Earnings Call Transcript - NSC Q3 2021

Operator, Operator

Greetings and welcome to the Norfolk Southern Corporation, Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Meghan Achimasi Senior Director of Investor Relations. Thank you. Ms. Achimasi, please go ahead.

Meghan Achimasi, Senior Director of Investor Relations

Thank you and good morning, everyone. Please note that during today's call, we will make certain forward-looking statements 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 nscorp.com in the Investors section, along with our reconciliation of non-GAAP measures used today to the comparable GAAP measures. Along those lines, recall that in the third quarter of 2020, we recorded an impairment charge of $99 million related to an equity method investment. So, we will speak to the quarterly results excluding that charge. A full transcript and downloads will be posted after the call. It is now my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires.

Jim Squires, Chairman, President and CEO

Good morning, everyone, and welcome to Norfolk Southern's third quarter 2021 earnings call. Joining me today are Cindy Sanborn, Chief Operating Officer, Alan Shaw, Chief Marketing Officer, and Mark George, Chief Financial Officer. Our third quarter results reflect a strong performance from the team. As we delivered third quarter records for operating ratio, net income, income from railway operations, and earnings per share. While volume held steady with last year, revenue grew an impressive 14%. And our 60.2% operating ratio reflects a 230 basis points improvement on a year-over-year adjusted basis. Our second-best performance ever outpaced only by last quarter's 58.3% mark. In the midst of significant supply chain disruptions and labor shortages across the country, we're delivering upon our commitments. And we could not have achieved those milestones without the tireless work of our employees, who day in and day out keep our customers' goods moving safely and efficiently. To our employees, thank you for your efforts to keep our economy moving. Now let's turn to Cindy to go through our operations.

Cindy Sanborn, Chief Operating Officer

Thanks, Jim, and good morning. In the quarter, we continued to successfully drive productivity improvement throughout the network. We worked to be as efficient as possible as we adjusted to accommodate demand shifts in many of our markets. This quarter shows continued progress as we attack our cost structure while positioning ourselves for further improvement in both cost and service levels. The quarterly operating metrics clearly show that once again, we generated positive operating leverage on flat unit volumes and GTMs that were up 5%. While we're proactively hiring train crews, efficiency in all areas of our operations, including engineering, mechanical, and communications and signals enabled us to run the network with 7% fewer people in the quarter compared to a year ago. Because assets drive activity, reducing the number of active locomotives was an important lever in managing the size of the workforce. Both train weight and train length continue to improve, driven by a focus on improving the productivity in our bulk network. Coal, grain, and other single commodity unit trains offer real opportunity for gains through collaborating with our customers on operating trains with more cars per set and by doubling up existing trains over portions of their route. I expect we will show continued progress in the fourth quarter as we see the fruits of our efforts. While strong coal traffic helped drive train weight more than length, train length continued to improve and set another quarterly record. After seven consecutive quarters of fuel efficiency improvements, we saw a modest deterioration this quarter despite the increase in train size as our horsepower leverage was challenged at times due to volatile traffic flows and we had modestly fewer of the very heavy, highly fuel-efficient trains. I'm pushing the team to respond more quickly in the face of change and we're committed to closing the gap with our peers over time and are redoubling our efforts in this critical area. As I mentioned last quarter, we are experiencing hiring and retention conditions that are increasingly challenging, especially in some of our more critical locations, and it is having an impact on our network. Despite hiring all year long, attrition has been accelerating in each of the last two quarters in several of those critical areas. In many of these locations, we've been able to absorb the impact by executing upon productivity initiatives and this will be very much a part of the equation going forward as we grow capacity. Some of the things we're doing to create relief, we've more than tripled our conductor trainee rank since the first quarter so that we can effectively backfill in critical areas. We've implemented tools such as perfect attendance bonuses, referral bonuses, and signing incentives to improve the stickiness of our current and future workforce. And we continue to leverage the valuable teams to quickly respond to business opportunities where needed. People are the backbone of the railroad, and we need to make progress on these initiatives to better manage the effects of a tight labor market. We are committed to having the right amount of resources in the right place at the right time, which will drive both cost control and service quality. As our business mix continues to evolve, creating capacity across our market segments has become an even more significant area of focus. Some shippers are looking to take advantage of unexpected market opportunities by shipping extra volume. Others are looking for us to help them adjust to volatility coming from other parts of their supply chains and, of course, all place a high value on service predictability. We're adjusting our network and operations to generate the various types of capacity that customers are looking for. For example, increases in both train sizes give shippers extra lift without further demands on our crew base. Train size increases often require connecting railroads, customers, and Norfolk Southern to change processes and we have found those process changes are worth the effort because they improve asset turns and capacity. We also continue to focus on terminal efficiency, whether helping to drive dwell at our biggest yard, Elkhart, to very low levels or tactically redirecting trains to intermodal terminals that have the capacity to unload quickly.

Alan Shaw, Chief Marketing Officer

Thank you, Cindy, and good morning, everyone. In the third quarter, we continued to execute on our growth plan, yielding double-digit revenue gains in each of our three markets, further demonstrating our ability to deliver value to our customers and shareholders. Beginning on Slide 12, I will highlight our results for the third quarter. We achieved total revenue of $2.9 billion representing a 14% increase from the same period last year despite flat volumes. Our revenue performance this quarter was driven by significant gains in revenue per unit and revenue per unit less fuel, both reaching record levels with double-digit year-over-year growth. This reflects the success of our ongoing efforts to yield up and improve revenue quality, a strategy that enhances our long-term potential for revenue and margin growth as conditions improve. Revenue in our merchandise segment improved 10% year-over-year while volume increased 5%. Growth was led by our Chemicals franchise that benefited from recovering energy demand that drove higher shipments of crude oil and natural gas liquids. Also contributing to merchandise growth was sustained strength of steel markets due to record high commodity prices and growth in manufacturing activity. Steel shipments were up an impressive 34% from the same period a year ago. Partially offsetting these gains were declines in shipments of finished vehicles and vehicle parts due to the ongoing semiconductor shortage. This limited automotive production activity and further depleted finished vehicle inventories to new lows. Both revenue per unit and revenue per unit less fuel improved year-over-year due to price increases. Our intermodal franchise experienced several headwinds related to supply chain disruptions that negatively impacted volume and our domestic and international business lines. In both segments, unprecedented demand from inventory restocking and consumer spending outpaced available capacity in the supply chain ecosystem. The combination of drayage shortages, warehouse productivity, equipment availability, labor force participation, and rail network fluidity pressured intermodal volume throughout the quarter, resulting in a 4% year-over-year decline. Overcoming these headwinds, we delivered revenue growth of 16% in the third quarter due to higher revenue from storage services, increased fuel surcharge revenue, and price strength. Coal revenue increased 32% in the third quarter as both domestic and global economies continued to recover from the pandemic and drive demand for electric power. Export coal shipments increased significantly as strong demand and record high seaborne prices increased opportunities for U.S. producers. Utility volumes declined in the third quarter as coal supply was limited as some crossover tons moved into the higher-rated export market. The mix shift from utility to export, coupled with price gains, led to a 20% increase in revenue per unit, less fuel for coal in the third quarter, a new record for the franchise. Moving to our Outlook, we expect the third quarter environment to continue through the end of the year. Strong consumer demand will continue while pressures from material shortages and labor issues remain, challenging global supply chains. Inventory levels remain at historic lows despite the continued push to replenish stock, providing a boost to transportation demand. We remain confident in our ability to leverage our strengths in these market conditions and deliver robust revenue growth for the full year. We expect the merchandise business will continue to benefit from recovering economic activity as conditions that limited business and recreational activities in the fourth quarter of last year have been much less impactful in the fourth quarter of 2021. We anticipate our markets for crude oil, natural gas liquids, and waste to experience higher volume as a result. Ongoing demand for steel will also be a growth driver with forecasts for industrial production up more than 5% year-over-year in the fourth quarter, and steel prices currently above $1900 a ton. A projected 4% year-over-year, fourth-quarter decline in U.S. light vehicle production will remain a headwind as the industry remains challenged by the chip shortage. Within intermodal, we continue to see strong demand from consumer spending and tightness in the truck sector. These favorable conditions are offset by constraints from supply chain congestion and equipment availability. We are working closely with our customers and our channel partners to mitigate these challenges. However, we do not see meaningful improvement in these headwinds before the end of the year. Coal demand is expected to remain strong with extremely favorable market conditions. Although coal supply will be the governor on year-over-year growth, natural gas prices continue to climb and declining inventory levels leading into the winter months are the current focus of utility customers. Seaborne prices are at decade-long highs in the export market, creating demand beyond capacity and supply abilities. Overall, we're optimistic about the opportunities in the fourth quarter and confident in our ability to execute our plan, to generate value, and grow our business.

Mark George, Chief Financial Officer

Thanks. As Elon just detailed, revenues were up 14% on flat volumes. With operating expenses up 10% we delivered strong incremental margins leading to 230 basis points of operating ratio improvement, driving us to a Q3 record of 60.2%. The improvement I detailed in RPU, coupled with strong productivity led to record Q3 operating income with growth of 21% or nearly $200 million. And our free cash flow is also at record levels, a 33% increase during these 9 months compared to last year. Moving to the next slide, let's drill down into the change in operating expenses. While operating expenses grew by $149 million or 10%, it's up only 4% or $67 million apart from fuel cost increases. The fuel cost increase of $82 million is primarily driven by price, but the 5% increase in GTMs also drove more consumption. You'll see purchase services up $35 million with a majority of the year-over-year increase in three areas. We have an increase in technology spend, which is consistent with our technology strategy, and you've heard a couple of project examples in Cindy's remarks. There are also headwinds from Conrail operating expenses, and there are increases in intermodal costs. More specifically, we had trucking costs associated with shuttling longer dwell containers to satellite parking lots in order to reduce congestion at our terminals and keep the freight moving. Lift expenses were actually up in the quarter despite fewer lifts, and that is primarily because of inflation we absorbed on lift rates associated with contractor labor availability. This is an area we do expect to see continued inflationary pressure going forward. Moving on to compensation and benefits, it is up 5% which you'll note the $40 million in savings from 7% lower headcount that more than offsets increases in pay rates and overtime. Meanwhile, incentive compensation comparisons in the quarter are a headwind of $43 million, similar to what we reported in the second quarter, reflecting our strong 2021 financial outlook compared to lower accrual rates last year. Materials, claims, and other expenses were all down year-over-year. Turning now to the next slide, and looking at the rest of the P&L below operating income, you'll see that other income of $14 million is $25 million unfavorable year-over-year. And that is due almost entirely to lower net returns from Company-owned life insurance. Our effective tax rate in the quarter was 23.6%, close to our federal and state statutory rates. But unlike Q3 last year where the rate was 21.9%, we benefited from tax advantages related to both Coly investment gains and higher stock-based compensation. Net income increased by 17% while earnings per share grew by 22%, supported by 3.6 million shares we repurchased in the quarter. Wrapping up with our free cash flow, as I have mentioned, free cash flow is at record through nine months of 2021 at $2.3 billion buoyed by very strong operating cash generation translating into a 102% free cash flow conversion. While property additions are trending a bit lower than the run rate for our $1.6 billion guidance number, capital spend is never linear and we expect fourth quarter property additions will get us close to the $1.6 billion. Shareholder distributions through nine months exceed $3.2 billion, an increase of over $1.5 billion versus the prior year, thanks to our higher dividend and a meaningful increase in our share repurchase activity. And with that, I'll turn it back over to Jim.

Jim Squires, Chairman, President and CEO

Thank you, Mark. We first demonstrated our commitment to sustainability with our visionary appointment of a Chief Sustainability Officer back in 2007, the first in the industry. And our efforts to support a low-carbon supply chain have greatly accelerated since then. Building upon the momentum earlier this year with the approval of our science-based targets for greenhouse gas emissions reduction and our launch of $500 million in green bonds in the second quarter, we are excited to report another set of milestones on our sustainability journey. In August, we released our 2021 ESG report, our 14th annual report on corporate responsibility, highlighting the transformational role sustainability is having on our business as we further integrate sustainable practices into daily operations. We celebrated our 500th modernized locomotive unit in partnership with Wabtec in August and announced our collaboration with Progress Rail in September on a first-of-its-kind, Tier four locomotive prototype for yard and terminal operations. Just earlier this month, we announced our decision to purchase 100% renewable energy to power Company operations in Altoona and Reading, Pennsylvania. Our commercial and sustainability teams work hand-in-hand to provide demonstrable low-carbon solutions to a wide variety of current and prospective customers, providing a compelling value proposition as we convert more freight from truck to rail, simultaneously benefiting our customers, our communities, and our shareholders. Before we open the call to Q&A, I will take a moment to provide an update to our outlook based on the current economic environments. As shared previously, we expect to achieve an operating ratio improvement above 400 basis points for the full year versus our adjusted 2020 results. And there's likely upside to the 12% year-over-year revenue growth as strength in our consumer-oriented and manufacturing markets drive the majority of the growth. Newer-term upside in coal markets provides a boost for the balance of the year as well, though coal remains challenged in the long term. We're delivering on our financial commitments and remain focused on creating long-term sustainable value for our customers and shareholders. So, with that, we'll open the call to your questions.

Operator, Operator

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Due to the number of analysts joining us on the call today, we will be limiting everyone to one question to accommodate as many participants as possible. Our first question comes from the line of Jason Seidl with Cowen. Please proceed with your question.

Jason Seidl, Analyst

Thank you, Operator, and good morning everybody. I wanted to talk a little bit about the pricing side. Several of your peers have mentioned rising costs and the need to take pricing up another notch. I wanted to get your opinion on that and what Norfolk Southern's plans are for 2022.

Jim Squires, Chairman, President and CEO

Thanks, Jason. Alan?

Alan Shaw, Chief Marketing Officer

Good morning, Jason. As you know, we price to the market. And right now, the market opportunities for our ability to price are pretty strong, and you've seen that with respect to our yields. You saw us in that environment earlier this year; we're very confident in our ability to deliver 9% revenue growth as the demand environment and pricing environment strengthen; we bumped that up to at least 12%. Our primary competitor is the truck and you saw that spot rates in the truck market were up 21% year-over-year in the third quarter. As we have an opportunity to revisit our contracts and the relative value of our product, we're going to price the market as we've always done, which is why we've delivered RPU ex-fuel increases in intermodal for 19 consecutive quarters and in merchandise 25 of the last 26. As commodity prices go up, Jason, it also means more demand for that product as well, so we feel good about the demand and the pricing environment.

Jason Seidl, Analyst

So, Alan, maybe can you remind us the percentage of your business that rolls over in 4Q and 1Q?

Alan Shaw, Chief Marketing Officer

It's a majority of the business rolls over in those two quarters, Jason. As you know, about 50% of it rolls over every year. It's a good environment for us to revisit our price plan.

Jordan Alger, Analyst

Yeah, hi. You talked a little bit about needing to hire crews and the tough environment. One question of course is where the headcount goes from here, but maybe the right question is, in an optimal environment, how much headcount do you think you need? Are you okay where you're at or would you like 1,000 more people, 500 more people? Thanks.

Cindy Sanborn, Chief Operating Officer

Good morning, Jordan. Thanks for the question. I think broadly, let me just put a broad perspective on it. We're really managing through a very disrupted labor market and it's been a challenge from the beginning of this year, but we've been able to really continue to find productivity improvements up to this point that the team has done a great job of, and you're really seeing it flowing through our financial results. So, when I think about where headcount should be, it's really a function of volume that we have on the network as well as our productivity initiatives, of which we have quite a few with longer trains and other opportunities for productivity. So, I think from where we are right now, we'd like to see headcount up maybe a little bit to take out some of the lumpiness of what we're seeing. But longer-term, we're going to be focusing on using technology and other things, focusing on continuing to bring that down. But at this point with where we are, we'd like to see it come up.

Tom Wadewitz, Analyst

Good morning. Wanted to get your thoughts on capacity expansion, I guess we could talk about intermodal or if you want to talk about the broader network, and how that would translate to your view on volume growth in 2022. It seems to me that there's certainly areas where if you had more capacity or the system had more capacity, you'd have stronger volume and intermodal is obvious on that, but how do you think about capacity additions in the network capacity? And is it reasonable to expect volume growth in 2022, supported by more capacity?

Jim Squires, Chairman, President and CEO

Cindy, why don't you take the network side of that, the line of road side of the capacity question, then Alan talks about terminal capacity – intermodal terminal capacity a little bit.

Cindy Sanborn, Chief Operating Officer

Sure. So, from a line of road perspective, as you know, we have had a discussion on these calls around siding extensions. We've gotten our first siding extension in service in the third quarter. I mentioned that in my prepared remarks, and we have about four or five more that are underway and then studying some others to make sure we have good capability in our single-track locations, predominantly in the southern part of our network to be able to drive longer trains and improve the capacity overall of the network by taking the total number of trains down because we can run longer trains. The technology of distributed power has been an enabler for that. And also, as you know, we're doing DC to AC conversions that increased the fleet size of the capability of our fleet to do more of that. So, we really see some good opportunities to continue to allow for great throughput on our network.

Alan Shaw, Chief Marketing Officer

With respect to the intermodal terminals, we absolutely need to improve the throughput through the terminals. There's some self-help there that's running trains on time, that's making sure that we've got the right amount of labor in the terminals with our terminal contractors. It's the chassis issue. Now, that was a headwind for us in the third quarter with the safety recall, we've addressed that. However, we're still short chassis. So, we're taking delivery of 1,100 lease chassis in the fourth quarter of this year. Our customers are short chassis too. As is the international community as well. And that's really driven by the dislocation and the drayage and in the warehousing community. If you look at records, there are a record number of job openings in warehousing and trucking for each of the last three months. This has put a lot of pressure on throughput through the intermodal terminals. We're working on things we can fix ourselves, as I talked about our own mitigation efforts, whether that's reopening a couple of terminals, leasing chassis, or offering dual mission incentives to make the drayage network more productive, and we're also working with our customers to see how we can help mitigate some of their own issues.

Tom Wadewitz, Analyst

So, I guess to bring that to point though, are you optimistic about intermodal volume growth given what you see on the capacity side in '22?

Alan Shaw, Chief Marketing Officer

Yes, because we've taken some very concrete steps to address what is under our control and we're hopeful that at some point the drayage community gets a little healthier and the warehousing community gets healthier as well.

Jon Chappell, Analyst

Thank you. Good morning. Alan, sticking with you, you mentioned improving revenue quality, which I know has been a big focus for you guys over the years and capacity is clearly at a premium, not just in the rails, but in every part of the transport supply chain right now. Are you being increasingly more selective in the freight that you're willing to move right now, and attempt to maximize your capacity in the mix and margin associated with that? And if so, how does that play into your long-term volume outlook, sacrificing yield potentially for volume?

Alan Shaw, Chief Marketing Officer

And Jon, part of yield improvement is really at the heart of it, allocating resources to the market signals that we get, which would indicate where the best home for those resources is. This involves making sure that we're onboarding the right type of business onto our network to ensure that we're not adding complexity and it involves making sure that we are being compensated for the value of the product that we're delivering. As you noted, our primary competitor is extremely stressed and truck just does not have the overflow capacity that rail does. There is also more interest from our customer base on sustainability. I was talking to a customer the other day about it. Effectively cut me off mid-sentence and said yes, we all know that rail is much more sustainable than truck, and we're doing everything we can to shift more towards rail. I think there is a prolonged opportunity to make sure that we continue to post improvements in our yields. I will tell you that one area in which I am a little concerned is within the coal network with export prices at record highs. I think it'd be irresponsible for us to feel like they're going to continue to rise into next year, so that might be an area in which you see a decline in yields.

Ravi Shanker, Analyst

Thanks. Good morning everyone. I apologize you missed this, but can you unpack the yield growth you saw in the quarter in terms of core price versus as fuel charges versus next?

Alan Shaw, Chief Marketing Officer

Ravi, certainly the storage solution that we provided in the international community was a driver of RPU growth as was fuel surcharge. We also saw much better pricing environment in the third quarter than in the second which is of no surprise and we've got a lot of momentum with respect to the price.

Ken Hoexter, Analyst

Thanks. Good morning, Jim and team. Great job on the improvement. Just a follow on the -- you gave before the fourth quarter outlook on operating ratio. I want to make it maybe just a little bit bigger. Your initial thoughts on 2022, just given your 400 basis points at least to improvement in the OR, maybe the scale of gains. And I know you're not necessarily going to give a number, but maybe Cindy, can you talk about the additional cost programs that you're looking at? Alan, maybe your thoughts on growth off of this higher base and the sustainability, just maybe some general thoughts to put a picture on '22 as we close out '21.

Mark George, Chief Financial Officer

Sure. Okay, Ken, thanks. Let me take the first part of that. As we look ahead to 2022 and beyond, as I said, we're committed to driving the OR lower and we will do that with a combination of emphasis on productivity and efficiency measures at top-line growth and there's a lot of opportunity for us there. We will get more specific with our 2022 guidance in January when we come back to you with our fourth quarter results. In terms of a new set of goals for the longer term, look for an investor day on our part sometime next year, we'll get more specific with regard to dates in the near future, but it's clearly time for us to update our longer-range goals as well.

Cindy Sanborn, Chief Operating Officer

So that one would to be a broken record, but we do have opportunities for train size and train length with our siding extensions, but also with growth being able to add into existing trains. We see great opportunity there to continue productivity and great drop-through on that revenue. We've got extra board consolidations; we're just constricting crews’ segments, those types of activities. Continued improvement in our processes and I can't underemphasize technology. I made some remarks about that earlier, so I will repeat those but the technological advances that will help us be much more efficient in how we go about our business. So, there's a great pipeline and I'm more excited about getting on the railroad.

Alan Shaw, Chief Marketing Officer

With respect to the macro environment, it's uniquely strong. You take a look at inventory sales ratios, historic lows, and the consumer has a healthy balance sheet and retail sales are continuing to increase, and so that inventory replenishment cycle is going to be a boost to transportation demand into well into 2022. PMI is at 61.1, which is well into the expansionary phase right now. Demand is really high; the only thing that indicates that the only thing holding it back are supply chain challenges, which we need to help solve for our customers. Steel prices are at record highs in a really weak auto environment. So, think about what happens when auto starts to rebound next year and potentially you sprinkle on a little bit of an infrastructure package before the midterms, we expect to have a robust environment for our product, our consumer-facing franchise next year as well.

Jim Squires, Chairman, President and CEO

Thank you, Mark. With respect to the vaccine mandate, I want to say first that we sincerely hope we won't lose a single Norfolk Southern employee as a result of that government mandate. That our employees will consider vaccination, those who aren't vaccinated or will seek an accommodation to which they're entitled under the law. This was not our idea. This was not our initiative. This is a mandate. We reviewed it, we studied it, we went over it with a fine-tooth comb. We determined that we are federal contractors subject to the executive order because of the business we do for the Department of Defense, principally. So, we're now in the process of implementing it. It's a tough, tough decision that's being imposed on some of our employees as a result. We do regret that, however, we will follow the law; it clearly applies to us, and we must comply. The next – and so what's next? Well, we get the information out there, we owe it to our employees to be clear about where we stand and what happens next, leading up to the deadline for compliance. We are keeping a close eye on the impact. As I said, I hope we don't lose a single person; we will probably lose some employees as a result of this.

Operator, Operator

Thank you. Our next question comes from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your question.

Walter Spracklin, Analyst

Thanks very much. Good morning, everyone. I'd like to go back to the regulatory question, just wondering if there's a bit of a silver lining here with supply chain issues and the very delicate capacity environment that this has proven our entire transportation network has. And my question, I guess for Jim here is things like reciprocal switching which eat up capacity with a different objective in mind but the consequence being that it eats up capacity. Do you think the White House is aware of this? Do you think the regulator recognizes that messing around with regulations that have one intended consequence could have a very detrimental one when it comes to capacity? And some of the indications that we've seen with where the capacity is, puts that at significant rise. Do you think that's lost on regulators or is it something that they become acutely aware of now and will rethink when potentially designing new forms of regulation for the railroad industry?

Jim Squires, Chairman, President and CEO

I think you summarized it pretty well and there is growing sensitivity and awareness on the part of regulators and policymakers regarding the state of affairs in the supply chain and the risks associated with policy changes at this stage. My message is at the very least, consider gathering additional facts and evidence, the supply chain is clearly in flux right now. It's in the process of reorganizing itself. And we don't know exactly what the future freight supply chains will look like. So given that the record in the relevant STB proceedings predates all of that, well, let's at least take a look at the current state of play and understand how freight is moving in today's economy and may move in the future before we make any significant policy changes.

Amit Mehrotra, Analyst

Thanks, Operator. Hi, everybody. Thanks for squeezing me in here. Alan, I just wanted to follow up on the intermodal growth questions. Obviously, we fully appreciate the challenges around drayage capacity and labor and warehouses, but just looking from the outside in, it's pretty clear that there have been some market share shifts in intermodal with your direct competitor. I mean, the chassis issue explains some of it but -- and we've seen a little bit of an uptake in weekly intermodal carloads but there seems to be some market share shift. I don't know if you think that's a fair characterization and if it is what the root cause is and you can address it but if you can just talk about that and then my second question, Mark, you used to provide this great slide that talked about fixed versus variable cost structures that spoke to the underlying operating leverage in the business. The cost structure is very different today, given all the good work that Cindy and her team have done, and the whole team have done. So, I was wondering if you can baseline where you think incremental for the business are given maybe a more volume variable cost structure than maybe you had a couple of years ago? Thanks a lot.

Alan Shaw, Chief Marketing Officer

In the third quarter, there were some international customer-specific actions with respect to inland positioning of containers that impacted our volumes. That's starting to unwind itself, so we should see a lift there. Although ultimately, international volumes are going to be limited by the drayage community in the warehouse community. Look, we've got the most powerful intermodal franchise in the east. It is a key component of our plan going forward to leverage that for growth. We've proven we can do it over time. I can give you numbers for it, comparing year-over-year performance metrics to show how we've improved incrementally as we adapt to the current economic conditions. We've done a lot to improve the productivity there; just in the third quarter, our train weight in intermodal was up 4%, and yet our train length was down 3%. We've got some things that we need to do to provide our customers with a better service product; they deserve that. We also have some things that we need to do at the interface with our customers to collaborate with them on making the whole supply chain efficient.

Jim Squires, Chairman, President and CEO

We see so many opportunities within our core business today. So many opportunities for organic growth by converting freight from road-to-rail within our existing franchise that we don't see a need to pursue businesses or approaches outside our core, because there are always risks associated with that M&A risks. Our approach will be to stick to what we know best and what we can execute well in light of all of the growth opportunities we have there.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes our Q&A session. I will turn the floor back to Mr. Squires for any final comments.

Jim Squires, Chairman, President and CEO

Thank you, everyone for your questions today. We look forward to talking to you again next quarter.