Hey, everyone. It's Jason Seidl from Cowen. Welcome back to Cowen's 13th Annual Global Transportation and Sustainable Mobility Conference. We are honored and pleased once again to have Norfolk Southern presenting. With us from Norfolk Southern as presenters are going to be Mark George, EVP and Chief Financial Officer, and Alan Shaw, EVP and Chief Marketing Officer. Gentlemen, I know you have some comments in the beginning, so why don't we start off with you guys?
Hey, Jason, thank you for the invitation to join you and our investors today. It's a pleasure to be here. Mark and I are excited about this, although I'll tell you, I miss my early fall trip to Boston.
As do I.
Maybe next year. We're looking forward to it. Mark and I will make certain forward-looking statements today. As you know, those are subject to risks and uncertainties. I would invite you in the audience to take a look at our annual and quarterly statements filed with the SEC for full discussion of those risks and uncertainties. If you'll advance. I'd like to talk to you about what we're seeing in the markets and increasing optimism as the third quarter has unfolded and we move into the fourth quarter. Our intermodal volumes are now at above pre-COVID levels. It's really been led by our domestic product, which has benefited certainly from the Amazon era. It's benefited from tightness in the truck market. It's benefited from inventory replenishment and just low capacity with truck drivers. We have a very strong service product as well.
I'm going to talk about that in a little bit, which gives us some confidence to innovate into that arena. International has really started to pick up over the last couple of weeks as import activity has been very strong. Even on the East Coast, export activity has started to pick up as well. You can see within our merchandise network, we're pretty close to pre-COVID levels right now. That has been driven by the improvements in automobile volumes. Inventory levels in automobile, finished goods, finished vehicles remain very low by historical standards. It's down about 26% year over year. We expect continued strength there. As we've talked about, that's also pulling product through the supply chain. You are seeing coil, steel, metals business picking up as well.
We're seeing plastics volumes pick up as well, both driven by the auto franchise, consumer markets, and the housing market. Plastics prices at this point are at a 52-week high. We're seeing a flush of that product coming our way as well. You have the energy-related markets. We're comping up against some pretty hefty headwinds within our crude oil franchise. Volumes sequentially improved every quarter in crude oil last year. Right now, our crude oil volumes are down about 90% year- over- year. There still is soft demand within the gasoline markets. That will impact light crude volumes for us. The spreads aren't really conducive to a lot of crude by rail to the East Coast, but we may see some heavy crude as the fourth quarter progresses.
Within coal, our utility volumes in August were over double what they were in May. We are seeing improvements there. We are starting to see a little bit more export activity into India and into China as well. While coal remains pressured and in a secular decline, we are seeing sequential improvements within that franchise. We will turn to the next slide. I will talk a little bit about our service product. You can see that train speeds have remained kind of steady for us as volumes have improved through August, as has terminal dwell. Throughout all of this, we want to remind everyone that we rationalized two hump yards. We did it while continuing to deliver a very strong service product to our customers. That has allowed us to start seeing highway conversions. That has allowed us to pick up some share.
That has allowed us to put some innovative new products out into the market, such as the recently announced intermodal product between the Southwest and the Southeast with both BNSF and UP. Recognize those are the two fastest growing regions of the country. I will close with a slide on our outlook. I will turn it over to Mark. Even before the pandemic, we were seeing changes in the supply chain due to the Amazon era. With the pandemic, we have seen a much deeper disruption to the supply chains. It is a profound reorientation of how goods are moving. Frankly, this creates a huge opportunity for Norfolk Southern because we firmly believe there is going to be greater risk aversion in inventories going forward. We believe that inventories are going to be held closer to the ultimate consumption market.
That is the environment and that is the geographic location in which we operate. It also will support a robust demand for intermodal. We have the most powerful intermodal franchise in the East. We are aligned with the best channel partners out there. We have strategic and strong access to every East Coast port. We have the capacity, and the capacity has already been put into the ground. We are putting out a very good service product. We are attracting new business, and we are adding it into an existing network. What that does is it creates a lot of operating leverage, which creates a lot of benefit for Norfolk Southern and for our shareholders. We are going to continue to innovate.
We are going to continue to look for products that we can put into the market that bring us closer to the consumer-oriented and the consumer end of the overall economy. We are doing that in both intermodal and in industrial products. Within the entire economy, as a result of the pandemic, we think there is going to be more reshoring and onshoring. That is going to benefit Norfolk Southern as well because we sit on top of about two-thirds of the consumption within the economy. We think that those products are going to be manufactured closer to the end use. We also have the best-in-class industrial development franchise. That is going to help us site new manufacturing facilities on our franchise, which is going to support further growth for us. We have got a very strong merchandise franchise. You have heard me talk about the diversity and the resilience there.
We set record for merchandise revenue in 2019 and in 2018 and in 2017 as well. We serve more U.S. vehicle production than any other railroad and more integrated steel mills than anybody else do. We are pretty confident about where we are headed in that franchise. Overall, we are continuing to make changes to our operating plan as we continue to look for opportunities to deliver efficiency and productivity. Personally, I have been out with eight of our nine operating divisions over the last five weeks talking to them, our operating team, about how marketing and ops can work more closely on driving improvements in productivity and in service and in revenue growth. We are going to continue to do it based on data. We are going to make data-driven objective decisions on what is best for Norfolk Southern and for our shareholders.
are going to continue a no-surprises approach to PSR, in which we are collaborating with our customers, our shortline partners, with our port partners on ways to improve our efficiency and their efficiency while preserving a platform for growth. We are going to continue to be focused on those initiatives. We are going to be data-driven. There will be no surprises. Mark?
Yeah. Go to the next slide, which is slide six. Let's talk a little bit about our productivity trends. In particular, our quarterly T&E productivity. You can see this is a chart we've shown before. Going back to 2015, we were attaining 3% productivity increases each quarter. As you can see here, we really saw a step change acceleration in productivity as we launched PSR in mid-2019. Now, two notable points I want to address here. First, you can see the effects that the pandemic-related volume decline had on the second quarter productivity from that 29% decline in GTMs. Now, despite that anomalous volume decline and productivity dip, the Q2 productivity levels were still at historically high levels, which shows the amount of change and structural improvement that's been driven into the business since the PSR launch. Second, and more important, is the third quarter data point.
It's trending very well, as you see on the chart. We're having good success bringing volumes back onto the railroad, leveraging our existing resources, which the second quarter call. In fact, both July and August, we drove crew starts down by 10 percentage points more than the volume decline year over year. Pretty good story. That productivity is a result of absorbing volume on existing trains as measured by train weight. If you go to the next chart, you'll see here's a snapshot of train weights by quarter since the beginning of 2019. You'll see in the third quarter, we increased train weights to around 6,900 tons per train. That's an 11% improvement since the beginning of 2019. What you're seeing here is the success of adding incremental volume into existing train service, whether it's intermodal or merchandise volume.
We're leveraging the capacity dividend we created with our PSR-based Top 21 operating plan, running a fluid railroad with fewer but bigger trains. Now, remember, this improvement has come despite headwinds from less bulk freight, including coal. I'm sure everyone knows the story with coal. You saw it on Alan's slide, his first slide, but it is down disproportionately, about 33% year over year. That obviously poses headwinds to average train weights. However, the team's been able to overcome and offset this by fitting the rebounding volumes that we've seen here in Q3 on a train plan that was downsized for the pandemic. As business has returned here in the third quarter, we've avoided the addition of new trains. It's a good story on productivity. If you move to slide eight, I'll just take a second here.
Let me give you a brief update on capital. We continue to be in very good shape with the balance sheet. We've got about $1.2 billion in cash after the dividend payment that's scheduled for tomorrow. Total liquidity stands at $4.7 billion in an economic environment that's actually improved from what we started to see in April and May, where everyone started to tighten up a bit. We feel very good about our liquidity. I will say we are still committed, however, to our dramatic reduction in capital expenditures in 2020. We've reduced our budget to $1.5 billion while keeping the physical network in good shape, while advancing the locomotive modernization program that we have underway, and also protecting our near-term revenue opportunities. We are scrutinizing the dollars we invest. That's a priority for us.
I am very proud of our team and how quickly we reacted to help deliver a more constrained CapEx budget this year with the onset of the pandemic. With that, Jason, Alan and I are open to questions.
Okay. Fantastic. I think I'm able to conduct the IT movements here behind the scenes. I have a few of my own prepared questions, and then we're getting a bunch in from investors. I'm going to try to balance it so people can sort of get what they want asked. I guess this can go to Alan. Alan, when you look at your Yield Up program and you look at sort of your competitor CSX beating you out there on the volume side, do you think that Yield Up program is part of the reasons why you trail them on the volume side, or do you think it's something else?
Yeah. We talked about this, particularly after the first quarter. We highlighted that there were a lot of issues that were going on that were impacting Norfolk Southern more than maybe some of the other rails. That included our utility network. We have a larger percentage of our coals in our utility network than some others. It included crude oil, I mentioned, it included ethanol, it included NGL. There was a lot of pressure on energy markets, which we faced. We also knew that some of these issues, we were going to overcome them as the year progressed. You can see improvements in our volumes basically since the middle of the second quarter, since about week 20 in mid-May. Look, we understand that we operate, and we are defined by that $800+ billion truck and logistics market. That is where our opportunities are. That is where we are positioned.
That is where Norfolk Southern excels. We are going to continue to excel in that consumer-oriented market. We are confident that is where there is going to continue to be long-term growth and long-term demand in the U.S. economy.
Talk a little bit about that market because clearly truck rates have been off to the races the past month or so. This week, it's probably not going to get any better with road check having been deflated. How much has that helped you guys? How much that we've seen on the rebound on the intermodal side or maybe even some of your merchandise traffic can be just attributed to the demand function out there in the marketplace?
Jason, I think it sells quite a bit. What you're seeing is that spot rates are pulling contract rates up. That is going to offer some long-term support in that market. There's not enough demand. I talked a little bit about the supply of truck drivers, which has been impacted by increased drug testing. It's been impacted by higher insurance rates. These are all kind of like secular drivers that are going to continue to put pressure on truck capacity. We're also seeing kind of an attempt at inventory restocking. Retail inventory to sales levels in July were the lowest on record. Overall inventory levels in August were even lower than July, even though sales were not up. We do not have the final census data. I think you're going to see continued pressure there as well. You've got PMI is positive.
Durable goods is up 11.4%. There is a lot of demand out there for our product. The space in which we compete, which is within that truck market, is pretty stressed.
If we could just flip a little bit, I'm going to stick with intermodal. Then I have a quick question for Mark, and I'll grab some from the clients. On the international side, we've seen a lot of shifts in sort of global supply chains. A lot of people moved to sort of Southeast Asia away from China. That's pushing from the West, which means it's going to come to the East Coast or it's going to come to the Gulf. How do you see your share of international intermodal over time?
Over the last 10 years, we've seen that profound shift that you talked about on our volumes from West Coast originations or terminations to East Coast. We think that will continue. Right now, there's a lot of business going in through LA Long Beach. A lot of that's getting translated into 53-foot containers, which benefits our intermodal franchise. As I talked about, we just launched a couple of new services from the Southwest into the Southeast, which is helping as well. We've got great access to all of the East Coast ports. We're aligned with a lot of the capacity and the vessel strings that are hitting the East Coast right now. We're starting to see improvements in export activity through the East Coast as well.
Perfect. Thanks.
We've got the best intermodal franchise in the East, and we're going to leverage it.
Great to hear. Mark, I wanted to follow up on one of the comments you made. You talked a little bit about CapEx this year. I know you don't have a budget for 2021, but given how low it is for 2020, directionally, how much of an upswing should we expect for next year?
Yeah. It's a fair question, Jason. I mean, we clearly went low by taking out $500 million this year. My goal, it's going to want to go up from here. My goal is to keep the increase as small as possible. Regardless of revenue, I want obviously, I'd like to see revenue grow at a much faster rate than our CapEx and decouple this percentage of revenue guidance that we've lived by in the past. I think we'll probably see a modest increase, but I'm not going to put a fine point on it yet.
Okay. So a modest increase is what we should expect.
Yeah.
Perfect. Okay. Let me grab some questions here from the audience for you, gentlemen. Can you see a scenario in which headcount growth is flat or close to flat sequentially 3Q versus Q2 despite the improvement in volume?
Yes. I can see that scenario.
There you go. Easy one. Do you see the potential for OR to inflect positive year over year at some point in the second half, or does that require a very substantial step up in volume from today's levels?
I think the momentum that we've seen here with volumes in July and August gives me pretty good confidence that we're going to be back on track to year-over-year improvements in our operating ratio, certainly in the third quarter.
Fantastic. Can Alan elaborate on shortline partnerships and examples of success?
Yeah. We partner with over 250 shortlines. They are effectively an extension of our network. They are also a sales arm for us. They are highly entrepreneurial. They are very close to their customers. We work with them closely on both efficiency and productivity initiatives, but also growth initiatives. You see a lot of that in the merchandise network, particularly in stuff that is truck competitive. Typically, a shortline is going to be serving industries with small lots or small shipment sizes, maybe somewhat frequent shipments, but small sizes that can transform back and forth between truck and rail. Our focus has been to partner with the shortlines on putting out there a really good service product and a high degree of transparency and visibility and ease of doing business so that our mutual customers will shift stuff from truck to rail.
Here's another one coming in. Do you have any comments on the recent filing you guys did with the STB along with CN and the UP on a new method to determine revenue adequacy, EP766? What drove this, and what benefits do you see coming out of it should the STB rule in your favor?
Yeah. Sorry. Do you have any comments?
No. I don't have comments on that.
I don't have any comments on that, Jason. I'm sorry.
No. Another one. When you talk about OR, what are you comping to versus 2019? There were many one-time items in 2019, particularly in 3Q. I guess they are just trying to go apples to apples.
Yeah. We did have a legal write-off we disclosed in Q3 last year that was in the numbers. All in, I feel confident that we will outperform the OR of last Q3. Even when you exclude that one legal charge, I think we're going to be within spitting distance of the adjusted OR last Q3 and with a good shot at even improving off of that.
Perfect. Another one just came up literally just a second ago. Just to clarify, you expect OR improvement year over year in 3Q, not just at some point in 2H 2020?
Yes. Correct. In Q3 is what we're talking about.
Fantastic. I think we actually, believe it or not, got to all of them. I think we finished a little bit on the early side, believe it or not. Listen, gentlemen, thank you so much for the time. As always, as I have been telling everyone, I just want to give my best wishes and thanks to the men and women of Norfolk Southern who are keeping our supply chains running during the pandemic. Their efforts are greatly appreciated on my end.
Thank you, Jason.
Please stay safe.
Thank you, Jason. Take care.
Bye now.