Ahead and get started here. Thanks for joining us today for the Norfolk Southern Fireside Chat. I'm Daniel Imbro, the transports analyst here at Stephens. Really pleased to be joined up here by management from the company. I have new CFO, Jason Zampi, and then EVP and CMO Ed Elkins. Thanks for joining us, guys.
Thanks for having us.
Thank you for having us.
So this will be a fireside chat. I'll kick it off with Q&A. Please ask questions as we go as you have them. But yeah, really want to start off maybe, Jason, just congratulating you on the new role, kind of move through the organization. We'll discuss a lot today, but you know I would love to start with what have you learned so far during your time as CFO? It's been a pretty transitional time for the company, and then what are some priorities that you have brought to kind of lead the organization from your seat now?
Yeah, thank you for that, Daniel. So I've been with the company about 13 years in the CFO seat for almost two months now. But you know I've had the opportunity to work alongside Mark George for the last five years. You know he's an outstanding leader. I've known Ed for a long time. Ed and I, back in 2011, actually went through a leadership rotational program. So I've known him for a while. And you know now we're bringing in some really good talent with John Orr, Anil Bhatt, Jason Morris, our Chief Legal Officer. So you know what I'm really most excited about and energized about is this team that we have. And you know I think the focus and the priority is really just, you know, a relentless focus on delivering results.
You know I'm fully committed, as is our whole team, to hitting the financial targets and goals that we've laid out there. And as you've seen, we've got a lot of great momentum. So just really excited about the team we have.
And so you mentioned the newer kind of executive team, but it has been a big transitional year for the company. So maybe I'd love both of y'all's perspectives on how has just the broader team responded to this? How's retention? How's team morale? It's typically tough to keep organizations going in that direction during a lot of change. So how's that been this year?
I'll start if you want me to.
First of all, thanks for having us here. You know everybody says they have a great team, right? It doesn't matter what conference you go to or who you're speaking with. But I can tell you that the cohesion that we're seeing, it's really exceptional, at least in my experience. And I've been with the company for 36 years, 31 of which were very boring, but the last five have been more exciting than I wanted them to be. But I will say that the cohesion, the three to four, has really been, to me, and I have a very limited viewpoint, exceptional. And when you ask about how's the team doing, you know it's an every day challenge for us.
And for me, I would say I have to remove the biases that I've built up over the past four or five years where we've had service that was good and bad. And you know we're able to meet customer in demand, then we disappoint them. And so I personally built up biases around what's possible. And so every day now, the entire team, which includes Jason, myself, John, Mark George, we're all testing those biases and trying to get them out of the way because what's possible is different now than what it was for us for the past four or five years. And we're demonstrating that. And that makes people excited. It makes you uncomfortable, to be clear. But we're becoming much more comfortable with being uncomfortable, so to speak, and really challenging ourselves to do things that we didn't think were possible. I don't know, Jason.
Yeah, no, I think that your last point there, Ed, really challenging what is possible, you know, and it's thinking about not doing things differently than the way we've always done them, and so I think that has really energized the team, and I feel like everyone has really rallied behind our strategy, and it is really looking forward to this momentum.
Agreed. That's great. Well, maybe we'll jump a little bit more towards near-term trends. You know, quarter to date, we know what the volume's kind of running. I think they're in the mid 140,000-ish range, I think is kind of where we're running. I'm curious how that shaped up relative to how you thought the quarter would look and kind of how you've seen any strength or weakness in relative markets through the quarter.
Sure. I mean, it's been an exciting year with lots of things going on, the latest of which, I guess, was a three-day work stoppage at the ports, which doesn't sound very impactful. But when you think about global supply chains shutting down the port for three days, very impactful. And reroute a whole lot of cargo globally is also very impactful. We're generally pleased with where volumes are. We knew coming into the quarter, and Jason, I think you were actually talking about it at a different conference earlier this year, that automotive was sort of developing into a volume challenge for the industry. And the same is true for steel, probably as an upstream byproduct of that. We've seen both those things sort of play out. But we're encouraged.
And what we're really focused on as a team on the marketing side is going out and finding additional volume in the form of share that we lost over the past four or five years that we can bring back immediately, as well as generating new revenue streams from customers who have freight that maybe hadn't moved on the railroad or any railroad in a long time. And the most important thing that we have going for us is really and truly, number one, the quality of the service that we're able to deliver. And when I think about what's our mission, it's pretty simple. We want to produce service that our customers can count on every single day. And we want it delivered by people that they can trust. And that's what my team is focused on.
That's what John's team is focused on and what Jason is focused on. So I'm encouraged. You know, we're still seeing those same headwinds. And coal price is something I'm sure someone will ask a question about. It's been kind of a headwind too. But we knew all those things going into the quarter. And you know, I think we are working really hard to backfill every place where we see that kind of weakness. I don't know if you want to add.
Yeah, I would just add on from an overall OR perspective. I think that's really good background, Ed, from a top line. But you know, just kind of reminding everyone about the sequential uptick in operating ratio from third quarter to fourth quarter. You know, we're thinking that's around 100 basis points of seasonality. Some of what Ed talked about, coal pricing, obviously is impacting that. And then three other components, one being we had some fuel recoveries in the third quarter that we don't expect to recur again, as well as just fuel price, right, the headwinds from fuel price. We had some land sales in the third quarter, you know, about $20 million. Those may moderate a little bit as we go into the fourth. And then we have some hurricane-related expenses. So if you take all four of those components, they're incremental to one another.
And that's kind of how we're thinking about where the quarter is going to shake out sequentially. But you know, we're very confident in our second-half guidance and the range that we provided.
So still in the second-half guide, and then kind of go into next year on solid operational footing.
Absolutely.
To go back to the volume side, I think an area of strength in recent weeks, intermodal is picking up nicely, which makes sense going further away from the hurricane and the strike. I guess, are we seeing any particular strength in domestic? We've heard anecdotes of that picking up, and I'm curious, are you seeing that in the Eastern network? Is that starting to have a mix shift change, just what we're seeing?
Yeah, we have. You know, we thought going into the second half that we would see some volume recovery in terms of secular recovery in terms of demand. And there's still probably too many trucks on the highway, so to speak, which is keeping price pretty flat sequentially, right? But what we are seeing is more and more customers are trusting us to deliver their products. And we can save them some money. We can deliver a product that they can trust. And we had a very successful bid season in 2024 with our key intermodal players on the domestic side. And we are seeing volumes, frankly, that we haven't seen since the fall of 2020 when it comes to domestic intermodal volume.
It feels like we are seeing truck pricing get a little bit off the mat. Not a ton to get excited about, but it's not going down, which is a nice change. You know, how long do you think we would need to see that before we did see more support for intermodal pricing?
Yeah, well, I think we're doing okay right now in terms of earning freight from our beneficial owners. I think what we will see, though, as we move into 2025, I want to see that spot price come up, which will drag up the contract price. You know, I expect that to happen in 2025. No one ever predicts a big boom, so I'm not going to either. But I do expect it to be, you know, at least modestly up. And what that's going to do is allow us to continue to be very aggressive on demonstrating the service that we can deliver and win more bids going into 2025. Because what we've seen is we have customers now that have experienced months and months of good intermodal service from us through their various carriers.
That's given them confidence to turn over more and more of that book of business.
I just add to that, you know, from a profitability standpoint, even when prices are low, you know, really doing a lot there to attack that intermodal profitability, whether it's, you know, the lane rationalizations in our intermodal business that we took on, you know, earlier this year, about 15% of our lanes to the reservation system that we've just put in place. So you know, I think John's team, Ed's team, really working closely there during this downturn to make sure we are operating as profitably as we can, so.
Ed, you mentioned there was a few-day strike maybe at the start of this quarter. That wasn't really finalized, but just pushed that to January. I'm curious, as you're talking to customers and they're planning for the new year, I mean, any insights you have on to how those negotiations are going? Do you think we replay the same playbook to start Q1 and then we have another kind of disruption? Or how should investors be calibrating their expectations, if any?
You know, I don't know, and I'll be clear about that. I have got little to no insight into what's going on with the carriers and the ILA. I will tell you that talking to shipping managers, whether they're in Los Angeles, Chicago, or Shenzhen, you know, everyone is kind of baking in some uncertainty going into that January deadline, so I expect what I would call distorted trade patterns that we're seeing now to continue. No one's going to run back to the same places that they were before, full on, because you don't know what's going to happen yet. That's my perspective on it. Now, I'm acting like that's the only thing going on, and it's not, because we got a new administration coming in, which I can't really predict what that's going to do to trade patterns.
Although when I read the Wall Street Journal this morning, they're talking about a pull forward of imports in anticipation of some tariff action. So we'll see how that manifests itself. It's a pretty long supply chain coming from Asia, so it's going to be hard to pull forward very much, honestly.
Well, yeah, and you can tell us what this all looked like on the tariff side. We'd love to hear the clarity too. So who knows what that's going to end up shaping into. You touched on, too, on the merchandising side, weaker categories earlier, autos and maybe derivative, metals, tank, softer. From an industry standpoint, I guess when you talk to your big shippers, like, how long are you guys expecting those markets to remain weak? It's an inventory issue they're working through, but is this the first half 2025? Can that recover as we move through the year? What are y'all's expectations for those end markets?
I kind of have a pre-election expectation and a post-election expectation. I don't know which one is right or if either one of them is right. I would say that, you know, the best data that we have right now is predicting finished vehicles in the U.S. to be down slightly next year, like 0.1% or something like that. And that's really a combination of there are a number of challenges in some markets, like with EVs. There's also what I would call pretty disciplined inventory control on the part of most auto manufacturers, which is going to suppress some of that surge stuff. I think, you know, I think we'll have to wait and see what happens with some of the tariff action that's going to happen or not and how that manifests itself.
Because those are both markets that you could see a lot of what I would call disruption from those manifestations.
How about just overall merchandise carload growth? You know, one of your peers talked a lot about just investment in the eastern part of the country. That should be a good thing for overall rail. And you mentioned just bringing more customers onto rails. So are we in an environment now where merchandise carload growth can, you know, begin to grow or outgrow GDP? How do you think about just the right level of merchandise carload growth for the network?
There's two. I'm going to leave all that other stuff I just talked about aside. Two things that I think are really going to propel merchandise growth over what I would call the medium to long term, and I think it is a somewhat idiosyncratic story for Eastern railroads and for railroads that are particularly located and strong in the Southeastern and Midwestern United States, right? The first is there is a lot of share that left Norfolk Southern in the merchandise space over the past five years for a variety of reasons, and that share had to go find alternative means of moving itself through those supply chains, so we are working really hard right now to identify exactly where that share exists, who's moving it, and what it'll take to get it back, right?
In some cases, simply having good service and being able to demonstrate good service will immediately bring some freight back. In other cases, you know, they're going to have to unwind contracts or supply chain alternatives that they built. But we're working hard to make that possible. So there's share recapture that I think is strongly evident both in terms of the east in particular, but Norfolk Southern specifically, where we are going to go after share that should be riding on Norfolk Southern. The second is, and really from an industrial development perspective, the U.S. is becoming a more and more attractive place to locate industry. North America in general for the U.S., really advanced manufacturing. And I think for the Southeastern United States specifically and some Midwestern parts, it's going to become incredibly attractive. So we have a nice pipeline of industrial development projects that are out there.
And most of those will land in the next two years. You know, that's what I have a line of sight on that I feel good about. And I don't see anything other than acceleration in that pipeline, given what little I know about what the next three, four years might look like.
Then, Jason, you had to talk for a couple of quarters about the share recapture. I guess, any way to quantify what you're expecting? I mean, in this year's guide, we can talk about because you've guided against, like, how much are you expecting of that volume to be share recapture versus other growth in the market?
Yeah.
How can you quantify that so we can know what you expect?
I'll actually throw that to Ed.
Okay. Well, you know, I think probably the first order of business is share recapture because we can deliver value to those customers immediately, right? There is some natural order in terms of which routes you want to move on as a shipper. And we've, because of the poor service we've delivered or erratic service we've delivered over a fairly long period of time, customers have had to find other ways, which probably aren't as efficient as the way that they might prefer to move it. So we're focused on that, delivering value immediately to that freight that's out there. The second piece of this is the U.S., I think, you know, is going to do well. We see industrial production for manufacturing coming up around 2% next year, at least that's the forecast.
That would be really good when you consider it was flattened down for the last 18 months or so. So we see organic growth, but also that share recapture piece. Share recapture is probably first.
I know it helps size up how much share recapture you're kind of assuming. You can bring back to the rail?
You know, sitting here, I don't have that number. I don't want to give you a wrong one.
Appreciate that. Well, maybe moving over to coal. You knew someone would talk about it, and here we are. Maybe first, just on the volume outlook, it feels like a bit of a mixed bag. Nat gas prices are coming up, but they're not quite up high enough yet, or maybe it matters. Just kind of curious how you guys are seeing the demand backdrop for domestic coal shaping up here in the fourth quarter.
For domestic coal?
Sure.
You know, I think it's going to be challenged because of that gas price. I think for next year, I believe the forecast is it gets up to around $2.93, and that's really predicated off continued growth in exports of LNG, and if that happens, you know, we'll see maybe some bounce in our step, so to speak, when it comes to utility coal. But I think really what we're focused on in terms of opportunity is on the export side, both for steam and for meth. There's a lot of demand globally. The U.S. is a very efficient producer, and we're doing our part to make it efficient in terms of getting that coal to ports.
You know, I think we've seen coal pricing stabilize. Not at a great level, but at least be stable here for a little bit. Can you just remind us, Jason, the guidance, like, what you're expecting for coal pricing? Is this kind of what's embedded in the outlook? Or what were your expectations when you sent that guidance to the [audio distortion] ?
So for this year?
Yeah.
Yeah, I think it's probably a bit lower than what we were expecting. You know, next year, like Ed said, still a little bit of a mixed bag there. But, you know, definitely lower, creating a headwind for us this year.
Got it.
Yeah. I mean, we've seen it come off. It's like $190 right now for meth on the seaborne side. And I think it's going to stay somewhere around that number going into next year. I don't know what else folks have heard. I think that's a price that will continue to keep U.S. producers in the ballgame, so to speak. And, you know, we always take a conservative outlook when it comes to building our OR and our own plan for out years. So, you know, I expect we'll be okay there going forward.
And then can you just remind us maybe how these contracts work? There's always floors and ceilings in these coal price contracts. We don't see them. But, you know, from this $190 level, I mean, are we closer to the floors or is there maybe less downside absolutely if pricing did go the wrong way? Or is there still, you know, a risk on the downside of pricing to fall in these contracts?
We're closer to the bottom than we were at $200, but it's, you know, I would say that we do have some floors on those contracts. There's still downside risk, but you know, I think the downside risk is you have to moderate that with what you might see in terms of global demand.
So the floor isn't $190. Got it. Helpful. But maybe just stepping back a little bit, you know, service has made a big step higher. I think, and you guys worked really hard to get that, John and the team have gotten the network running well. How are shippers? You're having the conversations on the front lines every day. Like, how are those conversations going? Are they seeing that? And when you ask them, you know, I feel like when you asked shippers when service wasn't great, how long it would take? Some said a year, some said a couple of years. Some just gave a long enough answer that you can check back later. Now, I'm curious, now that it's later, how are those going? And how much longer do you think you need to prove out service before they begin to reward you with more of that business?
No, I think there's a couple of things going on. You know, for some of our shippers, we're seeing them convert some truck lanes today. And, you know, when I think about a market like steel, let's say, where there's some macro weakness, then there's still steel moving on trucks in some of these lanes. And we can go out and try to recapture that, and we are. So we're seeing some share recapture, so to speak, from the highway. I don't know if that's virgin freight or reclaimed share, but it's share that we're taking. And, you know, on the other hand, we have existing customers. And I was just talking to Jason about this yesterday. I conveniently have an anecdote I can use. But I was talking to a customer yesterday who's a very large agricultural shipper. And, you know, we're just talking about stuff.
He's like, you know, I think I need to take my fleet down. And I'm like, what do you mean? He's like, well, you're running about 20% faster than you were for all of last year. I've got too many cars. And he said, I think I might be able to take my fleet down and still handle the same business and maybe grow some. And what he was really wanting to know was, was I confident that we were going to continue to deliver this kind of service? And I said, hey, man, you're singing my song. I think that's exactly what you should be doing to save money for yourself and to make the railroad less congested. So that's a real-life manifestation of what Jason and I debate all the time is, is it real? And I think we're starting to see that, don't you?
Yeah, absolutely. I think customers are seeing it, you know, that there's, I'm sure, a lot that want to make sure that it's going to be sustained, which, you know, we're putting the right processes in place to make sure that's true. But I think even from like a resiliency perspective, when you think about, you know, the storms that we've had recently, you know, how quickly we were able to rebound from those. And that's not something that we've been able to do before. Our customers probably were not accustomed to that. And so we're hearing that, you know, that they're really appreciative of that resiliency and how quickly we bounced back. So I think that's another great proof point that, you know, this good service is, you know, is real.
And maybe on the, you know, flip side of the ledger, when customers aren't bringing share back yet, is there a common thread of the answers as to why not yet? And I'm curious, like, when you look at the network, I mean, there's always room for more opportunity. Like, where are there still opportunities to improve service that you see as the most near-term and achievable?
You know, I think what most of our customers want, and you've probably heard me say this before, almost all of our customers just want a conveyor belt that runs at the same speed all the time. And we can debate what speed that is, but the first thing you got to have is a steady state. And so we've been able to deliver that. And so now we are actually going in and, you know, when I think about resiliency and agility, one thing that we've been able to do this fall is go after spot movements in some of these markets, like ag, for example, where we have operational agility that's created because you're moving cars faster, you're using less assets, and you've got this, I'll call it a battery of resiliency that you can go out and deploy.
And so, are there places where we could do better on service? Probably, there are around the network. But one thing that I'm really excited about, and we spend an hour three days a week with the ops team and the marketing team talking, is how can we redeploy this agility and resiliency to go after a piece of business that we know is going to be available for a short period of time that we hadn't planned for? And so that's a really exciting conversation.
You know, I think investors have asked this a few times throughout the last few months. But when we look at the network today, if we're running mid-140s on the railroads, like, with the assets you have today and the efficiencies, how much could the network handle without having to add more assets to it?
Yeah, I think from a, you know, any resource you want to look at, you know, we've set down 500 locomotives, stored 8,000 rail cars. You know, we've got our headcount about where we need it. So, I mean, I think from any way you look at it, we are, you know, absolutely prepared to handle more volume with the current set of resources we have. And that's because of this capacity that we've driven through, you know, through this great service product that we're offering. And it's not just us that it's benefiting, you know, as Ed mentioned, it's benefiting our customers in their asset utilization as well.
I think it was pre-COVID. I was looking. You were maybe mid-150s on weekly. Is that, could you get back to that without having to put locos back on and take rail cars out of storage?
Yeah, I think we can. I mean, obviously, it depends where that volume comes in, but, you know, and what type of business. But yeah, I mean, there's for sure capacity.
Yeah, and one thing I'm certain of is that, you know, any of this share recapture that we go get or any new business that we take off the highway, you know, there's very high incrementals associated with that because, you know, we're not putting on a new train.
Absolutely.
We're adding boxes to a train or cars on the end of a train, so it's a very compelling value statement.
Great. And I think another common theme you've heard from investors, I'm sure, is merchandise pricing. So merchandise carloads great. You guys are winning business. But how is the pricing backdrop evolving out there? And hopefully, as service gets better, pricing is less and less of a discussion leading it. But I'm curious just how you see the backdrop evolving as we kind of head into next year.
I'll start, and then Jason can backfill and correct everything that he needs to. But let me start with this. You look at RPU, and people see it move around, and they associate that with price change. And I think we probably just need to take a minute and unpack that, right? There is a price component, yes, but there is a huge mix component as well, right? The mix between intermodal, car load business, you know, autos, et cetera, et cetera, et cetera. And so even within that mix or the merchandise component, you know, let me start there. We've had a really good run of pricing in our merchandise product. And I think I won't quote myself, but I think it's like 27 of the last 28 quarters, we've had year-over-year RPU growth in our merchandise business. I'll have to go back and correct myself on that later.
But we have a nice, strong track record of success at delivering value to our customers and then, you know, producing value for our shareholders in the form of price. As our service gets better, stays consistent, and we're able to deliver even more value, like I just talked about a minute ago, that's going to open up even more opportunities for us on the merchandise side. So I feel very good about our price story in the merchandise markets. And I think that will continue. On the, you know, coal is kind of a different animal, right? Where it's really predicated by seaborne prices, global prices for that commodity. And, you know, we're there to take advantage of that when the markets allow.
And then on the intermodal side, really, it's a market that's dominated by truck pricing, which has been, you know, severely depressed for the past 26 months, something like that. And as those markets rotate, and they will, capacity is coming out and demand will increase, we are really well positioned to take additional advantage of price when it presents itself in those markets. So that's the way I kind of unpack that whole mix story from the price story. So let's talk about mix for a minute. You mentioned that we've been really successful at delivering value and taking share in the intermodal market space. And that just naturally creates a share headwind for us. But, you know, what we're doing is delivering that incremental load to a train that's already out there running. So we feel really good about that piece too. Fuel.
You want to talk about fuel. It's been a headwind for two years, and that's predicted to be another headwind next year in the form of, you know, what we can charge as part of our RPU.
Right. Yeah. I mean, I think that's right, Ed. You got to think about separating price and mix and fuel out of that RPU story and, you know, piecing that apart, and for sure, fourth quarter, you know, we've got some mixed headwinds. We've got fuel that we just talked about.
Coal price.
Coal price, for sure.
How have those mixed headwinds evolved versus how you thought the quarter would? We mentioned earlier, volume. Fuel is roughly as weak as you thought it would be weak. But any mixed headwinds we should be aware of as the quarter's played out as we're thinking about the road to growth?
I think International has done pretty well in the wake of the port strike. And International is sort of a headwind, but then a headwind when you think about intermodal pricing.
Right.
Coal pricing is what it is.
So, it's still mixed within mix. You know, it's twofold. Well, maybe moving over to the cost side a little bit, you know, and y'all talked about this, but you parked 500 locomotives. I want to say productivity was up something like 18% last quarter. From a network standpoint, how much more room is there to park more assets or get there? Do we pull forward what we thought might go next year and from here just grow volume and don't add back assets?
Yeah, I think to your point, right? We mentioned it. Parked the locomotives. We've got, you know, freight cars that we've parked as well. So really great productivity on that front. I think that there's, you know, John always talks about the, you know, kind of the next crank in the operations as they tighten down standards and, you know, continue on their initiative. So I think, you know, there's asset efficiency is definitely going to continue to be a big part of our productivity improvements as we move forward. And, you know, really, when we finalize the revenue plan for 2025, we'll really have a look at, you know, what's there and what we need from a resource perspective. So I think more to come on that.
Next year, I think you said you're expecting about $150 million in savings. You've done this before, but I'll ask you to do it again. Can you maybe just bucket out, as you sit here today and looking next year, where you see those savings coming from? What is the easy? is not the right word. What are the maybe most achievable in the near term? What are the ones that are harder to get to?
Yeah. So you remember this year for 2024, we talked about $250 million in savings. And we're on track to obtain that. So some of those costs, if you think about it, is, you know, getting rid of the kind of cost of poor service, right? So those have come out, and that's great. Some of the initiatives we're putting in this year are put in, you know, later in the year. So now we'll get the full benefit of those as we move into 2025. But I kind of think about the buckets from a labor productivity standpoint, fuel efficiency standpoint, and then, you know, when we think about our purchase services. So back to labor productivity, there's a lot of focus on probably T&E productivity, but it's really across the board, right? So we're focused still on our engineering and mechanical workforces and being more productive there.
Even within G&A productivity, our G&A headcount's down almost 10% year-over-year. You know, labor productivity is going to be a big story. Fuel efficiency, we're making great progress on there. John's brought in some folks that are really, you know, focused on that right now. I think that there's more room within fuel, not just within fuel efficiency, but fuel procurement and, you know, management that we're going to look at. That stuff's going to take probably a little bit longer. Then, you know, purchased services. We know we've got some work to do there to bring that category down. You know, everyone is fully focused on that. Within purchased services, I think about it and kind of bucketizing these things. I think about it from an intermodal perspective, intermodal and automotive.
So, you know, primarily all of our intermodal and automotive facilities are outsourced. So the cost of those hit that bucket. And that's, you know, so that's a very volumetric category for us. Another big bucket within purchased services is our operations, other operations spend. So we're, you know, John and his team are focused on being more productive there. And then the third is technology. And, you know, we've talked a little bit about that on our third quarter earnings call, but that is an area where we're really, you know, going after every dollar there as well to make sure that, you know, the projects are being delivered on time, creating value, and, you know, things that are not, we're stopping immediately. So that's kind of how I think about those buckets of where we're going to be in 2025.
Yeah. That makes a lot of sense, and maybe just double-click on labor productivity. There's always the two sides of that. You reduce headcount more or you grow the business on the same headcount. I guess you made good progress in headcount this year. How are you feeling about the absolute level of that? Is there still improvement we can make on that actual level or do we need to grow on this headcount base?
Yeah. So I think it's probably a little bit of both. So the most recent public numbers just came out. Year-over-year headcount's down 4% in October and 0.5% sequentially. So we're still making good progress there. And that's really, we're able to do that through the efficiency gains that the operations team has done, as well as attrition, right? We're working down that balance. So we thought we'd finish this year down about 2% from where we were ending 2023. Might be a bit better than that, but a bit lower than that. And there's, you know, there's always going to be places, individual locations or individual crafts where we may have to add some headcount. But overall, I think we're pretty good. And the key is, again, back to capacity. I think we've got the capacity with our current workforce to continue to add more volume.
And not to be an annoying sales letter, we're thinking about the model in my head, but, you know, thinking about comp per head, you guys have locked in labor next year with some of these union agreements. And as I think about what the offsets are to drive that level down, I guess, how should we be thinking about just the overall output of that compensation per head with all the changes you're making in the network, understanding that union agreements have been made now?
Right. Yeah. So it's a great, you know, great point. We've got 10 of our 13 unions have signed tentative agreements. Five of those have ratified. So that's about 30% of our union workforce. So, you know, it's really great to get a lot of that behind us, right? It's a distraction to the employees. You know, we want them to be engaged. And then the next step is working on, you know, local rules that benefit both us and the employees. And so that's kind of the next piece of this that we'll begin to work on.
But, you know, getting the wage inflation component kind of locked down really helps us, in addition to the benefits to the employees getting paid right away and, again, taking away that distraction, obviously helps us from a planning perspective, helps us from a pricing perspective to have some certainty there to know what those are, so I think the next steps will be the, you know, the local rules that we and work rules we work through with them with our union employees, and, you know, made good progress this year and really end of last year with more sick pay benefits and things like that, so we're making good progress on that front, and then, you know, just looking forward to continue to find those win-win opportunities for us.
Makes sense. Maybe just you mentioned fuel efficiency is a big bucket of savings over time. Curious what the actual investments you're making are. Is it just the modernization of the locomotives that are getting more efficient as you get those out? I'm curious what the investments that you're having to put in to get out fuel efficiency. Because I think that can be a black box for investors sometimes. They just see the output of it. Curious what you're actually doing to drive that.
Yeah. I think some of it is, you know, it's process-related, how we're using our locomotives, you know, the DP configurations, things like that. And, you know, just you think about things as we move into the winter months about locomotive idling, things like that. So having, you know, more strict adherence to what our rules are. So some of it is that. And then to your point, Daniel, some for sure is technology-based, right? And we think about, you know, technology on the locomotives to help us operate as efficiently as we can. So it's kind of both sides of the equation there. And then obviously, you know, taking these locomotives offline really helps with fuel efficiency as well, right? Because you're moving more freight with less locomotives.
When you think about those tech investments you can make on locomotives, I guess, could you, I mean, we'll talk about CapEx in a minute about next year, but could you ramp that? Like, could you do more of that to make the network more efficient? Or how do you think about the cadence of those programs?
Yeah. And I think some of it is too, right? You know, we're able to, with storing these locomotives, we're able to take the locomotives that may be older, less fuel efficient, and park those, right? And continue to run some of the more fuel-efficient locomotives. So we're moving fast on that front. And like I said, John has brought in some, you know, kind of experts into his team to really make sure we're focused on that.
Got it. It does dovetail nicely just into cash flow. Just thinking about from your seat now in CFO role, you guys have been vocal. I think CapEx should moderate next year, maybe hurricane recovery costs notwithstanding.
Sure.
I'm kind of curious, any updated thoughts on that recovery cost just so we can calibrate that expectation and how you see capital spending kind of developing?
Yeah. So from a CapEx perspective, that definitely will come down in 2025, both in terms of absolute dollars, but also percentage of revenue, just a kind of shorthand way to think about that. So that will be coming down in 2025. To your point, we will have some hurricane recovery-related costs. You know, that could be anywhere in the $50 million-$100 million range that'll play out over a couple of quarters here. We're still assessing some of the damage, actually, that's in some of the areas up in North Carolina that were really unfortunately impacted. But as I, you know, I think about that spend, the way we're able to reduce that CapEx spend is because of the operational improvements that we've made, right? We're utilizing our assets better. We're creating capacity.
So, you know, we don't need to maybe spend as much on locomotives or freight cars or, you know, infrastructure, things like that. However, we're always going to make sure that we're, you know, maintaining our track assets and investing in safety. So it allows us to prioritize more of our dollars there and maybe not as much on the growth side this year because of all the capacity we've generated.
Makes sense. And then as we look at next year, you mentioned the 4Q, OR, headwinds earlier. I think like four of them, the recoveries, the lower gains, the seasonality. The network's running smoother than it has in a while. And I think what is the normal, what's the right way to think about seasonality, at least from 4Q- 1Q then? Because we're going to go into 1Q at a higher base than we thought maybe after the 3Q results. So we're going to have a step up in 4Q. Like, what is the right way to think about typical 4Q- 1Q off of that high level?
Yeah. So we'll definitely give, you know, more information in the fourth quarter. But I think, you know, historically, first quarter is higher OR just due to some, you know, one-time expense type things that hit the way revenue and volumes come in fourth to first. So, you know, we'll give more clarity there on what we're looking at, but that's historically how it's.
What are the seasonal costs that step up just for our identification?
You know, things like, for example, payroll taxes, those step up from fourth quarter to first quarter if people have maxed out on payroll taxes at the end of the year, stock-based compensation, things like that. So there's, you know, some costs like that that hit earlier in the year.
Right. And we are coming up on time. So we got to squeeze one more in just, I think last quarter, Mark mentioned share repurchases potentially starting up next year, as CapEx moderates. Curious, I don't know if you guys have thought about when or kind of what makes sense. Is there a balance sheet level you're trying to get to? Like, what is the trigger for when you would think that makes sense to take a point?
Sure. Yeah. Yeah. So we've, you know, we work closely with the rating agencies and making sure, you know, we're focused on getting back in bounds with our ratings there. You know, we had a couple of really big impacts over the last 18 months. So outflows related to the East Palestine incident, profitability contraction. And then just earlier this year, we purchased the Cincinnati Southern for $1.6 billion. So we had a lot of cash out the door. Our focus in 2024 has really been balance sheet repair. And if you think about that, we've really done a great job. It's profitability that we've kind of shown throughout the year. We've done a great job on recovering some insurance from the EP incidents. So we're up to about $650 million of recoveries through the third quarter.
We just had two really significant line sales, one in Virginia, one in North Carolina that generated about $400 million of cash proceeds. And then finally is the piece we just talked about, you know, reducing CapEx as we move into next year. So all of those really help with that balance sheet repair. And that's what gives us the confidence that we will be back in the market in 2025 with share repurchases.
Great. Any last questions in the room as we wrap up? Awesome. Well, Ed Elkins, thank y'all so much for the time today.
Thank you for having us.
It's great talking to you.
Thanks everybody.