CSX - Q2 2013
July 17, 2013
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to the CSX Corporation Second Quarter 2013 earnings call. As a reminder, today's call is being recorded. During the call, all participants will be in a listen-only mode. For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation. Sir, you may begin.
David Baggs (VP of Capital Markets and Head of Investor Relations)
Thank you, Gwen, and good morning, everyone, and welcome again to CSX Corporation's second quarter 2013 earnings presentation. The presentation material that we'll review this morning, along with our quarterly financial report and our safety and service measurements, are available on our website at csx.com under the Investors section. In addition, following the presentation, a webcast and podcast replay will be available on that same website. Here representing CSX Corporation this morning are Michael Ward, the company's Chairman, President, and Chief Executive Officer, Clarence Gooden, Chief Sales and Marketing Officer, Oscar Munoz, Chief Operating Officer, and Fredrik Eliasson, Chief Financial Officer. Now, before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company's disclosure in the accompanying presentation on slide two.
This disclosure identifies forward-looking statements as well as risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With now 31 analysts covering CSX, I would ask as a courtesy to everyone to please limit your inquiries to one primary and one follow-up question. With that, let me turn the presentation over to CSX Corporation's Chairman, President, and Chief Executive Officer, Michael Ward. Michael?
Michael J. Ward (Chairman, President and CEO)
Well, thank you, David, and good morning, everyone. Last evening, CSX reported second quarter earnings per share of $0.52, a 6% increase from the same period last year. The financials benefited from overall revenue growth, excellent operating results, and a few items that Fredrik will outline later in the presentation. On the revenue side, we were encouraged by the solid growth across many of our markets, offsetting the ongoing challenges in coal. Overall revenue was up slightly on 1% volume growth, combined with the team's ability to drive solid core pricing for the service value CSX is providing. At the same time, we continued to deliver consistently high performances in safety, service, and efficiency in the face of a broad range of economic and market conditions that continue to be dynamic.
Those results helped increase the operating income to a record $963 million for the quarter and improve the operating ratio to a record 68.6%. As you view the presentation today, you'll see a company that is capable of consistently delivering value by leveraging the diversity and value of its product offering and maintaining a relentless focus on running an excellent railroad. Now, I'll turn my presentation over to Clarence Gooden, who will provide a more in-depth analysis of the top-line results and a forward outlook. Clarence?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Thank you, Michael, and good morning. Looking at the key economic indicators, they continue to point to slow, steady growth in the U.S. economy. In June, the Purchasing Managers Index registered a reading of 50.9, reflecting a modest expansion of U.S. manufacturing. At the same time, the Customer's Inventory Index registered a reading of 45, indicating respondents believe their inventories are still below normal levels. Looking at the right side of the chart, both GDP and IDP rates reflected modest expansion in the quarter. Although those second quarter growth estimates were below April expectations, forward projections still show slow, steady growth for the second half. Overall, demand across the diverse markets we serve was generally positive for the quarter, consistent with a broader economy. Now, let's take a look at the overall revenue.
Total revenue increased $57 million year-over-year, approaching $3.1 billion in the quarter. Starting to the left, the combination of rate and mix was favorable by $32 million in the quarter. Here, core pricing gains and liquidated damages were partially offset by the unfavorable mix impact related to growth in intermodal and the decline in coal. Moving to the right, volume had a favorable impact of $26 million in the quarter, as volume declines in coal were more than offset by growth in the merchandise and intermodal markets. Finally, fuel recovery declined $1 million in the quarter. Now, let's turn to pricing. Core pricing on a same-store sales basis remains solid across nearly all markets. Recall that same-store sales are identified as shipments with the same customer, commodity, and car type, and the same origin and destination.
These shipments represented nearly 80% of CSX's traffic base for the quarter. Looking at the chart, overall pricing, shown as the blue bars, improved 2.3% in the quarter, reflecting less difficult comparisons in the export coal market as we began to cycle rate reductions put in place during 2012. The gold bars, which exclude export coal, show pricing gains of 4.1% in the quarter, consistent with the performance in prior periods. On either basis, pricing exceeded rail inflation, which was low this quarter. A strong service product provides a solid foundation for pricing above rail inflation, which supports reinvestment over the long term. We are confident in the value of our service product and remain focused on driving profitable growth. Let's turn to the next slide and take a closer look at the volume.
Total volume was up 1% in the quarter versus the same period last year, with increases across most of the broad sectors we serve. The intermodal, industrial, and construction sectors delivered solid growth in the quarter. High service levels helped drive growth in the domestic intermodal market and capture opportunities in both the growing domestic and oil and gas industry and the recovering construction markets. The agricultural sector was flat, with growth in phosphates and fertilizer offset by the ongoing challenges in feed grain, soybeans, and ethanol. The coal story was mixed. Domestic volume was up 5% against a very weak second quarter last year, while export volume was down sharply. Now let's look at the individual markets in more detail, and starting with coal. Coal revenue declined 6% to $770 million.
Domestic coal shipments benefited from higher natural gas prices on a year-over-year basis. Although domestic coal demand has stabilized, inventory levels at southern utilities still remain high. Export coal volume declined 23% on soft demand for U.S. thermal coal, particularly in Europe, where broader economic conditions remain weak. Total revenue per unit was flat, with strong domestic pricing gains offsetting lower export pricing. Domestic pricing continues to benefit from the ongoing implementation of a utility contract structure that splits the conventional rate into two components: a fixed quarterly charge that does not vary with volume and a variable charge for each ton moved during the quarter. As a result, revenue per unit will vary more under this structure. During periods of low volume, the revenue per unit will be higher as the fixed component will be spread across fewer units.
Conversely, revenue per unit will decline during periods of high volume. That said, these contracts continue to reinforce our overall philosophy of securing inflation plus pricing, which supports reinvestment and reflects the value of the service we are providing to our customers. Looking ahead, we expect third quarter domestic volume to be relatively stable on a sequential basis, although down 5%-10% for the quarter and the full year. At the same time, our best estimate for 2013 export coal volume remains about 40 million tons, with a more unfavorable demand environment in the second half of the year. Next, let's look at merchandise. Overall, merchandise revenue increased 4% to nearly $1.8 billion. Chemicals was the key driver in the industrial sector, growing 11% on strength and energy-related products, including crude oil, liquefied petroleum gas, and frac sand.
The agricultural sector was flat as increased phosphates and fertilizer shipments offset the continued weakness in the feed grain, soybeans, and ethanol shipments. Regarding the construction sector, building products and aggregates increased due to higher construction activity and the continued recovery in the residential housing market. This was partially offset by lower military and machinery shipments. Looking at the third quarter, growth is expected in the industrial sector, driven by ongoing opportunities in chemicals, particularly in commodities related to oil and gas drilling. The automotive market will also remain strong, although we continue cycling tough comparables. We expect the agricultural sector to recover with the anticipated improvement in crop yields, supporting growth in grain shipments, primarily for animal feed. Finally, we anticipate the steady recovery in the construction sector will drive growth in building products and aggregates. Moving to the next page, let's review intermodal.
Intermodal revenue increased 4% to $425 million. Record domestic volume was up 4%, driven by growth with our existing customers and highway to rail conversions. International volume grew less than 1%, as growth with existing customers and from new service offerings was partially offset by volume loss to a carrier port shift. Total intermodal revenue per unit increased 2% on core pricing gains. Looking forward, we continue to make strategic investments in our intermodal network to drive profitable growth. Over 90% of CSX's intermodal volume currently operates in double-stack lanes. That number will grow into the mid-90s by the end of 2015, further improving efficiency and expanding capacity. New terminal construction is progressing as planned in Winter Haven, Florida and Montreal.
In addition, expansions are underway in Atlanta and Louisville, and an expansion of our Northwest Ohio hub is already in the planning stages. These investments will expand our network reach, increase capacity, and will allow the introduction of new service offerings that support profitable growth. At the same time, we continue to generate growth opportunities through our Highway to Rail, or H2R, initiative. We are working jointly with our channel partners to market the compelling value of intermodal rail transportation to targeted customers and further tap into an estimated 9 million truckload opportunity, which aligns very well with our network. Let's turn to the outlook for the third quarter. For the third quarter, we expect stable to favorable conditions for 83% of our markets, and the overall volume is neutral to slightly positive.
The outlook for agricultural products is favorable, with the anticipated improvement in crop yields supporting growth in grain shipments... Automobile and light truck production will remain strong, with annual production estimates now exceeding 16 million vehicles. We expect growth in chemicals as we continue to capture opportunities created by the expanding domestic oil and gas industry. Intermodal growth will continue as our strategic network investments and service reliability support the highway-to-rail conversions. Domestic coal volumes is expected to be stable sequentially, but down 5%-10% for the third quarter and the full year. Finally, export coal volume will again be lower on softer demand for U.S. thermal coals. Thank you, and I'll now turn the presentation over to Oscar to review our operating results.
Oscar Munoz (COO)
Thank you, Clarence, and good morning, everybody. As is customary, I discuss safety results at the beginning of each of these operations review to make it clear that safety is our first and foremost priority. Unfortunately, I need to make everyone aware of the tragic loss of two CSX employees this past week in separate incidents. The overriding focus of our safety program is to avoid such catastrophic events, and we are rapidly completing our investigation of how these events unfolded, and the lessons learned will promptly be applied to our operation. I want the colleagues, friends, family of these two gentlemen who might be listening to this call this morning to know that our hearts go out to them. At CSX, we are all passionate about sending each person home safely every day, and we must never, ever lose sight of this goal.
Now, if you'll allow me, let me review the company's overall safety results on this slide 15. The chart on the left shows FRA personal injury rate, which was 0.93 for the quarter. This rate is higher than the prior period and underscores our need to remain focused on safety each and every day. The chart on the right shows the FRA train accident rate, which improved by 7% to 1.81, and reflects our continued commitment to accident reduction. We will remain diligent in our efforts to keeping our employees in the communities where we work and safe. Now, let's turn to the next slide and review the operating results for the quarter. Here on slide 16, you can see that on-time originations on the left and on-time arrivals on the right.
Both measures improved in the second quarter, with on-time originations at 91% and on-time arrivals at 82%. Both measures are at record levels. I'm very pleased with these results. They represent the culmination of hard work and dedication by all of CSX's 31,000 employees during a quite challenging second quarter. Furthermore, these results demonstrate our commitment to a shared purpose founded on customer service. Let's look at the system performance on the next slide. Terminal dwell and velocity provide a picture of how efficiently cars and locomotives are moving across the network. CSX's continuing momentum in these two measures illustrates the company's ongoing commitment to improved asset utilization. Look at the chart on the left. We drove a 6% improvement in terminal dwell for the quarter to a record low 21.9 hours.
This means cars are spending less time sitting in terminals and thus more time in productive freight service. Velocity also showed improvement once again, up 3% to 23 mph, with improvement across all three networks: coal, merchandise, and intermodal. Strong on-time performance, dwell and velocity are a win-win, as our customers receive great service, and you, our investors, get ever-improving ROA. Now, let me review with you the company's improvement in operating efficiency on slide 18, which complements better service we are providing to our customers. Carloads were up 1% in the Second Quarter, and gross ton miles, the best measure of our true workload, was up nearly 2%. CSX absorbed this additional workload in the quarter with fewer resources on a year-over-year basis.
Moving down the chart, you can see road crew starts were nearly 3% lower than last year, as volume growth was largely incorporated into existing trains, and we improved our train crew productivity. In fact, both active locomotive count and total operations employment were lower by over 4% in the quarter, reflecting our improved operating environment. Now, let me wrap up on the next slide. Safety remains a primary focus for us, and we urge our employees every day to look out for and support one another in this endeavor. Service and customer satisfaction remain at high levels, and we deliver these great operating results while simultaneously improving our resource utilization. As such, we remain on track to deliver over $150 million in efficiency savings this year.
CSX remains committed to providing flexible solutions for customers to enable sustainable growth, driving significant long-term value for our shareholders. With that, let me turn the presentation over to Fredrik to review the financials.
Fredrik J. Eliasson (CFO)
Thank you, Oscar, and good morning, everyone. Looking at the top line, revenue increased 2% in the second quarter. Gains in merchandise and intermodal offset the declines in coal. At the same time, other revenue, which included a $60 million increase in liquidated damages, also contributed to the year-over-year improvement. Expenses also increased 2%, as wage and material inflation, higher depreciation, and volume-related costs more than offset savings from improved efficiency. Operating income was a record $963 million, up 2% versus the prior year. Looking below the line, interest expense was $140 million, other income was $9 million, and income taxes were $297 million, reflecting $17 million or $0.02 per share of tax benefits in the quarter.
While this resulted in an effective tax rate of 35.7% for the quarter. We continue to expect a tax rate of approximately 38% going forward. Overall, net earnings were $535 million, up 4% versus last year, and EPS was $0.52 per share, up 16% versus last year, reflecting growth in net earnings and the impact of share repurchases. As we turn to the next slide, let's briefly discuss how fuel lag impacted the quarter. On a year-over-year basis, the effect of the lag in our fuel surcharge program was $4 million unfavorable. This reflects $13 million of positive in-quarter lag during the second quarter of 2013 versus $17 million of positive in-quarter lag for the same period last year.
Based on the current forward curve, the fuel lag impact will be slightly favorable next quarter, primarily driven by the cycling of $16 million of unfavorable in-quarter lag in the third quarter of last year. Turning to the next slide, let's review our expenses. Overall expenses increased 2% in the quarter. I will talk about the top three expense items in more detail over the next few slides, but let me briefly speak to the bottom two on this chart. Depreciation was up 5% to $276 million due to the increase in the net asset base. Going forward, we continue to expect depreciation to increase sequentially by a few million dollars each quarter, reflecting the ongoing investment in our business. Lastly, equipment rent was down 6% to $96 million, driven by a reduction in locomotive leases and car hire expense.
Now, let's discuss labor and fringe in more detail. Labor and fringe expense increased 4%, or $33 million, versus last year. Looking at the chart on the left, total headcount was down 3% versus last year and up 1% sequentially to support a seasonal increase in demand and hiring ahead of attrition. Moving to the table on the right, improved efficiencies more than offset higher workload in the quarter to drive $19 million in net efficiencies and volume cost savings. Moving down the table, incentive compensation expense was up $24 million versus last year, and labor inflation was up $18 million, with core wage inflation remaining below 4%. Running out the table, other costs were $10 million higher for items that are not expected to reoccur.
Looking at the second half, headcount should be roughly flat on a sequential basis, although as we demonstrated over the past several quarters, we will continue to adjust our resources to reflect the current volume levels and drive efficiency. In addition, we expect labor inflation to continue to increase by $15 million -$20 million year-over-year for the remaining quarters, and the quarterly incentive compensation headwind to be similar to what we experienced in the Second quarter. Next, let's review MS&O expenses on slide 25. MS&O expense increased 2%, or $10 million, versus last year, with the key drivers shown in the table on the right. Total real estate gains reduced MS&O expenses by $16 million, reflecting two items. The first one relates to a $22 million gain on rail assets and easements.
The second one relates to SunRail gain, which was $14 million in the period, or $6 million unfavorable year-over-year. As a reminder, there will be no further material gains related to the SunRail transaction going forward. Moving down the table, inflation increased by $10 million, and train accidents and other increased by $16 million, primarily driven by costs related to a few derailments, including the accident in Rosedale, Maryland. Moving to the next slide, let's discuss the impact of fuel. Total fuel costs decreased 3%, or $13 million, versus last year. Looking at the table to the right, fuel efficiency was favorable by $10 million, reflecting a 3% year-over-year improvement in gallons consumed per gross ton mile.
Next, as shown in the chart on the left, CSX average cost per gallon for locomotive fuel decreased to $3.08, down 2% versus last year, driving a decrease of $7 million, as seen in the chart on the right. Rounding out the table, higher volume drove a $4 million increase in volume and other expenses, with gross ton miles up 2%. Now, let me wrap up on the next slide. Through the first half, CSX has displayed the benefits of its diversified portfolio business by overcoming over $155 million of coal headwinds to achieve record financial results. This was achieved by ongoing strength in our merchandise and intermodal businesses, and helped by $46 million in year-over-year gains from real estate transactions and nearly $50 million of year-over-year favorability related to liquidated damages.
Looking to the second half, coal will continue to be a challenge, driven by a depressed global coal environment and high domestic inventories. In addition, the year-over-year impact from real estate transactions, which was positive in the first half, will be negative by a greater amount in the second half. At the same time, Liquidated Damages, which was positive in the first half, are expected to be flat to slightly down on a year-over-year basis in the second half. Taken altogether, we're modifying our full-year earnings per share guidance slightly to now be roughly flat with 2012. Looking longer term, CSX will continue to focus on the same core elements that have driven the company to record financial results.
By focusing on safety, service, pricing above inflation, and profitable volume growth, CSX will emerge from this two-year transition to a new coal environment as an even stronger company and remains on track to sustain a high 60s operating ratio by 2015 and a mid-60s operating ratio longer term. With that, let me turn the presentation back to Michael for his closing remarks.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, thank you, Fredrik. It's been a pleasure to represent the great efforts of our 31,000 employees this morning. In addition to their positive results this past quarter, this team has delivered earnings growth in five of the past six years and improved the operating ratio in each of the past six years. This, in spite of the fact that CSX has lost over half of its domestic coal business over this period, and its merchandise business is still down from pre-recession levels. As I alluded to in my opening remarks, this team is all about consistency and execution, making the right adjustments at the right time, and focusing on the areas where we know we can make a difference. When we do these things well, the company stands the best chance of making the most of its opportunities and meeting its challenges.
At the same time, we are able to return substantial value to our shareholders through dividends and share repurchases, while also investing in our network, which holds great opportunity for well-documented reasons, including population growth, highway and trucking challenges, and the value and sustainability needs of our customers and the nation. In short, we like what we see: relentless, consistent performance and a promising future. Your company is well positioned to drive strong earnings growth and margin expansion long term as the economy continues its slow recovery and the energy environment evolves. With that, we'll be glad to take your questions.
Operator (participant)
Thank you. At this time, if you would like to ask a question, please press star one. Please record your first and last name when prompted. To withdraw your request, press star two. Once again, to ask a question, please press star one. One moment, please, for your first question. Your first question comes from Ken Hoexter of Merrill Lynch.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Good morning, Ken.
Kenneth Hoexter (Managing Director)
Good morning, Michael. Thank you for taking my question. Just let me stick on Clarence with the export coal here. What gives you the confidence in the 40 million tons, just given that API 2 is now at just over $86, Aussie coal in the low hundreds? Just sounded like you were a bit more negative on thermal coal. I thought you were always more positive on that, given contracts, and just surprised, not a little bit more negative on met coal, given that's more than half of the export side. So if you can just kind of run up on that. Thanks.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Okay. Ken, most of the thermal coal that we'll have for the second half of the year was put under contract in prior periods. So it was either done earlier in this year before the API 2 index dropped so dramatically or was done last year. So we feel, you know, pretty confident about being able to achieve those thermal numbers. And our met numbers, as you can already see, they've been declining on a, you know, sequential basis here from the first quarter to the Second Quarter, and we expect that they are pretty much going to stabilize at the level that they are now for the rest of the year. There's a lot of the steel companies, particularly in Europe, can't afford to buy some of the High Vol A.
They're buying a lot of the High Vol B coals, which CSX has been blessed with an abundance of, and that gives us some confidence in that market.
No, makes sense. I just thought you said in your presentation that you were more negative on thermal exports.
And going forward into 2014 timeframe, we would be.
Kenneth Hoexter (Managing Director)
Okay. Thanks for the time.
Operator (participant)
Your next question comes from Brandon Oglenski of Barclays.
Michael J. Ward (Chairman, President and CEO)
Morning, Brandon.
Brandon Oglenski (Director and Senior Equity Analyst)
Good morning, Michael. You know, I wanted to address an issue that we've been hearing a little bit more about and seeing in results here between you and your peer. It seems that some of the pricing discipline that's created so much value for this industry might be, I don't want to say slipping a little bit, but looks like your competitor might be trading a little bit more volume for price. Can you talk about how that's impacting outcomes for CSX and, you know, what your view is going forward?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, where we've lost business, Brandon, we're confident that it wasn't because of our service issues, and consistent with our long-term strategy, you know, we've remained committed here to pricing above rail inflation, which is imperative for us if we're to continue to invest in the business.
Brandon Oglenski (Director and Senior Equity Analyst)
Right. But I guess it seems, especially in the intermodal business, that there might be a little bit more aggressive behavior from the competitor. Is that creating problems for CSX? And do you view this as a longer-term issues that shareholders should be looking at?
Clarence W. Gooden (Chief Sales and Marketing Officer)
No, I, I certainly can't address what other competitors are doing. I would tell you that most of our conversions are highway to rail. We have a very positive program in our highway to rail program. We've added sales personnel in order to do that. With the beneficial cargo owners, we have a proprietary business model that we can use that will take the customer's book of business into consideration where that makes strategic fits for CSX. We think we offer a good product, and where it doesn't, we are very upfront with the customer in that regard. And domestic grew 4% this year to record levels. So we're continuing to see the growth, Brandon, in intermodal.
Brandon Oglenski (Director and Senior Equity Analyst)
All right. Thank you.
Operator (participant)
Your next question comes from Chris Wetherbee, Citi.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, Chris.
Chris Wetherbee (Managing Director)
Morning, guys. Just a question back on the thermal export coal side. Clarence, just kind of curious about the pricing dynamic. Sounds like most of the business is under contract, so is it fair to assume that the pricing on that specific piece of the exports is gonna remain relatively stable sequentially?
Clarence W. Gooden (Chief Sales and Marketing Officer)
I think, yes. I think you'll see it relatively stable sequentially.
Chris Wetherbee (Managing Director)
Okay, that's helpful. And, and then maybe just a follow-up on the utility side. You mentioned that the southern utility stockpiles were still kind of above average. When you think about the overall utility complex that you serve in the U.S., how do you think about stockpiles in general?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Stockpiles in the north are pretty much at normal levels. Stockpiles in the south are about where they were, and they've sort of continued along that line. That's based on both the rate of burn as well as the rate of resupply that the utilities are, you know, taking on an ongoing basis.
Chris Wetherbee (Managing Director)
Okay, that's helpful. Thank you.
Operator (participant)
Your next question comes from Allison Landry of Credit Suisse.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, Allison.
Allison Landry (Research Analyst)
Good morning. I was wondering if you could help us bridge the roughly flat earnings in 2013 with the 10%-15% growth in 2014. And from a high level, are there specific business segments that you see getting materially better next year? And I guess, what is the risk to this guidance based on the very weak fundamentals that we're now seeing in the export coal markets?
Fredrik J. Eliasson (CFO)
Well, I think what we've said is the underlying the guidance are two basic macro assumptions, that coal overall will be flat as we get through 2013. Both between domestic and export, we think it's gonna be flat. And we've also said that underlying that guidance of 10%-15% CAGR in earnings is going to be an economy that is going to grow, but albeit at a continuous modest pace. Clearly, export coal is, has gotten weaker, but inherent in the inventory overhang that we're dealing with on the domestic side, there's an opportunity perhaps for pickup as we get into 2014 as well. So I, I think overall, that's the, that's the macro assumptions that we have talked about.
I think as we stand here today, a quarter into the new guidance that we, that we've talked about, we still feel very comfortable with that guidance for 2014 and 2015.
Allison Landry (Research Analyst)
Okay. And, just as a follow-up, switching gears to crude by rail. Just given the recent narrowing in spreads, have your discussions with customers, do you get the sense that the eastern refineries have or will possibly switch back to coastal imports if the economics from the Bakken by rail don't necessarily work? Or is there generally a bias or a commitment to source domestically?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Allison, this is Clarence Gooden. When we talked to our customers as recently as this week about that, they're telling us is they don't see any significant need to change. Number one, they have commitments to the Bakken. Number two, a lot of the East Coast refineries get their oil off of the West African Coast, and that is what's really the driving factor for these guys. So we don't see any change right now in their behavior as a result of the narrowing of the spread.
Allison Landry (Research Analyst)
Fantastic. Thank you so much.
Operator (participant)
Your next question comes from Justin Yagerman of Deutsche Bank.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Good morning, Justin.
Justin Yagerman (Analyst)
Hey, good morning, guys. A couple questions on coal, shockingly enough. Where does Illinois Basin go over time as a percentage of utility coal for you guys from a sourcing standpoint? Where is it now? And how much of a positive RPU impact did that have in the quarter? Because when I look at RPU versus revenue per gross ton mile, it looks like maybe some of that longer haul had an influence on the RPU side, for domestic utility.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Justin, Clarence again. About two years ago, three years ago, 2010, about 12% of our coal originations on CSX were coming out of the Illinois Basin, and this most recent quarter, about 28%. And most of that coal has displaced Central Appalachian coal, which is down fairly significantly. So we see the Illinois Basin continue to grow over time, number one. Number two, for our southern utilities, Illinois Basin is a longer length to haul, therefore, will tend to carry a higher RPU.
Justin Yagerman (Analyst)
Got it. That makes sense. So positive mix shift. I mean, where do you see that going over time, Clarence? Do you have an idea of 28%? Is that kind of what you think the max would be, or can it go higher than that?
Clarence W. Gooden (Chief Sales and Marketing Officer)
It's gonna go a lot higher than that.
Justin Yagerman (Analyst)
Got it. And then, you know, as I think about the domestic coal franchise, you guys, in the past, have talked about the fact that you had a lot of contracts in Q4. I think 20%-25% of the book was expiring. As that gets closer, I'm kind of curious, because it sounds like you've had some of these conversations already, and maybe the contracts are already built in. How much of that's already been addressed, and how much of your book is left to reprice, and how is that conversation going in terms of putting in the more variable cost structure and pricing structure that you guys have been talking to for a while now?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, I think the same amount of contracts still have to be finalized, because you're correct in your assumption that we're in, you know, pretty serious negotiations with people. But we've had a lot of receptivity from a lot of the utilities for the fixed variable pricing. So it's a, you know, it's a learning experience for some that haven't used it as much as anything.
Justin Yagerman (Analyst)
So would that mean less liquidated damages on a go-forward basis and, and probably just more variability in terms of your overall, pricing schematic?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, it's obvious that the fixed variable would obviate some of the need for Liquidated Damages.
Justin Yagerman (Analyst)
Got it. All right. Well, thanks for the call, I appreciate the time.
Operator (participant)
Your next question comes from Thomas Kim of Goldman Sachs.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Thomas, good morning.
Thomas Kim (Analyst)
Good morning. I wanted to just ask you with regard to the, the longer-term outlook and, and how you're growing the various markets or verticals strategically. Where do you think coal sort of sits in terms of the overall contribution to the mix, let's say, in 2015, as the OR basically stabilizes, as you say, you know, sort of in a similar sort of range of 69% or so, or high single- high 60% range? Thank you.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, at 2015, which I guess is two years from now, I think you, Coal now, as we said earlier, is stabilized on a sequential basis. I think as those utility stockpiles draw down in the South, you could see some growth occurring over that period of time. And I think it's just too soon to assess what any further EPA regulations will be, because they'll certainly have court considerations in those.
Michael J. Ward (Chairman, President and CEO)
But in the meantime, we'll be growing our other businesses. So as a percentage, coal will probably be a somewhat smaller percentage because we'll continue to grow the intermodal, the crude by rail, the other markets where we have initiatives to grow the revenues.
Clarence W. Gooden (Chief Sales and Marketing Officer)
That's correct.
Thomas Kim (Analyst)
Right. And I mean, I think, and the reason why I ask is because, I mean, clearly, you know, part of the valuation differential between your good sales and some of your peers, you know, it has, to a good extent, related to the coal side. And so, I'm just curious as to what some of your targets or internal sort of goals would be to try to mitigate, or I should say, narrow that differential by, you know, addressing some of the market concerns around the coal as you think about the business, you know, much more strategically and longer term.
Fredrik J. Eliasson (CFO)
I think, just to clarify my answer to the guidance before. Overall, as we work off the 2013 base for the 2014 and 2015 years, we expect our coal business to be flat between domestic and export. And I think that gives you a sense of what the coal picture will look like. And then you add on to Michael's comment around the fact that we do see good growth prospects in many of the other markets. So that's the underlying assumption of our guidance.
Thomas Kim (Analyst)
Thank you very much.
Operator (participant)
Your next question comes from Tom Wadewitz of JPMC.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, Tom.
Thomas Wadewitz (Analyst)
Yeah, good morning, Michael. Good morning, everyone. Let's see, a question on export coal on the thermal side, Clarence. What level of API 2 pricing, you know, European thermal pricing, do you think is necessary for your customers to really make money and be sustainably in business? And if you stay at current pricing, which is pretty depressed, do you think it's reasonable to imply that you'd have a pretty significant step down in your thermal exports in 2014?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, let me give you two answers to that, Tom. The first answer is, the number as a rule of thumb that we use with what is necessary just to participate in the market, is gonna be in the mid-80s, somewhere in that number. But to make it sustainable over a long period of time, for, excuse me, some of our customers, it probably needs to be in the mid- to upper 80s.
Thomas Wadewitz (Analyst)
Okay, so then if you I guess we can just assume what we want on pricing, and then if you're not at that level, then you'd have some impact from the customers and your tonnage.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Right. That's correct.
Thomas Wadewitz (Analyst)
Okay, one more question for you, the follow-up question, I guess, on the crude by rail. I know you were asked this once, but wanted to see if you could kind of talk about it. I think you've got a couple facilities, maybe two facilities, that are scheduled to come online in second half of the year on the receiving side. And I'm wondering if those facilities have been, are still on track to start up for receiving crude by rail trains, or whether there's been a delay in those facilities and in your volume expectation related to this spread compression that's been pretty significant. Thanks.
Clarence W. Gooden (Chief Sales and Marketing Officer)
No, Tom, both facilities are still scheduled to come online here in the third quarter.
Thomas Wadewitz (Analyst)
Okay, great. Thank you.
Operator (participant)
Your next question comes from William Greene of Morgan Stanley.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, William.
Thomas Wadewitz (Analyst)
Hi there. Good morning. You know, Michael, or even Oscar, I'm just wondering if I can ask you a little bit about productivity and cost. So if we look at the second half outlook, obviously still a bit challenged, the longer-term outlook on coal, questionable. So does it make sense to become now more aggressive on cost, sort of do almost an inflation plus productivity gain, in addition to the inflation plus pricing? Because it would seem to me that that's the way to almost ensure outside the macro, that you continue to see these goals on the longer term basis that you're targeting.
Fredrik J. Eliasson (CFO)
Bill, it's Oscar. I couldn't agree with you more, and I think that's the path and initiative you've seen us take over many years.
Michael J. Ward (Chairman, President and CEO)
We started the year thinking we'd get one third of productivity. We're now saying in excess of 150. So we're, we're constantly striving to find ways to drive down the cost, and I think the most interesting thing we're seeing, as we provide this better service to the customers, it also has very favorable impacts on our cost structure. So we're gonna continue refining those resources and, and pulling them when they're not required and adding when they are required. But I think Oscar and his team are, are very focused on the productivity side.
Thomas Wadewitz (Analyst)
Yeah, I guess what I was getting at is, is there a world where you could say cost-cutting could become a much bigger part and element to growing the actual earnings of the company, as opposed to just kind of waiting for coal and macro to come back?
Oscar Munoz (COO)
I think I'd reiterate what Michael said. I think there's a delicate balance between the service we're providing to our customers, clearly, the safety of our employees, and, you know, the valuation of the impact that you discussed. And I think we balance all of those very well, and I think there is, you know, on a good news front, there's a lot of efficiency to be gained in our industry and certainly in our business, and we will pursue that.
Thomas Wadewitz (Analyst)
Yeah. Is there any element on CapEx that could come down then, given what the outlook on coal is?
Fredrik J. Eliasson (CFO)
Well, I think that the our CapEx guidance has an inherent ability to flex, depending on what we think that the gross ton miles is going to be within our coal business. So we have a revenue target out there. It's a percentage of revenue in terms of what our CapEx is, and depending on what we see with coal, that, that CapEx, as you get into 2014 and 2015, is gonna flex whatever we think that the underlying workload will be.
Oscar Munoz (COO)
Bill, it's Oscar again. I can't underscore the amount of effort and work inside the company with regards to asset utilization. We term it enterprise asset management, about ensuring that the efficiency of our operating network creates such a more fluid environment where it does obviate the need for additional CapEx.
Thomas Wadewitz (Analyst)
Okay, great. Thank you for the time.
Operator (participant)
Your next question comes from Scott Group of Wolfe Research.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, Scott.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Morning, guys. So, wanted to ask one first on export met. How much of the business right now is getting repriced on a quarterly basis? And so we saw that the benchmark Queensland rates dropped, what, 16%-17% sequentially from second to third. Does your pricing go down that much? I think historically, it goes down a little bit less. I just wanna get some color there, and maybe at a high level, if you think you can sustain flattish year-over-year overall coal yields in the back half of the year, given kind of the renewed pressure on met rates.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, the answer to both questions is yes. Our coal, as we've said before, Met Coal and export coal, does move with the market, but it doesn't move as much in either the upward direction or in the lower direction as the coal pricing itself does.
Scott Group (Managing Director and Senior Analyst)
Okay, and that was a yes also to you think coal yields can be flattish in the back half of the year?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Yes.
Scott Group (Managing Director and Senior Analyst)
Okay, great. And then just one on crude by rail. I understand your commentary that you're not seeing any kind of signs of changes in the demand environment. Are you seeing any changes in the pricing environment from you or the rail industry overall, where you need to give up a little bit of price given the lower spreads, or can you envision a scenario where pricing starts to become a little bit more flexible or get adjusted based on that spread on a quarterly or some period basis?
Clarence W. Gooden (Chief Sales and Marketing Officer)
I cannot see such a scenario as that happening. We think we've got our product fairly priced. We think that the, particularly with the tightness that's in the tank car fleets, that the things Oscar mentioned about the asset turns become a selling point and become very important and critical to keep the overall cost structure to the end user down.
Scott Group (Managing Director and Senior Analyst)
Okay, great. Thanks for the time, guys.
Operator (participant)
Your next question comes from Jason Seidel of Cowen.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, Jason.
Scott Group (Managing Director and Senior Analyst)
Good morning, guys. I guess I'll shift gears and talk a little bit about the intermodal business. The hours of service obviously changes are just upon the truckload industry, and I think all people agree it's gonna have some level of degradation of utilization, therefore impacting capacity. You know, in terms of domestic intermodal, what is CSX seeing going forward, and what do you expect in terms of a potential volume pickup because of HOS?
Clarence W. Gooden (Chief Sales and Marketing Officer)
You know, Jason, I met with two truckers last week, and they're not seeing as much impact as some of the people have forecasted. So they're looking at some numbers around 5%. I thought, as I'm sure you know, a 5% loss of productivity, and as I'm sure you know, there's been a lot of projections about much larger impacts on productivity than those numbers. I think it's too early to tell until people settle down at some type of working pattern of exactly what the impact's gonna be. I think the more important thing in intermodal is the value that's being offered to the customers, both in terms of service and in terms of price, that's available to them now, and a better awareness of the beneficial cargoes of what those values are.
Scott Group (Managing Director and Senior Analyst)
In terms of the pricing, I mean, are you guys gonna sort of take a balanced approach to this going forward if there is some impact and some spillover between price and volume?
Clarence W. Gooden (Chief Sales and Marketing Officer)
I don't understand what you're asking. Ask me again.
Scott Group (Managing Director and Senior Analyst)
You know, if you had the opportunity to gain more market share, especially in some of the lanes that you can increase your double... Is this gonna be a situation where, you know, you're gonna go for more volume initially, or is this gonna be more of a balanced approach in making sure you get properly compensated?
Clarence W. Gooden (Chief Sales and Marketing Officer)
It's gonna be a more balanced approach. As you know, the big thing I hope if we've made any one point here, is we're about profitable growth.
Scott Group (Managing Director and Senior Analyst)
Okay. My follow-up question, just so I can understand sort of the longer-term guidance, you know, when you said that you're expecting sort of flattish coal, so we should assume that the export coal assumptions in the out years are for 40 million tons?
Fredrik J. Eliasson (CFO)
No, I said overall, between domestic and export, and obviously as we're looking at the market right now, there's more downward pressure on export and perhaps more upward opportunities on domestic. But, we got a 2.5 years until that endpoint, so a lot of things will change. There's one thing you know, when you put guidance together and the underlying assumptions, most likely you're gonna get there a different way than you originally assumed. So we're gonna continue to do what we do best, which is to focus on the things that we control, safety, service, efficiency, and inflation plus pricing, and we feel very comfortable with the guidance that we put in place.
Scott Group (Managing Director and Senior Analyst)
Fred, when you talk about sort of an upward bias to domestic coal, when you look at sort of the southern utility stockpiles, how long do you think it's gonna take for, you know, for them to sort of get where, you know, the southern utilities start seeing a decent amount of growth in domestic coal?
Fredrik J. Eliasson (CFO)
Well, as we said, on the northern part, we feel that we're where we need to be in terms of stockpiles. In the southern end, we think that by the end of the year, thereabouts, we think we should be at a more normalized level.
Clarence W. Gooden (Chief Sales and Marketing Officer)
We would just like the Mid-Atlantic to send their heat down south. So that'll help.
Scott Group (Managing Director and Senior Analyst)
I'll gladly send it, guys. It's gonna be a brutal one here in New York. Thanks for the time, as always.
Operator (participant)
Your next question comes from Ben Hartford of Baird.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, Ben.
Ben Hartford (Analyst)
Good morning. Fredrik, if I could just build on that point, can you remind us what, what you had assumed in terms of met and thermal within that 40 million tons target at the beginning of the year and where you sit today? And then maybe if you could provide some context as well, a lot of discussion about the weakness in both thermal and met coal prices in the export market year to date. Can you give us any order of magnitude of where that 40 million tons run rate might be presently if it weren't for the contracts that were struck late last year or early this year? Thanks.
Fredrik J. Eliasson (CFO)
I'm going leave the second part of the question to Clarence, but this is Fredrik. And I would say in terms of the mix between met and steam in our long-term guidance, we have not given any sort of indication where we think that is, because there's one thing we know, we do know that it's very difficult to forecast exactly where export coal is going to be, and even more difficult is to forecast what the split is gonna be between the two.
Clarence W. Gooden (Chief Sales and Marketing Officer)
And in the current quarter, that was. And in the first half, it's been 57-43, 57 met. And I think our coal team and the export team did nothing short of a brilliant job in getting a lot of these thermal contracts, particularly in place before this API index has collapsed so much. The met was much more difficult to predict. The Australian dollar against the US dollar dropped 9% in the second quarter, and that severely impacted the met imports, along with the fact that the growth in China and the recessionary tendencies you've had in Europe have impacted those steelmaking industries.
So it's a little hard for us to tell you what it's gonna be doing here in the second half, other than what we're confident that we've got committed now.
Ben Hartford (Analyst)
Yeah. Is there any context, I guess, in terms of the order of magnitude of where or how much lower that export coal number would be in total at present prices? I mean, is it, would it be a 10% reduction, a 50% reduction? I mean, anything within that context might be helpful.
Clarence W. Gooden (Chief Sales and Marketing Officer)
I don't have. I just don't know. The Australians, they're gonna control what happens in that met market in any event, and they're probably at about as low as they wanna go.
Ben Hartford (Analyst)
Okay, that's good. Thank you.
Operator (participant)
Your next question comes from Cherilyn Radbourne of TD Securities.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Hello, Cherilyn.
Cherilyn Radbourne (Analyst)
Very much, and good morning. I was just wondering if you could give us a bit more color on the impact of mix in an overall sense in the quarter. Clearly, it was still negative, but it did seem that maybe it was a little bit less negative than it has been, because you did have some decent growth in some of your higher-yielding merchandise segments.
Fredrik J. Eliasson (CFO)
As we outlined in our presentation, the RPU was up about 1%. Our overall pricing, when you include everything, was a little bit above 2% on a same-store sale basis. That would indicate about 1% or so negative mix, and that is to be expected as our coal business continues to decline as a percentage of our portfolio. And intermodal, which is significantly lower RPU, is continuing to grow. So the overall pricing, as you saw, if you take out export coal, because that continues to be a drag, of course, on our pricing overall, it continues to be very solid, right around 4%.
So, mix is gonna be something that we're gonna be dealing with for a long period of time, the negative mix, as our intermodal business continues to become a bigger and bigger percentage of our portfolio.
Cherilyn Radbourne (Analyst)
Okay. And, Clarence, just wondering if you could offer some thoughts on the peak season and just whether you're seeing the housing recovery translate into any kind of a ripple effect into things like furniture?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Actually, what we've seen in the housing impacts has not been an impact on furniture. There was a lot of inventory, for example, for appliances, a couple of the major manufacturers, and we've seen that inventory actually drop as the housing starts have increased. What was your first part of your question that phone went out on?
Fredrik J. Eliasson (CFO)
Peak season.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Peak season? You know, I'm not sure I know if we're gonna have a good peak season or just an average peak season, and the average being defined as what peak has been over the last few years. We'll certainly start to get an indication of that toward the end of this month, July, because a lot of the shipments that'll be in the back to school area, that'll be getting ready for the holiday seasons will all start here in early August. So we'll be able to tell by the lift in the vessels coming out of Asia, what that peak is gonna look like.
Cherilyn Radbourne (Analyst)
Okay, thanks. That's it for me.
Operator (participant)
Your next question comes from David Vernon of Bernstein.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, David.
David Vernon (VP and Senior Analyst)
Hey, good morning. Could we talk a little bit about the, the strength in domestic coal pricing? How much of that is due to the move, to fixed and variable pricing with utility customers right now?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, I would say that, not a lot. It's been mostly impacted by the overall pricing philosophy that we had. About, 20% of our volume right now is covered, or revenue, not volume. Revenue is covered by the, fixed variable, so most of it has come off of either the escalators or renegotiated, contracts.
David Vernon (VP and Senior Analyst)
So that 20% of the revenue that's moving on the fixed variable, is that would that be including a bunch of fixed charge, or was that sort of at an average rate? Like, I'm just trying to get a sense for how the RPU should move as volume flexes.
Clarence W. Gooden (Chief Sales and Marketing Officer)
In this quarter, there's been no real material impact.
David Vernon (VP and Senior Analyst)
Okay. And then just one last question, Clarence. The IP numbers you guys put out on the macro side look like they're down a little bit, about 60 basis points, and the general balance of the commodity outlook seems a little bit more favorable. Is that just ag, or are you hearing some more on the industrial side that would lead you to believe the cut in forward IP numbers is probably unwarranted?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Are you saying, are you? Ask me that again. I didn't understand.
David Vernon (VP and Senior Analyst)
Sorry, sorry. I looked at the industrial production growth rates that you guys had in the first quarter to the Second Quarter, and it looks like they're down about 60 basis points.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Industrial products, you're talking about?
David Vernon (VP and Senior Analyst)
Yeah, industrial production.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Industrial production.
David Vernon (VP and Senior Analyst)
Sort of the macro, sort of the macro outlook, right.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, those numbers are coming out of Global Insights, and it's interesting to list, as I do all the time, about the IDP and the GDP numbers. Whatever some of these agencies predict they're gonna be, I know they're not gonna be that. I think the industrial growth has been a little bit stronger than what some of these numbers have indicated here for our business. It's certainly showing up in some of the construction materials that we had, as opposed to the paper side of the business. It's strong in our automotive business. It's not as strong in our steel business as we think it should be. But it looks to me like we're gonna continue to have growth in that, in the IDP numbers as we move forward.
Michael J. Ward (Chairman, President and CEO)
I guess, Clarence, what, housing starts last year were about 780, and we're thinking they might be in the 950 range. So-
Clarence W. Gooden (Chief Sales and Marketing Officer)
That's right.
Michael J. Ward (Chairman, President and CEO)
It is growing, but from a very low base, 'cause a normalized rate's more like 1.5 million. At the peak, it was 2.5. So we're seeing some growth there, but from a real small base. And I guess secondly, at least at this point, there's a good planting of crop. So we're hopeful that toward the end of the third quarter, we're gonna see some very good growth in our ag shipments, which have been down for the first half.
David Vernon (VP and Senior Analyst)
All right, great. That's what I was trying to get at. Thank you very much.
Operator (participant)
Your next question comes from John Larkin of Stifel Nicolaus.
Michael J. Ward (Chairman, President and CEO)
Morning, John.
John Larkin (CFA)
Hey, good morning, gentlemen. Thanks for taking my call. By the way, there were some disappointing housing numbers out this morning. You may wanna check on that, down 9.9% in June. Just as information, that was a surprise to many people, I think. First question, the incentive comp, I think, Fredrik, you said, was up $24 million year-over-year. How do you reconcile that with the outlook for a flattish year in terms of EPS year-over-year?
Fredrik J. Eliasson (CFO)
Yeah, I think, really, you going to go back to last year when we set our plan for 2012, which was really done in December. We had obviously anticipated a 2012 that turned out to be very different than or anticipated 2012, that was a very different coal environment. And as we moved through 2012, we took down our incentive compensation quite significantly, and we also now have a much larger part of our unions participating in that incentive comp plan. So as you get into 2013 and you reset the targets to properly motivate and incentivize your employees, that headwind becomes a lot more significant, and that's what you're seeing this year.
John Larkin (CFA)
Roughly how much of that incentive is related to the unionized labor force?
Fredrik J. Eliasson (CFO)
It is a relatively large %, but I don't have that here.
John Larkin (CFA)
Okay.
Fredrik J. Eliasson (CFO)
But this has been something that's been going on over the last couple of years.
John Larkin (CFA)
And then just on the large accident that unfortunately happened up in Quebec, involving a crude-by-rail train. Often, regulators will, if nothing else, you know, in a knee-jerk reaction, put in place some pretty onerous regulations. You know, we saw that with the PTC mandate. Do you see anything like that coming out of that accident across North America? And will that make it more expensive to move crude by rail and therefore less attractive vis-a-vis, say, pipeline?
Michael J. Ward (Chairman, President and CEO)
John, this is Michael, and, you know, first off, we just want to express our condolences to the people there in Quebec. I mean, that was a terrible accident, and the first responders did a great job of responding to that horrible accident. As you know, they're still investigating what the cause of it is. And I think until the cause is known, it's a little hard to speculate whether there would be additional regulations or not. As you're well aware, we move these because we're a common carrier, and we have a very good record of safety in handling these products. So I'm hopeful that as they determine the cause of this, if there's something to be learned to make us safer, we want to learn from that because, you know, our ultimate goal is zero. We have a great record now.
We want it to be better. So I think until there's a causation here, it's gonna be a little difficult to see whether there'll be a push for further regulation or not.
John Larkin (CFA)
Thank you very much.
Operator (participant)
Your next question comes from Matt Troy, Susquehanna International.
Michael J. Ward (Chairman, President and CEO)
Morning, Matt.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning.
Matt Troy (Analyst)
I think it's a question on coal economics. Obviously, exports have been kind of the perpetual albatross, if you will, for your story, and that for about two years, they've been poised to drop. Now that we're seeing that, I was just wondering, you implied flat guidance next year in terms of volumes, but there's negative mix. What's the profitability relationship between exports and domestic? Some folks will say it's 2x-3x as profitable to an export move versus domestic. I think that's crazy, but if you could just help us in terms of what that negative mix shift might mean for profitability of coal as a whole, that might help alleviate some concerns in the market about the decline in export tonnage.
Fredrik J. Eliasson (CFO)
Yeah, I would say that in the past, prior to us taking, this is Fredrik, by the way, prior to us taking some of these rate reductions in our export portfolio, we would have said, hey, if you combine the meth and the steam together on the export side and you compare it with domestic, they're relatively similar. Now, with some of the reductions that we've had to make on the export side, I would say that perhaps the domestic portfolio is slightly more profitable. So from that perspective, at this point, it's, it's not a, not a bad thing. Overall, obviously, coal is a, is a profitable business for us because it's a very efficient way of moving things, unit train, that's a conveyor belt. So it is, it is not as big of a deal as perhaps some people might think.
Matt Troy (Analyst)
I agree, and good to hear. The second question I had simply relates to intermodal capacity. You know, you talked about the percentage of your traffic that's flowing into double-stack lanes moving up into 2015. In terms of train length and, and some of the yard and asset productivity initiatives, what's the capacity to grow just average train length, where we know those incremental margins for the, the last cars you're adding are, pretty significant? Thank you.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, this is Clarence. Matt, I think it's fairly significant. We still have plenty of capacity to lengthen the trains and to fill them up in the air, so it's a positive thing for us.
Matt Troy (Analyst)
All right. More to come. Thank you.
Operator (participant)
Your next question comes from Jeff Kauffman of Buckingham Research.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, Jeff.
Jeff Kauffman (Analyst)
Good morning. Thank you very much, and congratulations. Thank you for taking my question. I'll keep it short. Given the weaker global outlook on API 2, and you had mentioned the Australian Exchange, you know, these aren't things likely to turn on a dime, yet you maintain the 2013-2015 guidance. So something else, I'm assuming, got a little bit better to offset this. What would that have been?
Fredrik J. Eliasson (CFO)
Well, Jeff, this is Fredrik. Overall, I would say that the reason why we took the guidance up for 2013 was really what happened here in the second quarter. We have several one-time events that got a little bit better than we expected, and that's the foundation, obviously, then also for our long-term guidance. So, clearly, the export coal market has gotten a little bit weaker, but we continue to execute very well on the things that we do control, which is what we're focusing on once again, safety, service, efficiency, and inflation plus pricing. And that's what gives us confidence to take up guidance slightly, and really is a reflection more of what happened here in the second quarter than anything that's gonna happen in the second half.
The second half is still gonna be very challenging, consistent with the points that I had in my prepared remarks.
Jeff Kauffman (Analyst)
Okay. I'm sorry, Fredrik. What I meant was not 2013, but kind of the 2014, 2015 view. If we're thinking the export markets could be weaker in 2014, what else got better to kind of keep the consistent 10%-15% to 2015 view?
Fredrik J. Eliasson (CFO)
Two things. First of all, what we have said here is that overall coal, we expect to be flat.
Okay.
And so, I, I'm not sure the domestic coal necessarily has gotten stronger during this last quarter since we issued the guidance originally. But what we are comfortable with is the fact that we are continuing to execute well. And then second, in our guidance is a range of 10%-15%. So within that range, we're definitely more still comfortable that we would be able to deliver our earnings growth according to that guidance.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Jeff, this is Michael. The only thing I'd add to that is we have, especially in the last couple of years, seen there's a lot of volatility in the marketplace out there, both with the economy, the energy environment, and it starts to feel like two and a half years is a long time, and many things happen. So what we're trying to position ourselves for, whenever there's opportunities, we're making sure we're flexible around. I mean, if you think back three years ago, who would even been talking about crude by rail? So there's a lot of things that can move around in a two and a half year period.
Jeff Kauffman (Analyst)
All right. Michael, Fredrik, thank you, and congratulations.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Thank you.
Operator (participant)
Your next question comes from Justin Long of Stephens.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Morning, Justin.
Speaker 21
Morning. Quick question. You know, outside of export coal, would you say that core pricing gains right now are pretty consistent among your different end markets? Or are you seeing any particular areas of strength or weakness? And you touched on intermodal a little bit earlier, but right now, what would you say the pricing dynamics are in that market, given some of the capacity expansions we have going on in the east?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, Justin, this is Clarence Gooden. The, our, our pricing has been pretty consistent across all of our lines of businesses. There's been a couple of that obviously have one point or so better than others. Our intermodal pricing is always under a lot of intense pressure, not only from, other rail competition, but the real competitor is the highway and is the trucker. And there's still a lot of trucking capacity out there. There's still a lot of unused trucking capacity that we see. So the, so the pricing pressures that remain in intermodal, remain from the highway, and is probably one of our more difficult markets in which to price in. But the others are pretty consistent across the board. We feel very confident that we can get the inflation plus pricing.
Speaker 21
Okay, great. As a quick follow-up, on your guidance for 2013 EPS to be roughly flat year-over-year, there have been some gains and one-time items over the last year. I was wondering if you could clarify what you're using as both a base EPS number for 2012, as well as what you're using for the first two quarters of this year.
Fredrik J. Eliasson (CFO)
Yeah. So, so the base, that we have is 179, is what we had in 2012. So that's really what we're saying, roughly flat, that's what we're expecting against. And you're right.... We've had the, we had the fortune for, of several one-time items on our expense side, and also, of course, had, the liquidated damages on the top line that helped us here in the first half, which is why the second half is gonna be more difficult than the first half, but the, the base is 179.
Speaker 21
For the first half of 2013, what EPS numbers are you using? Are you using the GAAP numbers?
Fredrik J. Eliasson (CFO)
Using the reported numbers.
Speaker 21
Okay, great. I appreciate the time.
Operator (participant)
Your next question comes from Keith Schoonmaker of Morningstar.
Fredrik J. Eliasson (CFO)
Morning, Keith.
Speaker 22
Morning. Thanks. You mentioned the proportion of domestic coal originating in Illinois Basin, I think, has doubled from 2010 levels. Other than a longer length of haul, are there aspects of this business that either benefit or constrain productivity or price? For example, train length, car type, lower grade, et cetera.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Keith, this is Clarence Gooden. No, there are no other constraints.
Fredrik J. Eliasson (CFO)
It's a good move for us.
Clarence W. Gooden (Chief Sales and Marketing Officer)
It's a good move for us.
Speaker 22
Are there more fixed variable contract structures in this region, or is there no structural pricing difference?
Clarence W. Gooden (Chief Sales and Marketing Officer)
There's the fixed variable is with the end receiver, so-
Speaker 22
Yeah
Clarence W. Gooden (Chief Sales and Marketing Officer)
- depends entirely on where they receive their coal from.
Speaker 22
Great, thank you.
Fredrik J. Eliasson (CFO)
Illinois Basin or Central Appalachian.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Either one, yeah.
Thank you.
Thank you.
Operator (participant)
Your last question comes from Walter Spracklin of RBC Capital.
Fredrik J. Eliasson (CFO)
Morning, Walter. Thank you for your patience.
Walter Spracklin (Managing Director and Senior Analyst)
Morning. Thanks for taking my question here. Just a quick question on intermodal. I know that's been a big, big part of your, you know, underlying growth driver, and I think it perhaps is getting a little dropped off in terms of context, given coal. So you know, you've invested a lot in your intermodal network. You've talked a lot about that 9 million loads that are available in truck. When you look at your 4% domestic growth this year, is there any way to disaggregate where you're getting that growth, you know, in terms of success of converting? And then the follow-up to that is, let's just say it starts coming online a lot quicker than you expect, where is the next bottleneck? I know you've done a great job double stacking.
You've got plenty of capacity on your, on an average train length basis. If it really starts coming online, where, where, where will we see the next pinpoint?
Clarence W. Gooden (Chief Sales and Marketing Officer)
Well, Walter, I would say that the biggest growth has come vis-a-vis our channel partners from the beneficial cargo owners themselves, and being able to say what the value of intermodal is. And we have a pretty good handle around who those customers are and what some of their needs and all are. I think our we've looked at in terms of where we could have potential capacity problems in the future going forward. So you heard us mention in the prepared remarks, number one, we've already got in the planning to expand our Northwest Ohio hub. We're looking at where we could have potential bottlenecks in the Southeast because there's a lot of growth, both in terms of population as well as in terms of highway conversions in the Southeast.
Fredrik J. Eliasson (CFO)
We are expanding Atlanta now, right?
Clarence W. Gooden (Chief Sales and Marketing Officer)
We're expanding Atlanta as we speak. We've, as you know, we built our Louisville terminal at, we, we went way over capacity, over the capacity of that terminal in Louisville fairly quickly, and so we had to get in and expand that pretty quick. As the Florida market has continued to grow, we had the foresight to get into the Winter Haven market on a, on an early basis. So we feel like we're pretty well positioned in terms of capacity for intermodal growth.
Walter Spracklin (Managing Director and Senior Analyst)
Segregating that 4% growth, how much would you attribute to that, to conversion or your customers winning market share? And how much is it just simple growth or gaining market share again against your, your rail competitor?
Clarence W. Gooden (Chief Sales and Marketing Officer)
be difficult for me to segregate that, to be honest with you.
Walter Spracklin (Managing Director and Senior Analyst)
Okay. Well, that's it. Thank you very much.
Clarence W. Gooden (Chief Sales and Marketing Officer)
Thank you, Walter. Thank you all for your attendance today. See you next quarter.
Operator (participant)
This concludes today's conference call. Thank you for your participation.
