Norfolk Southern Corp (NSC) 2026 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Norfolk Southern Corporation Third Quarter 2026 Earnings Conference Call. (Operator Instructions) Also note that this call is being recorded on Thursday, October 22, 2026. And I would like to turn the conference over to Luke Nichols. Please go ahead.

Thank you, and good morning, everyone. Please note that during today's call, we will make certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or future performance of Norfolk Southern Corporation, which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important. Our presentation slides are available at norfolksouthern.com in the Investors section along with a reconciliation of any non-GAAP measures used today to the comparable GAAP measures, including adjusted or non-GAAP operating ratio.

Please note that all references to our prospective operating ratio during today's call are being provided on an adjusted basis. Turning to Slide 3. I'll now turn the call over to Norfolk Southern's President and Chief Executive Officer, Mark George.

Well, good morning, everyone, and thank you for joining us. We are here in Atlanta, and I'm joined by Brian Barr, our Chief Operating Officer; Ed Elkins, our Chief Commercial Officer; and Jason Zampi, our Chief Financial Officer. Our third quarter was strong with steady execution, making notable improvements to our network while delivering solid results. We have an outstanding team of Thoroughbreds, who remained focused on the fundamentals, operating a safe, reliable railroad, serving our customers, growing the business and improving productivity across the network. So a big thanks to all our team.

Collectively, we delivered very strong revenue and operating income growth, while we continued to advance productivity. While we absorbed higher fuel costs this quarter, our team executed well on the controllables maintaining cost discipline while improving the efficiency of the operations. Overall, we're pleased to have our business performed in a dynamic operating environment and believe that the underlying fundamentals of the franchise remains strong. Demand for rail service is growing with encouraging trends in areas such as domestic intermodal and chemicals, which Ed will discuss in more detail. The current macro environment is tightening the truck market, and that helps rail be more competitive.

And what you saw in the quarter is us capturing the increased customer demand. Operationally, we continue to make progress. Under Brian's leadership, we've made targeted adjustments across the network and key service metrics are improving even as we handle higher volumes. Brian will detail some of the changes that helped us achieve record productivity performance in the quarter, and we are making other operational improvements while adding resources that will improve network performance going forward. And you should expect to see these efforts show up more clearly as we close out 2026 and continue into next year.

Bottom line, we're handling the volume today and we expect stronger results as the resources come online and our demand pipeline continues to fill out. While we are encouraged by the meaningful progress we're making, we know there's more work to do. And we've consistently said that we hold ourselves to a higher standard. We're accelerating some targeted capital investments into this year to accommodate continued volume growth so that we can deliver the level of service our customers expect. Meantime, we've identified opportunities to build more sustainable processes across our network so we can create a more resilient railroad for the long term.

And with that, let me hand it off to Brian.

Appreciate it, Mark, and good morning, everyone. I want to begin by thanking the men and women of Norfolk Southern. As I spend time in the field, it is clear our team is putting in the work. Our railroaders managed another demanding quarter overcoming significant weather and operating disruptions while remaining focused on serving our customers and operating safely. As I said on this call last quarter and say it to our teams frequently, successful railroading comes down to doing the fundamentals exceptionally well, originate trains on time, reduce terminal dwell, run the plan and align resources with demand.

During the third quarter, our focus on those fundamentals drove clear sequential improvements across the network. Turning to Slide 5. The most important part of railroading is ensuring our employees and the communities we serve remain safe. Our preliminary year-to-date FRA personal injury index is [1.08.] Our train accident rate is at 1.74, a historical best for Norfolk Southern.

Our accident performance continues to show step function improvement, and it's a clear sign of our railroaders commitment to safety. We recognize the progress, but we are not satisfied. We will never stop pushing ourselves to be the safest in the industry. Turning to Slide 6. We ended the quarter with a clear plan to recover network fluidity by improving originations and reducing dwell, increasing velocity and getting the railroad back on schedule.

We delivered sequential improvement across those foundational measures. These are results our customers can see and feel. This quarter-over-quarter improvement demonstrates that our operating actions are producing results. Moving to Slide 7. Our progress came despite significant August weather across the north.

On our network this quarter, The team quickly restored infrastructure, removing hundreds of downed trees, repairing multiple washouts and handling widespread power outages by activating strategic reroutes and repositioning resources. While the historic wind and rain interrupted some of our July momentum, it did not derail our progress. We made meaningful improvements versus the prior quarter as you can see by the metrics on the slide. We also drove substantial year-over-year progress, operating 5% more gross ton-miles than in quarter 3 2025.

The network was able to absorb this growth almost entirely through our existing infrastructure, driving a 4% increase in both train length and weight compared to the same period last year. Turning to Slide 8. We generated strong productivity in a higher volume environment. Our on-time origin performance increased by 12 percentage points, and we continue to see progress here daily. Running an on-time network is essential to driving cost out.

Workforce productivity was a quarter 3 record. We have begun localized hiring to support growth and targeted train plan consolidations will reduce labor intensity where demand is strongest, allowing us to continue capturing truck-to-rail conversions. In the third quarter, the team made improvements by redesigning car connections at terminals and removing costly handlings to reduce dwell. In the quarter, we eliminated 95 crew starts per week and took 200 cars offline per day. These adjustments allowed the network to accommodate 3% carload growth in the quarter.

Let me give you a couple of examples of our recent plan improvements. First, we consolidated smaller trains between Birmingham and Macon. This saves 14 crew starts per week, reduces the number of locomotives needed and delivers cars faster to the customer. And another example, we shifted 50 daily switch cars from Enola Terminal to Allentown Yard. That change freed up manpower for road service at Enola and moves the switching work to a lower cost per car location.

It also removed 6 blocks at Enola, creating additional yard capacity. Adjustments like these are keeping our network fluid and agile. When trains originate on time and move faster, re-crews decline locomotives turned more efficiently, cars spend less time in terminals and crews spend more time moving freight. That is how service and productivity reinforce one another. I'm proud of the way our operating team continues to improve the railroad.

That work has us on track to deliver at least $650 million in cumulative cost savings.

We made meaningful progress during the quarter, but there is more work ahead. Our standard is a railroad that operates safely, executes consistently and deliver service our customers can plan around every day. We will keep leading from the front running the plan and delivering results. I will now turn the call over to Ed.

Thanks a lot, Brian, and good morning, everyone. Our commercial results this quarter reflect a strong macro backdrop and a tightening truck market, which has allowed NS to drive growth across our network. Volume grew in every one of our business groups, and we set an all-time record for revenue less fuel. Let's move to Slide 10. We achieved 14% overall revenue growth for the third quarter, which is inclusive of fuel surcharge.

And when we look at revenue on a less fuel basis, we delivered a 6% increase to set an all-time record. We finished the quarter with broad-based strength, achieving 3% volume growth in each of our business verticals. These gains were supported by elevated global energy prices, a robust industrial backdrop and favorable truck market dynamics. RPU less fuel increased by 3% as our teams focused on pricing to the market. Looking within merchandise, volumes increased 3% and revenue less fuel achieved another record, increasing 5% from a year ago, driven by strength in our metals and construction franchise and by strong energy demand in our chemicals markets.

Our RPU less fuel grew 2% year-over-year as strong core pricing was partially offset by some mix. Let's shift our focus to our intermodal business. Volumes there increased 3% reflecting strong freight demand and tighter truck market conditions that favorably positioned our intermodal partners to succeed with particular strength in our domestic and premium segments, which was partially offset by international. Overall, intermodal revenue less fuel increased by 7% and positive mix and a positive price environment pushed RPU less fuel up by 4%. Looking at our coal franchise, volumes grew 3%, largely due to increased export volumes, which include the new customer that we announced earlier this year.

And despite strong demand, utility volumes were relatively flat versus '25 due to plant outages, along with some localized service challenges that limited our ability to capture upside. RPU less fuel increased by 2%, lifted primarily by tailwinds from favorable seaborne pricing. Let's go to Slide 11, and here we highlight several dynamic factors that continue to influence our market outlook. The inflection of fuel price has generated opportunities across energy-related commodities, which could carry forward for the duration of the conflict in the Middle East. However, if energy prices remain elevated in the longer term, it could begin to impact overall customer demand.

We're keeping a close eye on this interplay. The tightening truck market bodes well for highway to rail conversions across markets such as forest products and consumer products. And lastly, new project activity in industrial development remains ahead of last year. Although the pace has normalized following an exceptionally strong second quarter. And as we look forward, we remain positive on the outlook for new industrial development activity as tariff-related concerns ease.

Additionally, we have a subdued positive outlook for vehicle production. Industrial activity has maintained its momentum with manufacturing continuing its expansion for the ninth consecutive month. We are maintaining an optimistic outlook for the industrial sector despite ongoing volatility in the broader economic landscape. Global energy prices, while a significant wild card, could continue to support near-term opportunities in markets like natural gas liquids, sand and crude oil. Looking specifically at our intermodal markets.

truck market conditions continue to trend positively. Rising rates reflect tighter capacity against a steady demand backdrop. And we expect resilient consumer demand to support our domestic and premium segments in the near term as new orders increase and retail sales have shown modest growth. And on the other hand, more and trade uncertainty will continue to weigh negatively on international volumes on our network. And overall, we stand poised to take share from the highway as elevated fuel prices make conversion from truck to intermodal more attractive to our customers.

As we turn to coal, the outlook is positive for the remainder of 2026, and we expect growth to be led primarily by our export franchise, but will also be supported by favorable market conditions within our utility business. Let's go to Slide 12. Throughout the third quarter, we continued to build momentum across the business. Stronger service performance is enhancing customer confidence and their confidence in supporting market share growth and at the same time, new digital and operating capabilities are enabling us to grow more efficiently. Our digital investments are delivering tangible benefits for both customers and our operations through greater automation, visibility and better ease of doing business.

Whether customers are requesting a rate or seeking information on an active shipment we're delivering tools that help deliver faster and more consistent answers. We are streamlining the end-to-end rate request process through a single intuitive platform that allows customers to submit, manage and track their requests in one place. This reduces manual touch points, it increases transparency and accelerates decision-making. We're focused on delivering an increasingly seamless customer experience. At the same time, we're also enhancing shipment visibility by combining real-time network data, historical trends and machine learning and artificial intelligence to adapt to changing network conditions.

The result is a more accurate and more actionable shipment information, enabling customers to plan more effectively, operate more efficiently and ultimately make decisions with greater confidence. As these capabilities continue to scale, our goal is simple: Make Norfolk Southern the easiest railroad to do business with so that we win more freight in competitive markets. And as always, we want to thank all of our customers for their continued partnership and business. The entire NS team is aligned around delivering the service that our customers need every day building trust as a vital partner for them in their supply chains. And with that, I'll turn it over to Jason to review our financial results.

Thanks, Ed. I'll start on Slide 14 with the reconciliation of our GAAP results to the adjusted numbers that I will discuss today. During the quarter, we incurred $42 million in merger-related expenses and $28 million of net costs related to the Eastern Ohio incident. Adjusting for these items, the operating ratio for the quarter was 65.4%, and earnings per share was $3.62. Slide 15 details the comparison of these adjusted results versus last year.

As expected, higher fuel prices were a significant driver of both the revenue and expense increases accounting for about half of the variance in both line items. Last quarter, we were expecting fuel to be a tailwind to our third quarter operating ratio. However, as I previewed a couple of weeks ago, fuel prices actually increased as we progressed through the quarter, and that negatively impacted our operating ratio by about 250 basis points from where we thought we would be. That said, higher volumes and RPU in the quarter helped drive a 10% improvement in earnings. Drilling further into the expense line items on Slide 16.

Costs were up 17% for the quarter. As I just discussed, over half of that increase was driven by the rise in fuel expense. I'll also remind you of last year's significant land sale that impacts the comparison to prior year as well. Setting aside those items, continued inflationary pressures and volumetric cost increases are the primary drivers in our other P&L line items, including comp and [benefits,] purchased services and materials. Summarizing our financial results on Slide 17.

Despite the inflationary headwinds we faced, we drove an increase of 7% in operating income and delivered a 10% increase in both net income and earnings per share. As we move into the fourth quarter, we continue to manage through the volatility of fuel prices that will influence the trajectory of the operating ratio. That said, we are optimistic about the current demand environment and our ability to grow volumes, revenue and earnings. Mark, I'll turn it back over to you.

Okay. Let's turn to Slide 19. Looking ahead, our priorities remain clear. Most importantly, we will continue to operate a safe and reliable railroad. Safety remains the foundation of everything we do, and we remain fixated on that.

Network velocity increased from Q2 despite the higher load on the network and some disruptive events that Brian talked about. Our team is actively recruiting and training new T&E employees to augment our resource base to accommodate growth while we still drive smart productivity and efficiency actions. Accelerating and maintaining a safe network is essential to provide the consistent high-quality service that our customers depend on through their businesses. Now turning to guidance. The fuel environment has remained elevated.

As a result, our updated adjusted OpEx guidance for the full year is to be just north of $9 billion, which includes approximately $700 million of incremental fuel expense compared to our view at the beginning of the year. While higher fuel prices continue to pressure our cost structure, our team remains disciplined on managing controllable costs and delivering productivity improvements across the network. I'm exceptionally proud of this team as they've managed through the volatile environment this year while managing to keep core operating costs within the original guide we set forth at the beginning of the year despite stronger volumes. The underlying business remains healthy, and we are committed to balancing growth with operational efficiency. Now we are increasing our capital expenditure outlook and expect 2026 CapEx to be roughly $2.1 billion, which is up from $1.9 billion originally.

The incremental reinvestment in the franchise is geared toward positioning us to capture growth opportunities that we see on the horizon as well as to enhance network resilience and efficiencies. We're encouraged by the growth we're seeing across parts of our business, but we also recognize that today's environment won't persist indefinitely. We view most of the macroeconomic factors that are driving the recent truck to rail conversions as temporary. But with the freight market today is showing us is that when shippers are given a rail product that offers better value than the highway, they move freight to rail quickly. And the Union Pacific Norfolk Southern combination is designed to create those conditions permanently.

Okay. With that, we will now open the call to questions. Operator?

(Operator Instructions) Scott Group, Wolfe Research.

Just a couple of things, Mark, your comment about the truck to rail conversion being temporary. Just add some color there. Is your thought that like when fuel goes down, we lose the share back to truck? Or are you saying that incremental share gains will get tougher whenever fuel goes down or I don't have another thought on that. So I'm just curious about that.

And then, Mark, you've also just like in recent quarters, like been talking about the competitive dynamic, and I'm just wondering how that's evolving and how we should be thinking about pricing going forward in a world of higher truck rates and better rail volumes?

Scott, thank you very much. Okay. So yes, look, the competitive environment, it's definitely pretty robust right now. I think you see all the competitors offering new products coming together in the wake of the announcement of the merger, we've definitely seen a more enhanced competitive environment. So for sure, we're seeing more competition.

The good news is, and I think that's all good, by the way, for the rail industry as a whole because we are now finally getting some share back from the highway, certainly aided by the rising fuel prices, but still, nevertheless, I think the rails cooperating together is really a good thing even if it creates a tougher situation for us. So definitely, that -- I would confirm that dynamic exists. And look, when I talk about temporary, what I mean here, Scott, is obviously the rail -- sorry, the fuel pricing has pushed freight to the highway. We're seeing a large part of our intermodal growth has been driven exactly by highway to rail conversion. No doubt about it.

Now that is having an impact on the trucking market. And certainly, there's some capacity limitations now in trucking. But over time, when fuel goes back to where it was, you can expect that some will revert back to a large portion of what we've gained will eventually, and it might take a year or 2, but it will eventually go back to the highway unless this industry does some very structurally different things, which is really what I was alluding to there at the end. So that's why I think the merger is the real difference maker here in trying to make permanent some upward inflection on share recapture. So hopefully, that clarifies it.

Jonathan Chappell, Evercore ISI.

Ed, every single rail call every single quarter asked about pricing, and we get some broad-based answer. But if we look at your RPU ex fuel across all three segments, they're all really strong. So I understand that intermodal, you have some truck benefits, (inaudible) kind of the benchmarks, which is out of your control, but merchandise continues to set a record. So can you kind of help us frame out kind of what was controllable versus what wasn't and kind of where you are in kind of recapturing price as the service continues to improve.

Sure. Thanks for the question. I'll try not to be high level and generic even though it might be unavoidable in some cases. But look, we've had a strong history of price over a long period of time. And having a service product that is recovering that allowed us to exhibit additional value for our customers.

And that includes our industrial customers. Now it also helps that what we see as a pretty robust industrial backdrop when it comes to the macro. We've got 9 months of expansion now in terms of manufacturing and new orders continue to sort of propel what's going on out there. We see a strong industrial development pipeline of our own, which we think is indicative also of a strong macro. So it is a growth environment right now on the industrial side of our business, which is where, of course, our merchandise business mostly lives.

And we've been able to take advantage of the service that we've offered with that value to really try to price to the value of that product. And now other people say that, and we all aspire to it, but it's been a key part for us. And that really, in the merchandise segment, you think about it, we've had some some mixed headwinds in that side of the business as well, which kind of waters down our efforts when it comes to ARPU, which, of course, is not really price. So we're proud of that. On the Intermodal side, certainly, mix plays a role there as well.

But I will tell you that we've spent -- and I've told you this before, we spent a lot of time renegotiating our contracts and reconfiguring how we adapt to changing market conditions. So I think we're in the really early innings of seeing that happen. And I really expect that we'll continue to see that happen as this environment persists. Thanks again for the question.

Jason Seidl, TD Cowen.

Mark, you sort of mentioned if the industry doesn't take a few steps that you fear that some of this stuff that you've gained, the traffic that you've gained can be lost over the next 2 years. I guess when you look at that assumption, are you assuming that capacity comes back to the trucking market as it has historically because it does appear to be some structural changes in and at least some of the regulatory regime here. And also, aside from sort of creating that transcontinental option that you and the UP are proposing, what are other things that you think the industry can do to retain this traffic?

Great question, Jason. Thank you. Look, yes, I think eventually, capacity does come back into trucking when the prices -- the barriers to entry are very low. So capacity will come back when fuel prices go back down. And I think that presents a competitive challenge for rail.

I think don't forget the threat of autonomy with trucking and what that also will do to make the product more attractive and appealing, just aside from the cost benefit for the truckers, they're going to also have a lack of rest hour requirements when trucks are driving. So they're going to also deliver products faster than they currently do today, which is already faster than the railroads. So those are the things that I'm talking about. We have to structurally change. So -- what we can do aside from the merger is we still have to be consistent and reliable with our delivery.

And the challenges that railroads can't always flex to sharp inflections in volume. We saw that post COVID. And I think you see a little bit of that now, even when you start to see volumes hit beyond a couple few points, it starts to stress your crew capacities. So railroads have to be much more nimble. The challenge we all have as an industry is to bring on T&E resources, it's a grind.

These are hard jobs to fill. You have considerable attrition through a 6-month training process. So you have to basically hire double what you think you need because you're going to end up losing half by the time you get to the end of a 6-month training process. And that means you have to predict 6 months in the future what the volumes are going to be. And if you get that wrong, you might be either short or you could be long on resources.

And there's an area called Wall Street that thinks that you can be perfectly volume variable but it's a challenge. So we have to somehow crack that nut and figure out how to ensure that we've got adequate buffer in our resources to be able to accommodate a little bit more volume when we don't expect it. And let's just talk about recent history. In Q4 of last year, we were all feeling really terrible about the volume environment, and we weren't feeling very optimistic looking into 2027 about the volume environment. But it was exactly then you had to have the conviction to go and really augment your T&E resources and significantly increase for what eventually became a volume inflection in the middle part of 2026 or really the second quarter of 2026.

If you get that wrong, you saw challenges in your service product. So that's a real-time recent example of the challenge railroads have, and we have to crack that nut. Thank you.

Chris Wetherbee, Wells Fargo.

And maybe I can pick up on that last answer. So I guess as we think about service and your capacity for growth and maybe take into context with the bump up in the CapEx guide. Can you talk about how much capacity that you have? I mean it seems like service in the last couple of weeks has gotten a little bit slower. Maybe that's from volume growth.

Obviously, there's a lot going on out there from a demand perspective. So maybe you can just talk about big picture how much capacity you have to grow and sort of where you're going to be deploying the capital that you're raising?

Yes. I'll start off, and we'll tag team this answer. But look, we have capacity. And I think even in this quarter, you'll see that we've taken on volume. We haven't really added a ton of train starts.

A lot of this is through filling out existing trains. So it hasn't really had too big of an impact. That said, there are -- there have been some more asset-intensive volume that's come on the unit train side. So certainly, those are areas where when you have more bulk traffic and more unit traffic that you've got to move, that's where you end up feeling a little bit more of the pinch on the capacity side. But otherwise, in our regularly scheduled merchandise product and our intermodal products we've got capacity.

But Brian, why don't you jump in with your views.

Yes. I mean we're walking through the service there regularly. And as I mentioned here earlier in the call, with some of the operational changes we make, we're creating capacity with train consolidations with removing touches on existing cars. As we mentioned, we are hiring here at some strategic locations that build resiliency into the plan we're on path with it and in a few strategic locations. And also with the locomotives, we have 420 that are in storage currently that are there for capability as volume increases as we grow.

We've already been able to take on 3% more shipments this quarter and absorbed that into the existing network. Although, we're 4% bigger on length and weight, we still have a lot of capacity there on existing service.

Brian Ossenbeck, JPMorgan Chase.

Just a quick follow-up for Brian and a broader one about resourcing. Brian, we've been hearing a lot about trade driver challenges and availability, and that's not necessarily something you guys covered directly or managed directly, but it's clearly part of the whole supply chain on the intermodal side. So I wanted to see if there's anything along those lines, if you're feeling any constraints if there's any opportunities to work with your channel partners in there as this volume growth continues to be pretty significant, especially the conversion. And then, Mark, maybe just big picture, anything from technology perspective or maybe even a work contract negotiating perspective to get more flexibility to help out with some of that variability of volume with that long lead-time item, which is obviously labor.

Yes. Well, I'll start here, and Brian can kick in as well. Look, we're investing at the terminal level to make sure that our drayage community is as fluid and as efficient as they possibly can be. They're a key component to what we do, specifically, not only in markets where they're doing end deliveries, but we also do a lot of cross towns in the current environment, and they're really important there, too. Is there stress, yes, there is stress across the entire supply chain, particularly for trucks and drivers.

And I think that, that that's really been a part of the story here that people have talked about, but I'm not sure attention that they paid to it, but the supply of drivers and the capability there has been drawn down some. But we're investing to make sure that the drivers that come to our terminals are being efficient with their time. and that we are delivering value for them too. And Brian, I don't know if you want to talk about specific investments or where we're doing that. But I know you're looking at a number of places across the network.

Yes. So with growth -- I mean, we have locations right now that are hitting lift records here currently. So we have 5 locations going to hit a quarterly lift record within the intermodal ramps. We have 10 that hit annual. But we've been doing ongoing expansions and improvements in several of the terminals with the growth mindset and with increasing our capability.

And we're hitting a few locations there in Chicago, Harrisburg, a few key corridors specifically.

Yes. And I think technology, in general, is something we're investing in. I think in the intermodal terminals, we're looking at a fair amount of autonomy opportunities there that will help us with moving boxes and scanning and hustling and things like that. So those will help with our terminal fluidity. But on top of it, Brian, you're doing a lot of investments in some of the yards automating switches and doing some other things that will help alleviate some of the manual work requirements that we have.

Correct?

Correct.

So those are -- Jason, do you want to add anything else on some of the -- where the CapEx is the incremental CapEx?

Yes. I mean, our priorities with respect to capital allocation has always been first and foremost, to invest in the business and no change there. I think what you're really seeing here in this increase that we talked about at the end of the year is really preparing for growth. And that's really important. A lot of this takes some time to get in the ground or to purchase these assets.

So it's important to get in ahead of that. The only other thing I would just add from a technology perspective is really what we've done on the portals and the benefits that we get out of that from efficiency and safety. So I think that's another key thing that's been important for us.

It sure has been. And I think the key thing here is when you look at our accident rates, they have been consistently declining for 3 years, and we are really at the envy of the industry levels of accidents, and that just means more fluidity on line of road, which means less resources required when you have breakdowns when you have accidents, if you really congest you, you need a lot more human resources to move things. It creates a lot more re-crews. We are more fluid because we are better on line of road, thanks to the portal investments we've made. So let's move on to next question.

Bascome Majors, Stephens.

When you originally framed the cost to run the business this time last year, I think that was a helpful framework. And it certainly played out where you've had the capacity to grow and largely maintain service levels in the network. And I appreciate the comments earlier about the buffer and how you're managing through that and capacity. As we look to next year, it looks like 4Q, the cost guidance is, call it, $2.4 billion. There's actually a lot of volume variability to serve the business into next year.

But can you talk through the inflationary components and sort of the expectations that you're setting so we can get our own expectations for what that number looks like for 2027 versus 2026?

Thanks a lot, Bascom. Yes. So I'll let Jason talk to that. I mean we're not going to give 2027 guidance now, but certainly, inflation has been a challenge for this industry in the past couple few years. Obviously, the labor contracts are at the root of it.

But on top of it, all the inflation we've seen elsewhere in materials and vendor costs have really hit us. We offset as much of that as we can with productivity. We've had a couple of great years with productivity, and we'll continue to drive cost out of the business there. But Jason, do you have some first looks at inflation.

Yes. I think just from a kind of early perspective here, I mean, we signed wage agreements with the unions 1.5 years, 2 years ago now. And so we have a good line of sight to that. So we've got a 3.75% increase that just went into effect in July and another 3.5% next July. So we know what the headwinds are there from a wage rate perspective.

The other two things I'd call out, and I'm putting fuel aside here, obviously, is a bit of a wildcard. But the other thing is health and welfare benefits. Those have been very significant. Double-digit percentage increases in that, and we see that continuing as we move into next year. And then the other thing that I would just call out is insurance.

Our cost to receive insurance coverage as continues to go up. And I don't see that abating at all as we move into next year. So I think those are some big drivers that you should expect as we move into 2027.

And I'd imagine Bascome will do a similar type of guide next year and give you a cost envelope.

Richa Harnain, Deutsche Bank.

So I wanted to ask maybe a more bigger picture one. One of the key strategic attractions of the merger is obviously the opportunity to convert more over the road freight to rail. However, we're seeing more and more evidence that conversion potential in Western and transcontinental corridors may be more limited than in the use, of course, that makes sense. But your largest IMC partner, for instance, reported a stark difference in growth for as versus transcon. So given your strong Eastern franchise, how are you thinking about that difference?

And is it primarily structural given like shorter haul lanes being more truck competitive, or does it largely just reflect the absence of maybe a sufficiently reliable and competitive rail service offering in transcon, which the proposed merger is trying to fix. I'm just trying to understand like what the structural sort of impediments are and how those get corrected from this merger?

Okay. Thanks, Rich. Ed, why don't you take a shot at that, please?

Sure. Look, we think that there are opportunities to convert truckload business to the railroad, no matter what the length of haul, whether it's long or short. Certainly, the transcon lanes have had more attention paid to them over the past 30 years with a variety of services. And so the penetration in those lanes is naturally higher than it is in the, what I would call, the East, which is for us, east of Mississippi. The results that you're seeing from a variety of our partners, I think reflect that reality that there's a tremendous amount of opportunity in the east to convert truckload to the railroad with the right kind of service and value.

And I think we've become pretty good at that over time. We can always get better. What I think the merger is going to help us do is increase our penetration opportunity in those transcon lanes because we will have a better service and it will be a permanent change. It will not be an Interline product. It will be a local product that is durable across not only months, but years and decades.

And so it is a -- we view that as a perpetual opportunity for share shift in those transcon lanes. And at the same time, the new company will have what I would consider to be and a prime opportunity to convert a lot of the freight that still rides the highway in the east that would much rather save money, pay fuels and deliver value to their customers using intermodal.

Brandon Oglenski, Barclays.

This is Eric Morgan on for Brandon. I guess I'll just ask one on the coal outlook. It turned positive. I think you mentioned driven by export but also the favorable conditions in utility business. So can you just help square that with the relatively low natural gas prices and how much line of sight you'd say you have on that business?

And just any thoughts on how that shakes out for RPU. I appreciate it.

Yes, sure, sure. The -- on the domestic side, we saw our plants burn exceed the amount of tons that we delivered to them really for most of the year here. So we think that there's some replenishment that's going to happen. I agree with you that the low natural gas prices are going to be a strong competitor, but we do think that there will be some restocking going on for the remainder of the year and we know this maybe in the next year, but we'll see about that. On the export side, it's a pretty favorable environment when I think about pricing.

You look at the third quarter, U.S. low vol ended up somewhere around $200 and API 2 was at [$126.] And right now, we're -- recently, I should say, we're at [$210] and [$125.] So those are constructive levels, we think went into the fourth quarter. So yes, our outlook is favorable.

We're trying to be realistic with what the market can deliver on the utility side, but we think there's still some opportunity, particularly with the good partners that we have in the east here to deliver export tons.

David Vernon, Bernstein.

So Ed, I wanted to talk a little bit about intermodal. When you think about the trials and tribulations in the last 12 months, obviously losing some volume on the repositioning of some J.B. Hunt volume. How should we be thinking about the volume ex that headwind? And then as you think about your ability to not only touch on price next year, but also to think about new service introductions, things like that.

What are you thinking about on the product side? I know you're in this sort of merger waiting game, but are you guys doing more work to think about where you can expand the network or add some services that could kind of tap into this elevated highway cost market?

Well, yes, we are, of course, and there's old say and my dad use, which is you make hay while the sun shines. And so we're exploring every opportunity to deliver new value to our customers. And we'll see what emerges from that over the next few weeks and months, but I'm very bullish on that. When I think about our capability and what we've done, and think about the third quarter, we had the best domestic non-premium third quarter in history for volume. And that is -- that's saying something, given where we were a year ago, right.

In the business we had a year ago.

In the business we had a year ago. We had a really good quarter on the truckload side of our business. And I'm very, very encouraged by that in a couple of ways. One, we have great partners that are continuing to drive conversion out there on the street, which is incredibly important. And number two, we have a network that can deliver value very ably for those customers.

And I'm going to speak past you and talk to our customer base and say, I really want everyone to be confident that we can continue to deliver that value. We've got the capability. We've got capacity, and we're building more capacity. And I think we're in a really good shape there.

Tom Wadewitz, UBS.

So I wanted to ask a bit I guess you'll see this, but it's merger related. I think one of your primary competitor has pointed out that you have a really attractive intermodal network and access in Eastern Pennsylvania. And I think they'd like to get some access to some of it. How do you think about the capacity utilization of Harrisburg-Allentown, some of those key intermodal hubs? And just to kind of operational complexity of potentially having trackage rights or something where another railroad would get access to it, and not obviously that you're going to do that.

But just kind of high level, is that something that's operationally doable and where you sit in terms of capacity of Eastern intermodal network that I think kind of fairly presented is a nice advantage for you?

Look, I mean, we have a very attractive franchise in Eastern Pennsylvania, no doubt the envy of others. And no surprise people are going to take moonshots to ask for access for it. Heck, I'd love to have access to Bone Valley in Florida. And I'd love to have access to South Dakota. There's all these other areas on the network everyone wants access to, but guess what, the tracks in the ground.

We're going to live with our -- we're going to defend our franchise, and we're going to defend our network. And we're going to trust that the STB will view things like this through sober eyes and pretty firmly rejected, like they rejected a lot of the asks during the CPKC -- every ask during the CPKC merger application. So it's not really worth answering the rest of that question, Tom, because it's not going to happen. We're not giving up that franchise. I can't see a scenario where the STB would even entertain it.

That's it. Thank you.

Ari Rosa, Citigroup.

So it sounds like you've detailed an attractive opportunity set here from a volume standpoint. But I was hoping you could talk about kind of how you see the attractiveness of the business that's available and just how discerning you have to be in terms of freight selectivity and expectations around that business kind of sticking around. I understand there's obviously a service component on your end. But as we think about just kind of apples-to-apples, is that business that you want? And how do you have to price that appropriately to ensure you get attractive returns.

Sure. Thanks to good question. We have a team of folks that are out on the street every day, including right now, looking for new business. And that team is very well trained and really capable smart folks, they're going to bring opportunities back that are attractive and accretive to the business. And that's the first mission they have.

and I'm very, very confident that they're doing a great job of that, and they're going to continue to. You think about what business sticks around, well, here's the business that will take around a matter of what happens. And that is if we can deliver value in such a way that our customer can realize that value quickly and demonstrate that value for their customers, then we're going to be in great shape. And that means service, service, and that's what we're focused on. It means capacity, capacity capacity, and that's what we're focused on.

And I'm very confident that as we move forward, our portfolio is only going to get more attractive in the current environment.

Walter Spracklin, RBC Capital Markets.

This is James McGarragle on Walter this morning. I just wanted to ask on the volume outlook. Last quarter, you flagged an update on your industrial customer investment activity. You mentioned it's normalized a bit after a strong H1. So I guess, was that a surprise to you that, that normalize?

And any specific numbers you can give us surrounding that opportunity just to help us think about the opportunity in terms of carload growth there into next year.

Thanks for the question. We have over 50 industrial products that have moved into that design and construction phase, and that's the sort of the demarcation line, we think, between an opportunity that's theoretical versus one that's actually going to be executed. So we're encouraged by that. Yes, the first half of the year, we saw some acceleration and actually outperformance of that pipeline. And it has not decelerated but receded to the what I would call a normalized run rate.

And that's okay. normalized run rate is very sustainable for us over a long period of time. Probably the more surprising thing was the acceleration in the first half. And so I feel like we're on track. We always have a budget every year for what we think is going to happen, and we're back sort of on that run rate now.

And that's a very healthy thing. And frankly, very encouraging. In terms of carloads, we really can't find that here. But we're encouraged.

At this time, we have no other questions registered. I would like to turn the conference over to Mark George.

Okay. Thank you, operator, and thank you, everybody, for participating in the call. Look, I think I'll just wrap by saying, look, we've put an application forward for a merger. It's been -- it's more thorough than any merger proposal ever presented by an American railroad. And it includes the first ever use of a complete data set as opposed to sample data.

We now have greater visibility to the Board's time line. And we believe that the case for our merger is going to become clearer as the evidentiary record continues to build. And it is no doubt in my mind that we are very much in the public interest with this merger application. A unified network is going to provide customers with more opportunities to grow and compete placing new markets within reach, as Ed talked about, at a lower cost, and that enhances affordability for the U.S. consumer and the broader economy.

I think second, reducing handoffs, improving network fluidity and delivering a more consistent service outcome. That's what's going to matter to the STB when they look at this, that service reliability, resilience and broader supply chain performance. and a more fluid network also means it's going to help the communities. We'll have fewer interchanges, fewer stoppages and that's going to translate into fewer block crossings. That's in the public interest, for sure.

The freight conversion from the highway goes without saying we're going to save on overall diesel fuel consumption as a nation because we're up to 5x more fuel efficient than trucks. On top of that, we're going to make the highways safer by having fewer trucks on it. When you remove 3.6 billion truck miles, that translates to about 1,750 fewer accidents and injuries, which you can do math and estimate that's about 65 fewer fatalities. Not to mention for our employees being part of a larger company we are going to have more opportunities for employees, and we're actually going to start growing again, well-paid union jobs. So we're excited about the progress we're making on the merger application of the STB has put out this timeline, and we'll move on and continue to focus on running the business in the meantime.

So thank you all for participating, and take care.

Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.