravi Shanker
Analyst at Morgan Stanley

Got it. So given the incremental value provision of rails, you guys are confident that you can push yields higher even if the truck market -- truck pricing comes down?

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Yes. We stay very, very close to that. We're always looking at what truck prices are doing. Again, contract prices have stabilized at very high levels. We're always looking at the gap between what we believe the value that we're offering versus what a truck offers. And we looked at a number of lanes specifically where we offer intermodal service as an example, and we're comfortable that our door-to-door pricing is very competitive against over-the-road trucking. And let me remind everyone, including myself, there are multiple advantages to using rail versus the highway, including sustainability. We've seen a lot of our customers make commitments publicly about what it's going to take for them to reduce their greenhouse gas emissions. And when we think about the consumer packaged goods business, approximately 80% of the greenhouse gas comes from transportation. The efficiency advantage that we deliver for our customers over a long period of time is going to help them achieve those goals.

Ravi Shanker
Analyst at Morgan Stanley

Very good. Thank you.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

I will add. We had -- in our intermodal franchise has delivered 22 consecutive quarters of year-over-year growth in RPU ex-fuel. That's during a freight recession and during the pandemic. And so there's great value with the product that we deliver. And our focus now is on enhancing the value of that product.

Ravi Shanker
Analyst at Morgan Stanley

Makes sense. Thank you.

Operator

The next question comes from the line of Bascome Majors with Susquehanna. Please proceed with your question.

Bascome Majors
Analyst at Susquehanna Financial

Mark and Alan, as you both alluded to in your prepared remarks, there's some uncertainty as to what the actual wage increases from 2024 are ultimately going to be? Can you talk about how you have managed that uncertainty with your accruals so far? And if the actual wage is come in different than those expectations, when do you true that up retroactively and communicate it to us on a go-forward basis?

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Hey, Bascome. Thanks a lot for the question. This is Mark. Look, we've agreed with PEB that we weren't going to discuss publicly what our relative positions are. But I will tell you, we have accrued a level of back wages that reflects our efforts to keep our craft workers amongst the highest paid in any industry. And obviously, if there's a settlement that is at a different level, whether that happens through the PEB or subsequent to the PEB, we will have to make an adjustment, and we will make that very, very clear in terms of disclosure to you all what the impact will be. So, again, whatever that increment is, we'll let you know. But right now, we are accruing something based upon what our expectations were.

Bascome Majors
Analyst at Susquehanna Financial

Thank you for that. And just to clarify, you mentioned the PEB a couple of times in your timing. Is it the PEB report that would be that triggering your mind or something subsequent like a tentative agreement with the coalition or something in that vein?

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Yeah. We have to work with the accountants to understand what the trigger event will be. So, I'm not really at liberty to pinpoint that right now on this call.

Bascome Majors
Analyst at Susquehanna Financial

Thank you for the time.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Thank you, Bascome.

Operator

Our next question comes from the line of Jeff Kaufman with Vertical Research Partners. Please proceed with your question.

Jeff Kaufman
Analyst at Vertical Research Partners

Thank you very much, and thank you for taking my question. Just a question about the hiring process. And I know there's been a bunch of this quarter. One of the complaints we had heard from some other rails is that they were seeing a problem retaining employees training. Now you had mentioned the wage increase and some of the carrots that you had put out there. But I guess two questions. Why has this become so problematic? Is it just that it's kind of a Gen Z employee wants different things and we've got to change the job kind of item? Is it more of a pay item? And then secondly, let's say the economy slows a lot faster than we all think, just theoretically, and I know your volume forecast doesn't imply that. Do we still stay to the 1,000 employees by the end of the year?

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

Great. Well, let me start with the training retention piece. One of the challenges for our trainees when they mark up, as a seniority-based system they will tend to get the work that others do not necessarily -- they do not want, those will be the jobs that they can hold. So, as they step into that role, some find that, that's not really what they're looking for. Our training process allows us to convey that information, but sometimes it doesn't become real until you come up and you mark up. I will say in terms of what could be a solution at the national table is conductor redeployment that will allow us to have a more structured work environment for more conductors than we do today. So, that is part of what we feel like is a good solution, and we feel like it will fit the needs and demands of our workforce in the future, which is why we've got it on the table for negotiation.

Jeff Kaufman
Analyst at Vertical Research Partners

Thank you, Cindy.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

It's really more of a lifestyle. Jeff, it's really more of a lifestyle challenge in a very unique market where everybody is looking for talent. So you have to compete against everybody simultaneously. So labor has their choice of what they want to do. And in many cases, despite the very rich and attractive pay structure that the railroads offer, sometimes they'd rather work in a more predictable schedule in warehousing or in home construction, where they can be nearby where they live and not stay in hotels, and also just not be on call or work their shift. So we're just in a very unique environment right now where the entire labor market has their options to choose from.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

As Cindy noted, some of those work rules changes that we're proposing would directly address some of those issues that Mark articulated.

Jeff Kaufman
Analyst at Vertical Research Partners

Okay. And second half of the question, I know the trainees are already in process. So were we pretty committed to that 1,000-plus employees by year-end with the STB plan or what if the world changes?

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

We are committed to levels of service throughout all economic cycles, because we believe that services resiliency enhances the ability to be opportunistic during the near-term recovery and generates confidence by our customers and building supply chains around us for the long-term. As Ed noted, there are a lot of inherent advantages to our network, there's a lot of reasons that customers want to do business with us over the long-term.

Jeff Kaufman
Analyst at Vertical Research Partners

Okay. Thank you.

Operator

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

David Scott Vernon
Analyst at Sanford C. Bernstein

Excellent. Good morning guys. Thanks for fitting me in here at the end. I've got two longer term questions for you on TOP|SPG. If we're adding 1,000 heads to workforce, can you talk about maybe, Cindy, what level of volume growth you could absorb with that headcount once it gets productive? I'm trying to understand whether the embedded labor productivity level in this new version of the operating plan is higher or lower than maybe what we've seen in the early days of PSR? And then, Alan, maybe longer term on the service side, does this get us to that low to mid-80s in first and last mile service levels as you outlined for the STB? Or is there upside to that? I'm just trying to get a sense for how you think about is low to mid-80s enough to drive modal conversion longer term?

Cynthia M. "Cindy" Sanborn
Executive Vice President and Chief Operating Officer at Norfolk Southern

David, I'll start. I mean so from TOP|SPG, I mean, I would think it's going to be a very productive operating plan. And obviously, it's not going to be static. We're going to adjust as volume adjusts and as business adjusts across our network, it's about balanced, executability and train size, as I described. One of the areas that I mentioned in my prepared remarks in the bulk network, we have seen a lot of improvement in train size from the standpoint of combinations of trains, but we will be able to add additional cars to trains as well in our standard sets in our grain network. So I see this as an enabler from a productivity standpoint and allow us to bring on volume with a consistent operation that we will offer.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

Go ahead.

Mark R. George
Executive Vice President and Chief Financial Officer at Norfolk Southern

Let me just add to the fact that the number of people we're adding, it requires a lot more energy and people to get the network sped up to where it needs to be. And then also that the number of people we're adding. And once we're up to speed, gives us the capacity -- additional head count capacity to handle even greater volume. So I think that's the other point is the capacity dividend that a faster network provides will allow us to take on more volume.

Claude E. "Ed" Elkins
Executive Vice President and Chief Marketing Officer at Norfolk Southern

And a stable, reliable, predictable service product over a long period of time is exactly what our customers need to build their businesses around ours, and we can offer tremendous value and unlock value for them and for their customers by delivering that kind of service. And that's what we're committed to over the long-term building a high level of service that our customers need that allows them to deliver growth and value for their customers.

Operator

Thank you. This concludes the question-and-answer session. I will now turn the call back to Mr. Alan Shaw for closing comments.

Alan H. Shaw
President and Chief Executive Officer at Norfolk Southern

We thank you for joining us today.

Operator

[Operator Closing Remarks]

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