Good morning, everyone. My name's Tom Wadewitz. I'm the transports analyst for U.S. Freight Transportation at UBS. It is a pleasure to have John Orr, who's Chief Operating Officer from Norfolk Southern, with me. We also have Luke Nichols and Chris Ceraso in the room with us, so they can provide us some support on some of the numbers and input as appropriate. First, I'm going to read a disclaimer, and then after that, we're going to get into the fireside chat, and so let me just take care of that. As a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company on which I express a view today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the call.
So, John, thanks so much for joining us. This is great. I appreciate the time. Maybe just to start with, can you give us some thoughts on, I think people know your background at, at a high level, but maybe what you've what you've done and what you think is particularly relevant, in your experience and as, your, your task, at Norfolk Southern?
Hey, Tom, it's awesome to be here today in New York. It's a beautiful day outside. It's a great day for railroading across Eastern United States, and our numbers are showing it. Our service is improving, velocity's improving, and our dwell throughout our terminals are improving so much that our customers are writing us emails and saying thank you for the engagement. So, it's a pleasure to be here. But about, you know, yeah, I've got a long history. I've been in the rail industry for over 40 years. I spent most of that at Canadian National. And for the people who know me, you'll recall I spent about 17 years of the first part of my career in the crafts. I was a conductor and a locomotive engineer and a yardmaster.
For about 15 of those years, I was local chairman and provincial level union representative for the United Transportation Union. Subsequent to me leaving the crafts, I have worked across Canada, mostly in the East. But I spent 6 years in Western Canada, in British Columbia and Alberta, both regionally and as a network vice president in the West. And then the rest of the time I was back in Eastern Canada as a regional vice president and a senior vice president in the U.S. for about 5 years. And after that, of course, I spent some time in Turkey rebuilding a new intermodal platform and new intermodal systems and delivery capability that really disconnected and decarbonized, you know, some of the traffic moving around in Germany and Austria.
and then, fortunately, was able to come to KCS six days after my non-compete was over. And Pat Ottensmeyer brought me on to bring service back into alignment, create a better cost structure, and really prepare the company for the merger. So I think everything counts, but certainly the most recent preparation for STB, designing the operating plan for KCS, CPKC, rather, in preparation for a lot of the STB hearings and, of course, for the merger was pretty germane because that incorporated not only the Western Canada end-to-end bulk environment that resides in Canada that I had specialized in at CN, but also the industrial complex and creating more value and downstream impact as the two companies came together and we were able to really have material improvements in our terminals and our terminal capabilities.
And you see that in the Shreveport numbers and how sustainable those improvements are. You see that in Monterrey and SLP and a lot of the most key markets that are emerging for Mexico and really driving a lot of the performance and growth at CPKC. So those are really good indications of the skills that I bring because I think NS is a terminal-rich network that's got a blend of intermodal, high-speed intermodal that we're really focusing in on to get better yield and continue to grow that at a fast pace, but also the merchandise segment that was underperforming and that was creating a lot of network suboptimization similar to what I saw when I was brought into KCS to clean it up.
Or even when I went to Vancouver to really, you know, create a lot of positive momentum with stakeholders and people who didn't necessarily have commercial agreements with us, but were really influential in how we could gain market share. So, you know, it's a body of work I'm proud of. It's not something we could talk about 15 minutes, but that's pretty much the highlights of what I've done over the last little bit.
What approach did you take to getting up to speed when you came to Norfolk, right? Like, you've been there. It's not that long. You have had multiple, you know, things that you have been required of you since you've been there. What did you do when you got to the property to say, "Okay, I want to understand what's happening and what I can do to support improvement"?
Yeah. And as I said, I've spent a lot of time in the East. And when I was a regional vice president in Eastern Canada, we did a lot of interchange with NS CSX on the Eastern Seaboard. And being a senior vice president in Chicago, or sorry, in the United States, Chicago is the epicenter of railroad. I mean, every Class I now that especially now that CPKC has successfully been formed comes to Chicago. And as Chicago goes, so goes the railway. So understanding how we interchange and how we're influenced by the Western lines and our own Eastern competitive landscape was important.
Especially when it came to really understanding the customers, I did a kind of a network view of things where I looked at overall what do I think the underperformance indices are. That was really about terminal performance and speed. That forced me to really want to challenge our service plan, the standards that we have in the terminals where we're handling merchandise, and elevate that merchandise without compromising the intermodal franchise. So rather than, you know, smooth things out, really pull things to the highest denominator. Really looking at the business models and design, looking at the business asset evaluation, and then really understanding the capability was something significant. But I'll tell you what was critically important, Tom.
It was critically important. In my first day on the job, I went to East Palestine because I really wanted to understand the headwinds and the level of commitment that NS had committed to in that community. I wanted to make sure that I understood what people were dealing with and how much capability for change they had and the pace so I could really understand how best to serve the men and women and respect what had gone on before, but also challenge the underperformance in a way that people couldn't wrap their heads around and really create agility of the company. So that's it was kind of three-dimensional assessment, and that's proven up to be a pretty good start so far.
How many of the yards have you had a chance to visit, in terms of major hump yards and in terms of, you know, flat switching or intermodal yards at this point?
Yeah. Yeah. I've been to four of our major hump yards and across all of Chicago and in a couple of other switching locations. But that's really validating what the work that's gone on in the war rooms and the task forces that we have. So in Atlanta, I visit our task force war room every day where we're really grinding out the network evaluation and then feeding high-level, grand and even granular level points of opportunity to the field. And we've got a field component that's really converting on those things and taking, like a terminal clock. They're decongesting whatever particular terminal they're at and writing a playbook. So the time I've spent in the field is really to give outreach to the workers who are there, really reinforce that I'm here for them.
I want to learn and respect what they do, and at the same time have them understand that their feedback is important to me because that's how we make change more rapidly and more with more accuracy. So it's been good. You said it. I've got a lot of distraction right now. Otherwise, I would probably be in the field a lot more than I am. But, you know, we'll get to that.
So the time you've spent in the war room, the time you've spent in the field, what do you think are the just most notable things that you say, "Okay, this is really a big opportunity"? I know the network's complex. I know that it's probably many different things. But if you said, "Okay, this really stands out as something that needs to be fixed," or maybe it's a couple things.
Yeah. Well, complexity's my middle name. I, I have gone to complex areas to, to fix or to be the architect of a new design, on every, every front and in every place I've gone to. I've done it in Mexico, the United States, and Canada. And I've done it most recently in Mexico with where the English was a second language and, and having to work through that to create that, momentum of change. But I, I would say that, as, as I assess the terminals and find that merchandise was the biggest opportunity to, close the gap for our peers relative to how we handle cars, how fluid the terminals are, and the, process standards we put in place to create, continuous improvement and build on the strength of these initial, inputs has been very, very important.
If I look at the, you know, kind of PSR, so I've covered the industry a long time. I have seen PSR take place at a number of different railroads. I think of 2012, 2013, when Hunter and team put it in place at CP. And then I think of, you know, I think CP had maybe 5 hump yards and then went down to 1, right? But it's a pretty linear railroad. And so that was kind of one thing. I think train lengths was something. If you look at CSX, it was some different elements. I think there were some commonalities. But I just, you know, kind of jotted down some of the things that you might see. So, you know, redesign a blocking, creation of a new train schedule, right? That's one thing.
You know, looking for balance in the train schedule. Rationalizing the footprint of classification yards, right? I referred to CP on that. Siding additions, longer trains, mixing train types, shedding cars and locomotives, right? So it's a bunch of different things. But it does seem like each railroad maybe has a greater opportunity in one or two buckets. How do you think about the buckets that, you know, investors might have intuition on that you say, "Okay, this stands out for an Eastern railroad or for a Norfolk Southern" when you think about that high-level PSR?
Yeah. Well, I'll tell you, this is what I wrote about when I wrote about PSR 2.0 back in 2020, railroading in a digital age and really understanding how to be responsive to the environment you're working in as much as the railway opportunities for asset improvement. And it goes back way beyond, way before CP. I mean, I was at the forefront of this with Hunter Harrison and Keith Creel in MacMillan Yard in Toronto in 2003 where we really put the toehold on PSR in Canada. And the environment in 2003 is completely different than it is today.
You have to, as an architect who's moved across Canada, implementing PSR in every condition, whether it's a highly industrialized area of Ontario or the kind of hybrid of industrial/bulk environment of Western Canada and then the port conditions in British Columbia. Every one of those has an opportunity to really eke out value for the stakeholders and create a competitive environment and a very responsive environment for the rail. So it depends on the situation and what presents. What I think is important is having a collaborative environment where you're open to listening and moving faster with knowledge and you're having those inputs. So at NS, you know, I see the PSR model really having that inclusivity where shareholders, stakeholders are part of the solution.
This is exactly what Hunter talked about with me in Vancouver. I've shared the story before, but I'll say it again. You know, when Hunter was with me in Vancouver, we had just had dinner together, and we were walking back to his hotel toward a later part of his career. Claude had already been announced as the new CEO. And I had asked Hunter, "What would you do differently if you had the chance to, you know, do something?" And he looked at me and said, "John, if I had the chance to do something again, it would be to create inclusivity, to really communicate well with the people we're trying to drive change with." So they understood we're taking them along for the journey and the value proposition they're creating.
And I think that is probably the most important aspect of creating collaboration and value for shareholders, because that allows us to be responsive. So fast forward over to NS. I think that we have a great intermodal franchise that we need to get better yield at. And that's one of the reasons why I advocated for Alan to bring it under my tent. I want to take the same level of improvements we're making for merchandise and for other assets and that collaboration and linkage to the core of what we do from within intermodal automotive. So there's yield there. The other component is really understanding and evaluating the capability of the assets that we have in place today and challenging their historic precedents to get the most sensible and aggressive operating value from them.
So as I said the other day, everything's on the table. System redesign is in flight. We're starting to introduce new design train designs as we speak, you know, starting in the south, moving to the north. But that network redesign is underway. Our road or, sorry, our local and yard assignment assessment is underway. And we're creating a new playbook for how we work in our terminals to create more fluidity, tighter standards, and tighter connections. And it's proving itself out. Our train yield is coming up. Our overtime is coming down. Our recrews are coming down. So our accuracy is elevating. And our cars and assets are being right-sized in their fleets.
When you think about the changes, I think that there's, you could say, "Well, if we're going to do a, you know, schedule change, we would look at it systemwide." Or you could say, "Well, we're going to go kind of yard by yard." It seems like your approach has been, you know, "Let's find the yards that are the biggest challenge and we'll address those and then maybe move to others." But how would you address the question of, "Well, why not do a full systemwide redesign of the schedule?
Yeah. Well, Tom, I think what you're talking about is the forward-facing visibility to the improvements that we're making. Yeah, we're out in the field. We're redesigning our yards and our terminal clocks and decongesting the flows in and out, and beyond just one yard. I mean, yard to yard and how they work. That's what I've told the, you know, the street. These are the measurement points that you'll see as we progress towards a greater value proposition to the entire network. You need to have those measurable milestones so that I have confidence that what we're doing is driving change that will manifest into, you know, a better OR, reduced costs, more reliability of our fleets, and more work-life balance for our people.
But at the same time, we are taking all of these in context and in the back office, so to speak, we are building that new service plan and tweaking it in some cases, re-engineering it in other cases. And as I said the other day, we'll be rolling that out within the next 60-90 days. But it would be irresponsible not to really understand the sum of the parts before you start redesigning the network.
So when you think about the rollout over the next 60-90 days, is that a new schedule for the merchandise network? Is it, kind of a, you know, region by region, changes? Or how, what do you plan to do over the next 60-90 days?
Yeah. Well, you've seen that we, everything's on the table. And you've seen how we've redesigned even some of the lanes in our intermodal franchise where we've shed some of the lanes. We've some of the customers have come over to our other corridors. And so, you know, it's not just merchandise. It's the entirety of the network. And in some cases, there would be significant changes. In others, it'll be more refinement. But the playbook and the expectation of yield, you know, velocity, making dwell work for you where we can't we improve it to a certain point, those are important things. And you can't do anything myopically.
There are, you know, to just look for the end result on a single metric doesn't take into consideration all of the connecting costs and consequences or opportunities that go into the sum of the whole.
Okay. What you mentioned metrics. What do you think are the most important metrics from the outside that we should watch to gauge your progress? Is it, you know, railroads are, you know, I think, interesting to cover because there's so much data.
Yeah.
I think it's sometimes hard to know what's the most important data to follow. So what do you think if you were going to name, you know, one, two, three metrics that you'd say, "This is really important for me to show progress on," and you can see this data, you see it in the data.
Yeah. Well, I'll tell you, they're all driven around, you know, safety, people, process, and accountability. The whatever metrics I use really are to keep me focused on those key things that really drive the right behaviors and create value for the network. But I've said it before. I want to have kind of cross-pollinized, cross-checks, checks and balances in the metrics that I would say people should regard. So if I look at over-the-road performance, which is a key indication of how we use our assets, how the plan is built, and how it's being executed, you know, you look to things like speed. And then if I'm looking at asset, I want to look at how my asset's using and how productive it is. So a cross-reference.
So GTMs for available horse is an important measurement. That tells me not only am I running my things fast, but I'm getting yield. I'm not running fast at the consequence of having short trains, you know? So, I'm sizing properly. Our terminals are a key piece because they can either be scrubbers or draggers to the network. I've always been successful in making a terminal a scrubber of performance so we can accelerate through a disciplined approach, how cars connect and how fast anything that goes outside of the normal lane of connection, like a bad order or a car that needs a safety renewal, gets back into the mainstream. So terminal performance and dwell is a key indication.
When you say a scrubber or a dragger, I guess I'm, I'm not familiar with necessarily what you mean by that. Do you mind,
Oh, yeah.
Elaborating a touch on that?
Yeah. Some terminals, I'll give you a great example. So in Toronto and MacMallian Yard, huge hump yard, in the early 2000s, would handle 1,600 cars. The average dwell was around 72 hours for a car coming in and leaving. And it had a very high cost, or I think we had about 50 assignments around the clock.
Right.
Over the 3 or 4 years that we implemented PSR, it got to a point where it could handle 3,000 cars. And the connection standard was as low as 16 hours and found its equilibrium around 17 and a half. And that was true. That disciplined calendar, terminal clock, everything had to be in order. And so we went from trains coming in and losing 72 hours to trains coming in gaining time on their schedules because we could make fast connections with an 8-hour connection standard and actually clean the system. If trains came in late, we could have a really good pit stop, get the car back on the track, and get back into the lead lap. That's what I mean by it. And so struggling.
You want to be a scrubber. You don't want to be a dragger.
No. A dragger means you don't have the jack in the right place, or you, the guy on the rear tire, it doesn't have the gun in the right place.
Sure.
and or the lollipop doesn't come on and off, and you create an unsafe condition. So you do it safely. You do it effectively. And you clean the network. So, that's what I mean by it.
So how many draggers do you have? Any scrubbers in the NS network yet? Or are they all draggers?
Well, they're getting there. Conway's looking pretty good. Chattanooga's picking up, and Macon is doing very well. So that's the objective. And we will all agree. And I'm not going to, I'm not going to diminish the fact that the network was underperforming. That's why I was brought in, and I was brought in to elevate the entire network, redesign it, apply PSR 2.0 the way I know how, and do things in an because it's complex, like you said. It's nonlinear in a lot of the relationships and the puts and takes of what you do. But you have to look at it in context. And you can't get too happy about one particular metric, and you can't get too annoyed at another one. You have to create the balance so that overall, you're elevating the entirety.
And it's never going to be linear. I mean, you're going to have oscillation in improvement, but the walking up of improvement is key. So as we get the hump yards working so they're all scrubbers, we're also looking at the same time, is that the best solution? Run the plan. Run it well. And as we do that, we're evaluating and looking concentrically out at the terminals, can the work be better off out there or inside the humps? And if we can bring them inside the humps and highly mechanized, highly predictable scrubbers, then that fixed cost produces a lot of good results. If we can't and or it just the math doesn't work, then we'll have to look at how do we think of that?
so getting rid of the underperformance, really accentuating the high performance and creating the standards is key. Those metrics that we talked about, on-time performance, you know, yield on locomotives, yield in terminals, speed across the over the road, and safety, they're the ones that are really going to tell me the network is running the way it should.
What's interesting to me, Tom, is if I look across 20 different metrics, they all are showing improvement at the same time. It's not like you can hide behind one or the other. It's all high-single, low-double-digit kind of improvements. Some of them are even greater than that. Whether it's velocity or dwell, car miles per day, recrews, overtime, trains held, every one of them is showing meaningful improvement.
So let's go back. Why is that? It's because the approach I'm taking, I'm looking at the customer and assessing and mapping the network based on what our commitments are to customers. That could be bulk. It could be, so that's on a train view. It could be merchandise, and that's on a car view. Or it could even be in intermodal, where it's a product view. Competing with trucks, it has got to be a product view. I've made a lot of architectural changes across three railroads in three countries by business modeling and designing and then taking the capacity and capability and assessing them and engaging in that great discussion.
And so you think about one of the experiences I've had in Western Canada. Hunter asked me before I left Toronto to go west for a few years to think about rationalizing the hump in Edmonton. Didn't tell me to do it. Just said, "Look, think about it." And as I worked out there, then got the network running better, got the fluidity in the corridors running better, had, you know, the McLennan and the, you know, the Prince George and the Winnipegs of the world, you know, benefiting from the work I was doing within the central part of Canada, was able then to push work away from Edmonton up into the outlying yards, optimize the cars handled per yard engine hour and employee hour, and find the latent capacity there and shut down the hump.
That hump has stayed shut down since 2007. And so what I've learned from that, it matters how you rationalize assets. It matters because when you're going to make a significant change like that, you're now removing the costs of the IT, the OT, the field equipment that's very specific, like master retarders, group retarders, inerts, all of that slope and free rolling. You're taking all of that out forever. And so you have to be very wise about that. And I've walked into Western Canada after Hunter shut down Symington and had to reopen it. And he did that two or three times. So a part of what I did in Melville, Saskatchewan, is every three weeks unraveling it, because it wasn't done with that kind of forethought.
So as I said, everything's on the table. We're looking at all of these things. We're going to make good decisions, very, very urgent decisions, but mindful of the network impact.
So, I think one of the questions that comes to mind for me, and I think investors as well, is, you know, you've been there a short period of time. You're making, you know, it seems like there's a lot of progress. Locomotives coming out of the system at a pretty quick rate. How do we understand the opportunity to make such big changes so quickly, and especially kind of considering that you do have multiple, you know, tasks pulling at your time, right? Like, how have you been able to do that? Was it just, you know, Norfolk was primed to do better, or what is it? Give us, help us have some more intuition on how you've been able to do it so quickly. And then I have a, you know, some follow-ups on that too.
Well, it's what I do. And that's. I have been an agent of change and an architect of design for my entire career. And so I'll just draw you to Mexico. I went into Querétaro, Escobedo . Again, I don't speak Spanish, certainly not as good as I need to, and learning the regulatory environment, learning the enterprise commitments on service, and a brand new collective agreement with a different, you know, dispute resolution mechanism, unlike anything I've ever dealt with throughout my career.
Engaging in collaboration, getting people and coalescing around the problem, getting them mobilized and engaged, listening to them, but also knowing the levers to pull, unplugging the proverbial drain that was clogging up the network and freeing up cars, and then getting into that very disciplined approach of managing it, engaging it, driving change, and at the same time, playbooking to make sure that whatever we were doing, we're capturing it so that we could go to scale at other locations. That's exactly what I'm doing here. I did it when I went to Western Canada. I did it when I was in MacMillan Yard. I'm able to do it more quicker because I practiced that. The team is accepting my leadership very quickly.
The feedback we're getting from the field, and you just have to go into that war room and see the dynamics of what's going on, the diversity of departments that are in there. You've got commercial, fleet, transportation, network operations, people from the field, and you've got this, that same kind of grouping in the field. People finding, people fixing, people finding, people fixing. Then it becomes a multidimensional change. At the same time, you're not doing an isolation of that because we have a great blend of people in both camps. They're communicating back home into the terminals and saying, "Hey, this is what we've learned. How fast can we get this done?" They don't need the full-on terminal change group to really drive that.
It's creating this ecosystem of, of willing change agents who are driven to improve. Yeah, there's, there's some lower-hanging fruit. There's some mid-level fruit. In the end, people are driven by the vision. They're, they're driven by the confidence that what they do matters. They're driven by the direction they're getting because it's, it's fairly precise.
If you said, so let's say 200 locomotives come out of the system, is that more a function of the changes to the intermodal schedule? Is it more a function of the yard work you've done? What enables that, what seems like a pretty significant change in terms of your, you know, your power? And at the same time, I think, you know, maybe some thoughts on the risk of doing that, that you don't starve the system of power.
Yeah. Well, let's go to starve the system of power first. There's business assessments on the assets all the time. And, as Chris just said, there are a lot of measurements. And one of the measurements that I look at are locomotives dwell in terminals, or locomotives queued up in the repair shops or the service tracks before they're actually worked on. And that drove me to really look hard at that, that represents waste to me. It's a wasted HPH that needs to get to work rather than wait in line. And so by pulling out a lot of those locomotives, we reduce the lineups. So we're still getting the turnover now faster in the shops.
We're getting them out to the trains when they need to be rather than waiting in line for the, you know, 10 moves, 10 moves from now and creating a lot of discipline. So on-time performance of trains has improved. Over the road has improved. Recrews have reduced, even, even the online failures and the bad order count have come down. And that means the shops are, are using their people to fix locomotives more appropriately, service them more fulsomely so that they're reliable online. And this is this is an evolution of improvement. And so what we've done so far is we've been able to park locomotives. We've been able to drive a lot of locomotives over to UP and BN, for HPH balance.
We've even been able to take them out of storage and put them into emergency service to support Baltimore in the Francis Scott Key Bridge disaster, because that routing now of coal from Eastern Pennsylvania into Norfolk is almost 1,000 miles longer. It's taking almost 70 more locomotives to complete that cycle and support our customer in Eastern Pennsylvania and our off-take commitments to coal. So it's creating more tension in how we see locomotives and our flexibility to stretch ourselves to respond to market conditions or emerging threats or opportunities, in this case, an opportunity from a threat, and balance out our yield.
So I think that there would if we were just looking at it as an objective to slash, and not think about how does that asset contribute, how is that asset architecture look, and do we have enough or not enough, what are the indices, then I would say, yeah, it could be risky, but doing it in a way that takes account what it's being used for and what else is impairing that and removing the impairment, now you know that what you really need, your baseline.
I think as we improve our yield on trains, as we move to HPT measurements, horsepower per ton measurements as part of our service design, that's going to help us really understand how to make the most of those locomotives and give the people that we've got working for us in the shops a chance to really do their jobs and do them well.
Think about it more like an output than an input, Tom, right? If you run the network faster, you don't need as many locomotives. So it's easy to take them out if you don't need them. If you're getting the trains over the road faster, you're making connections faster. There's fewer trains held. You're not recrewing as many trains. You're getting them through the mechanic shop faster. They can deploy quicker. You just have excess assets. Then you can take them out.
But you may need them. And so creating that resilience by putting them in service, having discipline that you don't take them out frivolously, and there's a business decision that you need to surge up like Baltimore, or if we have a terrible set of swarms, like UP has just experienced in their territories, you may need to pull a few out to supply something that's got impaired locomotive sourcing from because of something that had nothing to do with the railway, and still service the customers. But then it's the discipline, pull them back out again, put them back into hot readiness so that we can be agile and responsive to whatever conditions we need.
So, when we, trying to remember the exact timing of the, there was an analyst meeting Norfolk hosted in Atlanta, what, December of,
2022.
2022. There was a perspective offered that or a strategy of, let's keep some extra assets so that when the growth comes back, we can serve the customer better. Is that, I, I guess, you know, we've heard various views about, you know, extra assets of being good or bad. Do you think that, you know, this is that resiliency strategy, if you will, is, you know, kind of set aside and that, you know, this is very different from that? Or how do you think about kind of what we heard is that as a framework versus what you're doing and what people perceive as, as PSR?
Yeah. Well, I'll say this. The business strategy hasn't changed. Business strategy and plan execution are two different things. One is derived from the other. I'm here to drive the capability of the network. Having the right amount of assets active is critically important. Having too many can be very detrimental unless you have a lot of discipline to have them where they need to be when they need to be. There are items like that are a long lead. So, you know, take, for example, a locomotive. Right now, it's probably three years to build a new locomotive. And having discipline around preserving that latent HPH at a very low cost is probably a great business decision because as the business comes up, as our service gets better, we will grow. That's our path is growth.
Getting closing the gap on costs and our financial results is going to be a critical path to that growth so that we can grow at the lowest cost. And so it's a balance. We're this is probably where the biggest discrepancy is between our proposal and some of the activist proposal, where we are really based on fact. We're measuring things on fact. And the assets that we're moving in or out are done through evaluation, through business requirements, and business modeling. And we're redesigning our structure around that. A lot of the suppositions are flawed on the other side or just outright wrong. And to a point, it's almost pathological. And I think people need to be aware of that as we drive and cross-reference 20, 30, 40 different measures.
It shows that we're accurately using the cut of the assets, we're accurately servicing customers, and we're going to do it at the lowest cost, and we're closing the gap.
So if we focus again at your approach and the opportunity, do you think that culture is an issue that needs to be changed? I think, again, back to the approach on the resiliency that, you know, and also to the structure where intermodal and I think automotive are under marketing, right? And I don't know if you have seen that structure at CP or CN or KCS. So how do you think about kind of the right organization structure to be successful, the right culture to be successful, and, you know, whether you have the, you know, the kind of freedom to do the things you need to do to really drive strong operating performance?
Yeah. Corporate culture is really important. That's to me the embodiment of workers' commitment to the organization and the commitment of the organization to our workers. And you only have to look at Mexico and the pace of change that I drove there, the depth of change, and the development of Mexican leaders in operations who are really owning that country's output into the CPKC network. And again, that's done with English as a second language and creating that value proposition where people can coalesce around your vision and your approach and speak up to ideas, speak up to issues where they see improvement kind of accelerating is important. But it's the sum of the activities. It's not something you buy off the shelf. Having a culture of willingness to change, I've seen that.
Alan, it didn't take a long discussion to have automotive and intermodal come to me. The changes that I've driven, in collaboration with Ed or Mark, our CFO, they have all been willing to address the issues that I've been able to bring up to them. And I think that's going to continue. When people are confident that they've got the commitment of the organization, they're willing to step up and do amazing things. They're willing to really just have discretionary effort. And from what I've seen so far, it's been a hugely energized and skilled workforce that we've been able to really tap into and deliver some fairly impressive results in short order. And as we roll out the playbooks, it'll really go to scale faster.
So I wouldn't have come here to NS and left a very high-profile job at CP as a chief of transformation, responsible for a lot of very important aspects of the merger to NS if I thought to the contrary. In fact, I think I can leave a great footprint and a great legacy in the sector over the coming years as a leader here at NS.
So I guess this goes kind of to the way back, but I think of Norfolk 20 years ago with Steve Tobias having a tremendous discipline as an organization. And I don't know how much of that would have changed over time. How, how do you think of, you know, culture? Is there discipline in the organization that you say, okay, well, we need a little better plan and, and people respond to that well? Or do you think that there needs to be some maybe infusion of, of more talent from the outside or just another way of driving that culture to be what it needs to be?
Yeah. Well, I'll tell you, I have high standards. I have high standards for myself and hold myself accountable, first and foremost. And then, I expect high standards and integrity across my entire team. And that includes being willing to address operational needs and not get stuck in historic precedent. I think that, it's probably the thing I say the most, and I mean the most. It's what we do has to drive value for our shareholders, has to drive a winning, competitive, heavy haul transportation solution for our customers. And change comes in a lot of forms. But the change that we're driving is deep, and it's meaningful, and people have embraced it. Let's face it, not everybody not everybody's going to be able to, you know, play on every team. And so there'll be people who want to go and go somewhere else.
There'll be people who want to come, and we've got to balance both. And as I said to our labor leaders when I met with them, that, you know, it's a very, very difficult business we work in. The fact that I come from the crafts, and have worked in, you know, -40 or +40 degrees Celsius weather and snow and rain and everything else, I respect what people do. I think that respect for people also translates into the front office and the network environment. And as long as we have a respectful dialogue and we set pretty aggressive goals that people can, you know, see how we're progressing on, I think they're willing to do a lot of great things. And so the case is there.
Yeah.
There's a handful of positions that I've seen so far that I want to infuse with some people I've worked with in the past or know of, from the sector or from outside the sector to really, you know, juice up the output, or introduce skills that may not be as fully developed in some of our business. But that's a balance. My first call is to develop the people here at NS and help them be successful in their careers and help the company be successful and help the customers win in the market.
Okay. I've got a couple more here, but I want to make sure I give you a chance. Thank you. I wanted to maybe have a chance to talk about the relationship with unions. We've seen some things where some of the unions have moved over and shifted support. Do you want to offer some thoughts on why you think that's the case and what you think, how you think about what's necessary in the relationship with the unions to have that respect, but at the same time have the ability to, you know, do what you need to do?
Yeah. Well, I'll tell you, Tom, there has been nothing, nothing has happened that's changed my perspective or my commitment to the women and men who work in the unions on our properties or even the people who are protective or legislative representatives at different levels within any agreement body. I understand that people are going to make choices, and there's a lot of stories out there. And what I do take issue with is that I think it's completely inappropriate for an organization that has no signing authority to be signing MOUs with our labor and disrupting our labor management cadence and our responsibilities that we have to one another, that they're trading away shareholder value, material shareholder value, and that I find disruptive, and I find very concerning.
I'm sure at some point, the lawyers on our side and their side and our commercial regulator, at the STB, might, you know, rule on that sort of thing. But I can assure you that I am committed to labor. Nothing is going to change my perspective. Even people who are taking a side one way or the other, when we meet across the table or we meet on the shop floor, we're going to shake hands, we're going to talk about things, and we're going to solve problems together. Because that's – you have to be professional, and you have to make sure that you don't let things like this distract you from your mission.
And my mission is to run this railway the best it can, at the safest it can, so that we're efficient, we're safe, and we're reliable. And that takes everybody, craft or non-craft, takes unionized or non-unionized. And everybody matters.
I think, when we contemplate the potential drivers of cost reduction, so, you know, we've done our analysis. You have numbers out there. There are other sets of numbers out there. There is significant opportunity to reduce costs through utilization of equipment, through design of the schedules. How do you think about headcount and the component that that plays? Because when we have seen PSR in the past, it typically does result in some reduction in headcount, and that's, you know, comp and benefits is a large expense line item. So how do you think about that as a component and how it manifests over time, and whether that is a significant driver of cost or whether that's kind of a smaller driver of cost in the way we've seen PSR in the past?
Yeah. I, I think, Tom, when, when I think about what, what the mission is before me, it's closing the gap to my peers. It's closing. It's putting more financial discipline around our consumable resources. It's making sure that we're more accurate in how we serve our customers. And there will be cost that flows out of that. And that's some of the power that you're talking about. This is not about headcount reduction. I, I've doubled down on my commitment to labor, that this is not about furloughing. And that's, that's not what we're going to do. And I'm confident that the service that we're providing is going to grow, grow the business. And there are a lot of ways to deal with the ebbs and flows of surplus worker hours available, and that, that they come in many forms.
I'll tell you, as we reduce overtime, that allows me to be more constructive in how we build work-life balance and schedules. As we think through a new service design, we have more ability to think about how does that fit into worker schedules? We can look at how do we accelerate some of the training and create more locomotive engineers today so that we're ready to go once the business comes and do that training ahead. That's the model we took at CN in its next phase of improvement. You know, we pulled forward some capital work because we could get out at the lowest cost without a lot of interference as we came out of the financial crisis in the early 2000s. We were able to train ahead to be ready for the growth.
And that allowed us to hit that uptick in the economy as it came back at really, really favorable cost structure and, and compete hard with our with our competitor in Western Canada and take business from them. So, that's what I see it as. Headcount reduction is not, is not the outcome. It's not the desired state. And if, if the business doesn't come, we have a we have enough mix in, in our people who are eligible to retire that could retire and, and through the natural course of attrition, balance that out. But that's, that's not the that's not the first call. It's not the last call. I, I want to invest in people. I want to double down on my commitment to people.
As we get the right size service, we're reducing a lot of those costs that really create some of the drags on retention. You know, people are working too many hours. They can't have the right schedules. I want to be able to attract and retain people at the right time, because retaining people gets us out of that cycle of always training. It allows us to be more productive. It allows us to be safer because of that experience that's generated over the years. And you create a lot of discretionary effort that I'm seeing firsthand. I was just in Chicago in our 47th Street Yard having breakfast with 25 craft and management employees this Saturday. And the discretionary effort that they were talking about, and the ideas that they were giving me on how to improve the organization, was tremendous. And that's important.
That's what you get when you commit to people and you demonstrate that commitment to people.
Part of it's about the pace of improvement too, Tom. I think we've talked about that getting to targets so quickly would require thousands of furloughs. Doing it in a sort of more measured way over time, you can do it under normal attrition, as John said.
Yeah. Well, and that gets into the difference between, again, our plan and how we're going to treat people, how we're going to ask people to do more by giving them the experience, giving them the skills, and being very transparent in our mission. And the other side, you know, masking massive layoffs under the guise of an accelerated OR, we're getting to the same place within a fairly similar time frame, except ours is a lot more precise and disciplined and transparent. And you can't keep saying things and doing other things. As I said, it becomes pathological at some point.
So I'd want to bring it back to your plan here. As you know, UBS doesn't take any sides in this endeavor. So, your plan. What are the key elements of achieving that significant improvement in operating ratio in second quarter? You know, there were challenges in first quarter. You've got good momentum, but what do you think are the key components of that? And then, I guess I'll give you a second one because we don't have much time left, but if you want to address that, and then what do you think are the key challenges if you look beyond second quarter, like what's really important to execute on to deliver on the cost savings that you've laid out in your plan?
Yeah. I think the value that we're deriving from running on time, getting better yield on our cars and less handling. So that's a big issue for me. Reduce the waste and rework. That will see itself in the costs for our crews, in the form of overtime and recrews. That's rework that can be eliminated. We're going to see big buckets coming out of fuel and fuel consumption and fuel efficiencies as we move out the less efficient locomotives and allow the better performing locomotives to have less interruptions online, better over-the-road performance, and we'll have better fuel consumption. Every time you stop a train on line, it costs you over $300 worth of fuel, and then to start it again costs you another $300.
So if you're stopping for any kind of disruption or any kind of inefficiency, it costs a lot of money. And so, you know, that helps with the fuel efficiency as we go. And we're introducing, you know, standards and policies and how we can be the, you know, we learn from the best and be the best in our fuel efficiencies as we run. Cars online, the reliance on cars, that's less of a pocket, but I think having less cars in the way so that we get better yield in the yards will be able to give us better connections. So you'll see us measure the number of cars per waybill so that we understand how many cars do we have to have in our system in order to generate revenue. And that number is coming down nicely.
All of that discipline and precision execution is going to pull those big rocks and small rocks out of cost.
Okay. Do you think that so that's a comment on, you know, kind of you're doing the same things as you look in the broad, you know, kind of 2Q and then looking beyond that?
Yeah. Yeah. I think in Q2, in Q3 and 4, as we gain momentum and we are able then to really see where our glide path is as far as the business coming back and, you know, I think we can leverage up on growth at that point and at the same time, continue to really look at the bigger issues, let the redesigned service plan work its way through, continue to evaluate yards and assets that we have in place and make sure that we're getting the full value. And as I said, you know, whether we move volume into outliers or we bring them into major terminals, we'll be looking at how do we maximize the use of those yards and get the most value from them. That will itself eliminate a lot of costs.
Right. Okay. I think we're right at the 1-hour mark here. John, I just want to say thank you so much for the time. Chris and Luke, thanks for joining us. Hope this was beneficial. There will be a replay available, and I think we can end it here. So thanks, everybody, for listening. John, thanks so much.
Thanks, Tom.
Next time.