I think we're gonna get started. It's 12:00 P.M. I think the webcast should be on now. We're just kicking things along, day one of the transport conference here at Deutsche. We had CSX this morning. Just really, really pleased to have Norfolk Southern here, joined by the CEO, Alan Shaw, the CFO, Mark George, Luke Nichols from IR. Gentlemen, thank you so much for taking the time and, and joining us today. Obviously, a lot to talk about in volume and costs, and a lot of the recovery is now behind you guys, and hopefully, the service momentum is very clear to everybody. I just want to say before your prepared remarks, I think you guys got through a really tough time, and I think you've handled it almost perfectly.
I think everybody in the investment community knows that, you know, you guys responded in a way that was, that was great and effective and, and responsible. I just want to congratulate you for doing that and, and now, hopefully, kind of on the upswing from a service and, and volume perspective. The company's got a few minutes of prepared remarks, and then we'll jump right into the Q&A. I'll hand it over to you, and, Mark, the clicker is right there if you want to pass it on to the slides. Thanks a lot.
Amit, thanks. Thanks for hosting us, Mark and Luke, I'm really happy to be here, and I, I appreciate your comments. You know, I'll tell you that what we've done this year is perfectly aligned with that groundbreaking strategic vision that you and I talked about quite a bit, right? It's really kind of focusing on, you know, the, the best interests of our, of our shareholders over the long term and doing the right things. That generally works out. We're gonna make some forward-looking statements today, which are certainly subject to risks and uncertainties. I'd invite, Amit, your guests to take a look at our website. The slides are up on the website, you can take a look at the website, our SEC filings, for a better description and more detail on, on our risks and uncertainties.
You know, being a CEO is all about accountability, and it's all about keeping the promises. I'm really proud of how we have done exactly what we said we were gonna do this year. I'm proud of the fact that we're becoming known as Norfolk Southern, coming down as the railroad that does what it says it's going to do. You know, we went into this year, on the heels of our Investor Day in December, saying we're gonna be focused on investing in safe, reliable, and resilient service, productivity, continuous productivity, and smart and sustainable growth. What we've done through this year is we've continued to invest in our resources, which includes locomotives, intermodal infrastructure. It includes technology, it includes freight cars and the merchandise network that help us compete with truck, and it includes our people as well.
We're seeing through the near-term headwinds associated with inflation and associated with interest rates, because we've got so much confidence in our franchise, our customer base, our strategy, and the U.S. economy. We said this year we're gonna make a safe railroad even safer, and we're doing that. Our safety stats are markedly improved over last year, and last year, the number of derailments on Norfolk Southern was lowest in two decades. We can do better. You know, one of the things that I do, even though I've been at Norfolk Southern for 29 years, is I look outside of Norfolk Southern for inspiration and for talent, and I'm willing to look outside of the rail industry for the same thing. I mean, that's one of the reasons that Mark George is with us.
We talked about another addition that we just announced this morning, where Norfolk Southern is looking outside of NS and looking outside of the rail industry for talent and inspiration. You can also see that with us hiring the folks from Atkins Nuclear Secured. I wanted to get a safety consultant this year. That was something that we had teed up at the end of last year, and it would have been really easy for us to hire any number of rail safety consultants who do a good job, right? They've done a very good job for the rail industry. I wanted something better because that's what our strategy is all about, is being best in class.
I got in touch with someone who used to run the Navy nuclear program and asked him to put together a team to work with us as an independent consultant, reporting directly to me for two to three years and focusing on our safety culture. Admiral Kirk Donald has put together this, like, all-star team, several former admirals, seven or eight others, all of whom have careers in the nuclear Navy. The nuclear Navy is a gold standard of safety in all of industry, and we're gonna be the gold standard of safety in the rail industry. We continue to invest in our people. You know, we were the first railroad to have paid sick leave for all of our craft colleagues. That's important to me. You know, employee engagement is really important. Our employees are a critical component of our success moving forward.
One of the other things that we promised is that we were gonna fix service as we moved out of the second quarter, and we've done that. Our service metrics have improved dramatically, whether you look at train speed, terminal dwell, cars on line, and I, I told everyone, "Pay attention to cars on line. That's where you're gonna start to see the real improvements." We took a step back in the second half of July. I'll admit that. I'm not gonna make any excuses. We're getting that fixed as well, and we're addressing it. I'm confident that we're on the right trajectory for continued service improvement. What you've actually seen is that's started to create a little bit of lift in volume for us, right? Because that's frankly the cornerstone of our strategy, right?
If you're a service organization, and you improve your product quality, demand for your product is probably going to go up. You might even be able to charge more for it, too. It's a, it's a double coupon for us. As I take a look at volumes, there's certainly a lot of strength in automotive. We see a lot of strength in international intermodal as well. We're taking share away from truck in international intermodal right now, despite the loose truck market. The domestic market in intermodal is really pressured by the loose truck market, although we see that spot rates have kind of flattened out. So maybe—
Prices coming up, ticking up a little bit.
Yeah.
Yeah.
Mark and I were talking about that over breakfast, that, that could provide us a competitive advantage relative to trucks moving into, into the fourth quarter. Metals and construction is performing relatively well. I mean, frankly, anything associated with construction right now is, is white hot, and I'm sure we'll have an opportunity to talk about that. You know, the real drag right now on our volumes is anything that's energy related, whether that's utility coal domestically, export thermal coal, or NGLs, frac sand, you know, any of the, the crude oil products in our chemicals franchise. There, there is a lot of uncertainty as we move through the second half of the year. We're gonna, we're gonna pay real close attention to this, as you will.
I think it's... You know, our volumes are gonna be dependent upon how quickly we can spin our assets, and we're seeing improvements there, and then just the, the demand in the, in the truck market going forward. Yeah, we've talked about our strategy a number of times. It really is about leveraging the unique strengths of the Norfolk Southern franchise. We serve about 60% of the consumption of the U.S., 50% of the manufacturing. We serve over half the U.S. light vehicle production in the United States. We've got the most powerful intermodal franchise in the East, and we serve more short lines than any other railroad in North America, which expands our reach and gives our customers even more flexibility. Then, you couple that with some macro trends that are in place, such as more e-commerce.
You know, e-commerce is three to four times more intermodal intensive than regular brick-and-mortar retail, so that's a growth driver for us, particularly our franchise. Poor position of inventory next to the consumer, that's what we serve with our intermodal franchise and in our, our footprint in the East. Sustainability is becoming more and more important to our customers, and certainly rail is three to four times more carbon efficient than truck, so that's another plus. Then onshoring. You know, investment in manufacturing this year is up 75% year-over-year. New factory builds are running at a clip right now that's 3x what it was in 2010 through 2020. We're in a manufacturing super cycle, and a lot of that is in our service region, in the Southeast and in the Midwest.
Nine of the top 10 states for doing business in the United States are served by Norfolk Southern. There are a lot of macro factors that are pushing business up against Norfolk Southern's unique franchise strengths. We've got a franchise that's built for growth and that faces the fastest growing segments of the U.S. economy, and that's what we fully intend to leverage with that new strategy that we outlined last December, which is all about safely delivering reliable and resilient service, continuous productivity improvement, and smart and sustainable growth. With that, I'll open it up for questions.
One of the things that's interesting. By the way, if anybody wants to chime in questions, it's a pretty informal setting, so please just speak up whenever you, whenever you'd like. One of the things that's interesting that, you know, when you guys had your last, when you became CEO of the company, you know, I feel like the, the model for the industry was maximize the fundamentals on the way up and minimize fundamentals on the way down, which kind of defies the laws of physics a little bit in terms of leveraging the cost structure on the way up and then minimizing the cost structure on the way down. Of course, labor is the lever to do that, and obviously, the, the industry kind of suffered service as a result of that.
I feel you, at that Analyst Day, Alan, kind of started on this saying: "Hey, listen, like, we're, we're gonna run a little bit heavy on cost in a weaker market, but it's gonna cycle over cycle, give us an opportunity to win more business, preserve that service, and the NPV of that over time is, is, is positive." You've, you've, you've invested heavily in labor countercyclically, which is very new for the industry, and I feel like Norfolk has kind of led that. Where are you in that right now? Are you at a place where you feel you know you're good on labor? Do you think you need to add, add more headcount? Or are we now primed for delivering a really good service product when, when the cyclicality of the, of the, of the model kind of is more accommodative?
Hey, you know what? We're students of history, right? What we've seen is over the last 25 years, rail has ceded share to truck with only one reason. Look, rail is less expensive than truck, offers a sustainability advantage to truck, is safer than truck, and it offers a capacity advantage to truck as well. The one reason that rail has lost share to truck is service. Again, as we think of ourselves as a service organization and decide we're gonna compete based on service, and it's not only that physical delivery of the goods, it's like that overlay of a best-in-class, consumer-oriented experience for our customers as well. We know we can grow, particularly with our franchise. That's the way this works for Norfolk Southern.
You know, we also know that if you give your customers a lousy service product every three to four years, you're never gonna be a growth franchise. We are a growth franchise, we're investing in that through the economic weakness or softness, because the numbers are really compelling. You know, yeah, we could furlough, you know, we could furlough 1,000 employees and save about $90 million, I also know it costs $50,000 to recruit, hire, and train a conductor, right? That kind of cuts that savings in half. Every three to four years, we would lose $800 million to about $1 billion of revenue, because our service wasn't in place to handle it. We would also have service recovery costs, what? Tracking about $50 million a quarter.
Yeah, the, the math is compelling. You do have to invest to get the return. Just like every other investment, the investment comes before the return.
Can we talk about the volumes now down a little over 2%, 2.5% quarter-to-date. They're down 3% year-to-date, so you've made up some ground. You're kind of at this, like, high 120s, low 130s, depending on the week, kind of, weekly car loads. The service has gotten better. There's a little bit of a blip, like you mentioned in, in late July.
East Palestine now, at least in terms of the, the detours and the extra congestion is, is now we're back online. Is there a volume that's sitting on the sidelines that can move? I mean, when, when do we get, like, a real... Are we at the point now where, listen, we, we're susceptible to cyclical factors from where we are today, or is there still volume to be moved that has yet to show up in the weekly car loads because of what we've went through in East Palestine?
I think that as our network continues to improve its fluidity, we'll pick up more automotive buy-in. You know, automotive has been a strength of ours, but we gotta get the multi-level network spinning a little bit faster. There's some volume in the agriculture markets, that, that we could handle with improved service, a little bit within our metals franchise as well. I think within coal, within intermodal, it's, it's all macro related, but I am confident that we are gonna continue to enhance our service product to help us pick up the business, and then the rest of it's macro related.
There's always something that comes up in this industry in terms of now you have the UAW, and there's a lot of noise around what happens with the Big Three auto production come September. You have a big auto franchise, as you, as you talked about. It's a growth driver for you right now. What, what's your kind of latest thinking? I know a lot... You hope there's no strike, but what are you hearing? What are you thinking in terms of, you know, how that franchise can perform over the next couple months?
If there is a strike, and I'm, I'm not gonna call that, right? That's— There are other people more qualified to talk about that. You know, there's, there's, there's ground product. There's product on the ground right now, that we could handle for a week, week and a half, finished production that's, that's waiting to move. If it were throughout the whole industry, so the, the, just the Big, yeah, for all the Big Three, you know, it would probably impact our volumes maybe 30%, 40%. You know, we're in a pretty good position because of our best-in-class industrial development team, that we've got a really diverse portfolio of, of OEMs on Norfolk Southern throughout our geographic network, and so we're not just solely tied to the Big Three.
30%, 40% of your auto volume is tied to the Big Three. What's your ability to kind of protect the network if something like that were to happen? What's down the cost structure to the best of your ability, and then kind of protect the network when that, that volume ultimately comes back on the back of a resolution?
Potentially, that were to happen, any, anytime we see a downturn in volume or an upturn in volume, now we will immediately take a look at our train plan, and make sure that we're handling the volume that's out there, but try and be as variable with our cost structure as possible.
Can you talk about the, the service right now? I mean, just maybe give a little bit more color, kind of what happened in late July and, and where we go from here? There's obviously always further room for improvement in service. You guys have made tremendous improvement over the last several months, but, maybe just give us a color on, what happened in late July and, and, and where we go from here.
Yeah, yeah, we, we had some weather disruptions. Candidly, I don't even like talking about that because that's a, that's an excuse, a resilient railroad doesn't make excuses, I'm really focused on getting ourselves back to where we need to be. Paul and his team have done a fantastic job of turning our service around this year. It's, it is East Palestine and the impact of getting that track back, but it's also process improvements, right? It's, it's continuous improvements throughout our terminals and execution, strict adherence and execution to our plan and then iterating that plan. This team's really focused on it. I'm focused on it.
First, first place I go every morning when I'm in our building is the network operations center, you know, our mission control, even before I even go to my office, because I wanna get my finger on the pulse of the network. You know, we talk about being customer-centric and operationally driven, which means there is an expectation and a standard of care expected for our operations.
Where's the Trip Plan Compliance now in terms of where you are right now, you know?
Yeah, our customer-facing network, our customer-facing networks are pretty close to the, our targets. We can do better. You know, one of the things that we're doing, because we've got our eye on the future, is we're sitting down with our customers, including some of you are gonna talk to tomorrow, and saying: "What kind of service product do you need five years from now? Not just today, but in order to really grow on Norfolk Southern and incorporate Norfolk Southern's franchise into your long-term supply chain needs?
What service product do you need five years from now, 10 years from now? It might even define it differently. Second quarter was really tough for you guys, and you talked about it way back in May, so that wasn't a surprise to anybody. It was tough for everybody, trucking, rail, everybody. I think for you guys, though, there are some reasons where it gets better from here. Not where you want to be, but relative to where you were in the second quarter from an OR perspective, it gets better, I would imagine. Volume is kind of a wild card, but maybe, Mark, you can talk about or Alan, in terms of what's the right calibration for OR expectations, profitability expectations to move from 1Q, 2Q to 3Q? How'd you do that?
Yeah, we, we would expect that we'd do better in the back half than, than certainly we did here in the second quarter. As I laid out on the call, I mean, there are some unique RPU challenges going into the back half that are really going to provide some headwinds for us, as we look at the operating ratio. You know, we were pretty optimistic, that, you know, we'll have volume growth return in the back half, principally in the fourth quarter. You know, we just got to remain a little cautious on that. I think there is a new variable out there, which is the increase in fuel costs, that over time, I think fuel going up is, is probably accretive to our operating income and, you know, supportive of our OR.
I think as it's going up, we have a lag effect, especially as it turns like it, like it has been. third quarter, in particular, you know, we'll probably face the impact of the higher fuel costs, but you don't get the revenue surcharge, you know, except on a couple of month lag, usually. I mean, there are some lines of business where you might get it within a couple of weeks, but by and large, the lag is closer to a couple of months.
When we think about yield, because that's obviously such an important factor, you've got fuel stepping down call 8%, 10% sequentially. There's a sequential yield headwind on fuel. I'm talking about a two-month lag, but yeah. There's a sequential step down. Coal is another, another negative guy. Pricing's positive. You know.
I think coal pricing is positive.
Yeah, pricing is positive. Then, so then we're talking about mix. So as you think about mix, not just mix in general, but then there's, like, mix within mix. It's also a little bit. Maybe talk about what your expectations are for mix. I mean, does yield on an absolute basis come down sequentially from 2 Q to 3 Q?
There are, there are a lot of headwinds associated with yield as measured by RPU. Right? Certainly, you mentioned fuel surcharge. You mentioned export coal pricing. It's, it's accessorial as well. Then it, it is mix within mix, and you just pull apart our markets. The domestic utility market is pretty weak right now. Export thermal is pretty weak. Export met is pretty strong, but the pricing is pressured. Well, export, we were looking at it this morning, export met prices are still, like, $250 a metric ton. I mean, that's historically, that's a really, really good number. This is not 450 like it was this time last year. Right?
Then you look at our intermodal franchise, and that's probably where we're seeing the biggest mix impact, because as I know, we're stealing— we, we are securing share from truck and international intermodal. International intermodal tends to be a little shorter length of haul. The box is 40 ft instead of 53 ft, so it's... It's a private box instead of potentially our box and our chassis, so it has a lower RPU than domestic. Then as intermodal outperforms some of the other markets, that has a negative mix as well. Then you walk into our merchandise network, you see negative mix there as well, when you see chemicals effectively leading the decline in, in the merchandise market.
Just on, on pricing, because intermodal is such a big piece of your carload, maybe not a big piece, piece of revenue. But I mean, the pricing environment there has got to be tough vis-a-vis truckload, and I think Swift Intermodal's contract this year, you pulled it forward. I believe you secured it as of July in terms of a new rate. Is pricing in intermodal just very pressured right now? Even if you're being disciplined on pricing, if compliance is low and you're not moving as much, how do you kind of think about that on the intermodal side? Just because it's such a big piece of the cargo.
Yeah, well, it is pressure, right? We got to respond to the market. We, we have been disciplined in our approach to pricing relative to truck since the last seven, eight years, right? Since I become CMO, in that we're not going to really follow that spot market. You know, that's, that's 20%, 10%, 15% of the volume that's out there. If that, you know, we've got long-term relationships with the best channel partners in the industry, including J.B. Hunt and Hub. You know, you take a look at their strategy, it's the same as ours, right? They're investing in long-term growth.
I'm, I'm much more interested in a long-term approach with them as they are with us, which includes a long-term approach to pricing, which is why, you know, you've seen continued quarter- over- quarter- over- quarter RPU less fuel increases for us in intermodal and in merchandise. That's been our approach. I'll tell you, Ed and his team have done a really good job this year. In many markets, we're actually exceeding our, our rate plan. As we improve the quality of our product, as I noted before, there will be more demand for our product. We'll be able to place more value into the market, and we'll be able to price accordingly.
Volumes down year-over-year, but kind of flattish as well, sequentially, yield pressured sequentially, so revenue kind of flatted down sequentially. The only other lever that translates to EBIT is costs? I know that you guys were running a little heavy. You ring-fenced some of the Palestine thing, but there's a lot of stuff you can't ring-fence.
Yes.
I think of, like, peanut butter. It's like costs everywhere.
Yeah.
Mark, you've done a great job kind of giving us a sense of, like, the ex-fuel costs and how those trend and how much can unravel. Maybe you can just help us out with that.
Yeah, I think, you know, when you, when you look here, going into the back half, you're going to see comp and ben sequentially pick up. We've got the wage rates that go into effect the—
It's kind of offset that $35,000. That's offset with some of the other stuff.
On a per employee.
Yeah. Yeah.
Employees are going up.
Right.
The absolute dollars you'll see climb, and I, I basically lumped together all the other costs because there's puts and takes in there, and so ex comp and ben ex fuel, I kind of see them sideways in the back half. You know, there'll be puts and takes within the different P&L line items, but I see those going sideways and fuel, like we just talked about, that will tick up, obviously, in the third quarter based on the new rates that we're starting to see.
You say flattish costs the second quarter?
Correct.
Right. Got it. Okay, really, it's just about volume.
It is. How much, how much volume do we see come back onto the road? We know the RPU headwinds. We just kind of laid them out. So it really gets down to volumes.
Then as we move into next year, service recovery costs start to unwind.
Yeah, and some of the service recovery costs are in that decline. Like I said, there's some puts and takes in a line item by line item between equipment rents, between, purchased services, materials. We're going to start seeing some of those service costs here unwind in the third quarter and accelerate down in the fourth quarter. There's other increases that kind of mitigate some of those as well.
If employee costs are going up, fuel costs are going up, and everything else is kind of staying flattish.
Sideways.
The OR and revenue is kind of flatted down, and the OR is flat to worse, right, sequentially, 2Q, 3Q?
It, it depends on volume. You know, could it be... Could it improve? Yeah, it should improve. Modestly. It's really going to depend on the, the state of volume. You know, we started off July, frankly, a little bit lighter than we wanted. We'll see what's out there, and certainly in the fourth quarter is where we're expecting a better year-over-year volume in, in our outlook, but, you know, I think we're increasingly cautious now.
Interesting. Great. Can we just talk about competitive? I want to talk about pricing for a minute later, but because that's obviously very important. I want to talk about the competitive environment because, you know, CSX and CP are kind of joining hands. I mean, it's funny, Tom was here earlier today. I think he, by accident, mentioned the Meridian Speedway, like it was CSX's, but of course, it's yours. So just talk about, you guys have a lot of confidence in your, your service, and you should, because the metrics have been great, so you compete on, on those merits.
Just talk about what, what the risks are from a competitive perspective, where two of the, you know, legendary service, you know, CP and CSX, the top-tier service providers, are getting together to move more volumes from Mexico to the Northeast and kind of in your backyard, especially with that auto franchise and Meridian Speedway?
Yeah, we're, we're engaged with, with our other rail partners as well.
Including CP.
Yeah, on opportunities to provide different service products out there to attract business. It's an important component of any rail franchise, is working with all the other railroads because, you know, 50% of our business either originates or terminates offline. We got unique franchise strengths, and that's what gives me so much confidence in our franchise going forward. That's why our strategy fits for us. I can't comment on anybody else's franchise. I have never been more excited about the future of Norfolk Southern than I am right now.
I think a lot of those conversations that are happening with our interline partners, just like the one you referenced, it's really about taking freight off the highway. We're having the same conversations with all the other interline partners, including CP, on what opportunities are out there for us to take freight off the highway.
[crosstalk] Our interline partners see our franchise strengths, too. They want access to that as well. Y ou know, that's one of the— Frankly, that's one of the reasons you see folks from other railroads joining Norfolk Southern.
Any questions for Norfolk? The audience. Can we talk about pricing in terms of where we are? Is the, is the book kind of fully baked from a pricing perspective this year, and now we're looking at 2024? Where are we on the pricing kind of?
Yeah, usually, the pricing calendar for us is, is kind of like a barbell, right? First quarter, fourth quarter is where you negotiate most of your, your deals. The coal pricing, particularly export, is linked to indices, and so that'll adjust throughout the year. As we move into fourth quarter and in the first quarter of next year, there'll be more opportunity to, to negotiate price, which is one of the reasons that I'm encouraged by our recent improvement in our service product and our ability to demonstrate to our customers, just like you said at the opening, that we're keeping our promises. We're doing exactly what we said we're going to do. That, that buys us a lot of credibility.
I'll tell you, I think, Ed and his team are doing an excellent job on pricing this year. They really are. We're having a very good year. It's just being eaten up to some degree by some of the other RPU pressures we've seen.
Can we talk about regulation? It's been a long time, February, right, since, since these East Palestine developments happened. I remember when PTC got legislated, it was like 14 days after the accident. You know, every day you wake up and it's less, right? I mean, I think the numbers, the numbers kind of, if you look statistically, rail is by far pound- for- pound the safest. There's just not, you know, reporters outside of every trucking accident on the highway, I would say. It got a lot of press and attention, but I think specifically, there's not a lot of argument to say that rail is unsafe. Nonetheless, you know, there's legislation that, that maybe argues for some more oversight and train lengths and train weights.
I don't know what you, what you see the latest and greatest on, on, on that is. What, what do you think the... I know you're a proponent of a safer, a safer railroad, and legislation to drive that, but there's risk here that maybe legislators overstep where there is no regulation needed? I don't know what your opinion on that is and what, what you think the, the implications are from these overviews?
Yeah, look, we are fully supportive of the legislative intent to make rail safer, right? We're really pushing for bipartisan legislation here. If you take a look at, you know, the NTSB report, you know, the NS crew did exactly what they were supposed to do. The wayside detectors worked as planned. There were no track defects. They're focused on a catastrophic failure of a wheel bearing of a car that no railroad owns and touched three railroads before it touched us. That tells me it does require an industry-wide solution, which includes rail car owners and customers and certainly railroads, right? You've seen me on the Hill, vocally advocating, frankly, ahead of the rest of the industry, on many of the provisions that are in the various railway bills that are in the House or in the Senate.
We're not waiting to act. You know, we implemented a six-point safety plan. We hired the Atkins folks. We have created a VP of safety at Norfolk Southern, and we're making real improvements in our safety culture. As I look at the bills, there's a lot of merits to many of them, and I don't think that the provisions that are out there would be too onerous on either the rail industry or on our customers.
Are there big, chunky costs, Mark, that you've helped us kind of refence second quarter, you've added to it? I mean, are we, are we mostly through it? I know the insurance is still on to come, but obviously, our spending before the insurance payments happen. What, what do you look at as kind of additional outlays from an expense perspective relative to where you've already accrued?
We've accrued based on our view that the vast majority of cleanup efforts should be done by mid-October.
It's $800 million?
Yeah. So far. Of which cleanup is probably environmental cleanup is the largest proportion of that, of that cost. We believe that the, the cleanup efforts should be completed largely by mid-October. You know, that's gonna obviously require alignment with the EPA. They, they too, validate that we are in fact done. Beyond that, you know, there'll be continuing legal costs, you know, as we, as we deal with the, the fallout, and litigation matters. You know, we don't know what fines and penalties may be out there on the come, and we can't estimate that, which is why we haven't recorded that. And, you know, there'll be some ongoing, you know, we haven't taken care of the medical funds yet as well, the other funds we've, we've recorded amounts for.
You know, if, if the cleanup efforts are done, really, like we anticipate by the fourth quarter there, mid-October, you know, I think the big ones that could move on us really relate to that legal world and fines and penalties.
Is all that covered on the umbrella, no pun intended, kind of insurance policy?
I think a large, a large proportion of what we recorded does get covered under insurance. We believe so, for sure. We have to start entering those dialogues with the insurance companies here, starting in the third quarter when we start filing the claims. Remember, you make the claims only after you incur the costs from a cash perspective, not when you accrue. That's why there's a lag there. That'll take time probably to settle, you know, not, not months, probably not even quarters. It's gonna take years, probably, to settle all of this. Then, you know, the, the timing of when we learn if there are any other fines and penalties levied is, is hard to predict or anticipate.
There's also third party.
Those would not be... Sorry, those would not be covered under insurance, any kind of fines or penalties, to answer your question.
Then potential third-party recoveries as well.
You would have seen that in the second quarter, we started our efforts to recover money from other third parties.
[Hey, David, back]?
Yes. In the earnings call, someone's asking about margin improvement, and I believe I'm just paraphrasing, but the answer was, there's not much you can do on cost, and there's not much you can do on pricing, so you need the volumes coming over the top. Is that just like a now thing, or are there things we should think about for next year and beyond that would change that equation?
Yeah, that's a now thing, right? It's, you know, pricing is effectively what it is for the rest of the year. Mark outlined our cost structure, where it is right now. As our network stabilizes, gets healthier, we're able to really iterate on productivity and take a look at opportunities to pull additional costs out. That, that was a reaction to the question specific to what's going on in the third quarter.
Yeah, bear in mind, I mean, this is a year where we're also investing a little bit more to build some resiliency in our network. You know, we had talked about the fact that our 95 different hiring locations, not all of them were up to minimum standards in terms of staffing levels. We were still on a quest to get to the point where, okay, we're staffed appropriately to handle the appropriate volumes in all of our locations, and then a little bit more for resiliency, so you can handle things like we even saw occur in July. Little bit of disruption knocks you off a little bit and starts to show visible signs in your network. You know, we've got to get to that point of being more resilient.
Then, to be honest, there is a lot of productivity opportunities out there. What, what Paul Duncan and his team are doing, you know, we created this performance excellence team, where we're marching around the network looking for productivity and efficiency opportunities to run the railroad smarter, better, where we do things we don't need to be doing. I'm, I'm super encouraged at some of the early findings here that I know will start yielding results in the quarters ahead. Definitely, actions around costs are still part of the equation going forward, but you're in a year now, like now, where we are investing a little bit. You know, we've had to invest a little bit more, even on some of the safety solutions that we've decided we need to do.
The six-point safety plan that we had launched, that results in adding some additional costs, and there's plenty other, other examples like that. I think the point here is there's a lot of volume we can start to absorb on this network without adding a whole lot of costs. You know, intermodal will have lift costs, you know, that's volume variable, but by and large, a lot of the merchandise volume, there's almost no incremental cost to it. We're, we're excited about the leverage on the upside, and that's really part of that strategy we talked about. [crosstalk] Leveraging volume.
If I look at, like, employment data, I look at, like, you know, non-train and engine employees relative to train and engine employees, it's quite high as a percentage of non-T&E versus to T&E relative to your direct competitor. There's a lot of, like, noise in that data, so I don't want to say, like, that's definitive, but is there an opportunity to kind of take your biggest, you know, headcount item in terms of non-productive labor? Every employee is productive, I don't mean it like that, but non-T&E employees.
Non-direct labor.
Yeah, correct. Is there, is there an opportunity there, or i s there something in that data that's, that's not correct?
Well, we're, we're looking at it. That's an area where we are actively benchmarking. We do know that there's a couple of things. There are contractors, as an example, where different companies can take different approaches to how you do work. Okay, whether you use subcontract or third-party labor versus in-house labor. That's definitely an element. One of the areas would be in the, in the world of IT and technology development, how much in-house versus how much contracted labor do you use? Even on the customer service side of intermodal terminals. You know, those are areas actually where we have a team doing some benchmarking to look at the non-T&E-
Is there fat to trim there on the labor side, the non-T&E side, or is that, is that part of that noise around how things are reported?
We're going to continue to look at that. We're-- actively, we are. I will tell you that we are hiring more supervisors in the field, and we're hiring more folks in mechanical. Elsewhere, we're going to take a really hard look at it.
Okay. Any final questions? Ben?
As you aim to take more truck share, what's the best way for us to model this then? How should we think about the freight profile in terms of, you know, 500 mi plus, 1,000 mi plus? These are customers that are used to paying maybe three times as much, but they get there quicker. How should we think about all of this in terms of freight profile?
Yeah, our, our average length of haul in intermodal is pretty close to, like, 600 mi, 700 mi, right? If you take a look at the population centers in the east, it's 600 mi, 700 mi, or 800 mi apart, which, that's a real sweet spot for us. We've actually proven that we can be really efficient, really effective with really short-haul business, whether it's Savannah to Atlanta or Charleston up to Greer to service the inland port up there. The merchandise network, there's a lot of opportunity for stuff that's anywhere over 250 mi. I think one of the things that really excites us about all of this is it's, it's not new train starts.
You know, it's a five, six, seven more intermodal boxes on an existing intermodal train, you know, and, and it's a couple more boxcars on an existing merchandise train. It really is all about revenue density on existing train starts, which creates a lot of good incremental margin leverage.
Yep. Rachel?
I hate to go back to an answer the question, but Mark, you, you talked about your outlook, sort of embedded in your outlook, just the return of volumes in 4Q. Can you remind us if that's, you know, what's driving that? Is there, like, a comp issue that we should be aware of? Or, like, why, why are you optimistic that volumes should come back?
I think it's, you know, an anticipated demand return in the fourth quarter. You know, I think it's a little bit of intermodal, it's a little bit of industrial products, and, you know, it's probably—
Yeah.
Yeah, certainly, the network velocity allows for us to take on some more demand, you know, unless there's softening in the macro. That's what we don't know.
You see it, right? You, you take a look at our, our volumes, year-over-year comps relative to the rest of the industry. Since our service started to improve in late April, we've outperformed. Service sells. It might take a while, but service absolutely sells, which is why it's so important to have that standard of care for operations that I talked about earlier.
Cut your turns, you can move more goods.
It's looking at a faster railroad and a less expensive railroad.
You know, if we can get our turns up, you'll see a lot more automotive volume, you'll see a lot more steel volume because the demand is there.
There's a lot of reasons, even in this economic environment, people want to shift business from truck to rail because we're less expensive. They want to save money, too.
On that positive note, Alan, Mark, Luke, thanks so much for taking the time. Appreciate it.
Thanks, Amit.
Thank you very much.
Thank you.