CSX - Q2 2014
July 16, 2014
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to the CSX Corporation second quarter 2014 earnings call. As a reminder, today's call is being recorded. During this 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.
David Baggs (VP of Capital Markets and Head of Investor Relations)
Thank you, and good morning, everyone, and again, welcome to CSX Corporation's second quarter 2014 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 Investor section. In addition, following the presentation, a webcast and podcast replay will be available on that same website. Here representing CSX 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 2.
This disclosure identifies forward-looking statements, as well as the uncertainties and risks that could cause performance to materially differ 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. That said, with nearly 30 analysts covering CSX, I would ask as a courtesy to everyone to please limit your inquiries to one primary and one follow-up question. And with that, let me turn the presentation over to CSX Corporation's Chairman, President, and Chief Executive Officer, Michael Ward. Michael?
Michael Ward (Chairman, President and CEO)
Well, thank you, David, and good morning, everyone. Last evening, CSX reported record second quarter earnings per share of $0.53, up from $0.51 in the same period last year. CSX also generated record revenues of $3.2 billion for the quarter, up 7%, on an 8% volume increase. These results are evidence of both broad-based economic momentum across most markets and a transition in the energy markets that is largely behind us. We handled volume levels this quarter that exceeded our expectations while maintaining stable operations, and we're taking additional steps to return service to the high levels that our customers have come to expect from CSX over the last few years. We're excited about the growth we're seeing and what it means for the future of this company and our shareholders. That's why we've added people and capacity, including locomotives, freight cars, and infrastructure.
Oscar will discuss these initiatives in more detail later in the presentation. Thanks to the efforts of CSX's 31,000 employees, the company produced record operating income of nearly $1 billion and delivered an operating ratio of 69.3%. As we look to the back half of the year, CSX is focused on improving service levels, leveraging the growth opportunities before us, and generating modest earnings growth for the full year 2014. Now I'll turn the presentation over to Clarence, who will take us through the top-line results in more detail. Clarence?
Clarence Gooden (Chief Sales and Marketing Officer)
Thank you, Michael, and good morning. The underlying macroeconomics remain strong, and our experience in the data suggests a positive outlook for growth. The Purchasing Managers' Index held firm at 55.3 in June. A reading above 50 indicates that the manufacturing economy is expanding. This is the thirteenth consecutive month the PMI index has signaled expansion. At the same time, the Customers' Inventory Index remained at 46.5. A reading below 50 indicates customers' inventories are low and suggests continued strength and demand for manufacturing output. As a result, many of the customers we serve grew at a robust pace, and most of the key indicators we track, including vehicle production, housing starts, and agricultural output, point to continued expansion. Overall, demand for rail service was very strong in the second quarter. Now let's look at the results on the next slide.
As you can see on the left side of the chart, total volume grew over 8% to nearly 1.8 million loads in the quarter, with strong growth in merchandise, intermodal, and coal. Moving to the right, total revenue increased $198 million to over $3.2 billion in the quarter, reflecting overall volume growth and increased pricing across most markets. Merchandise and intermodal now account for over three-quarters of CSX's overall revenue. Total revenue includes $11 million of liquidated damages related to contract shortfalls in coal shipments. We expect similar levels in the remaining quarters of this year. Looking forward, we will be cycling $51 million of liquidated damages from the third quarter of 2013. Next, the average revenue per unit was down slightly.
Here, core pricing gains in our merchandise and intermodal markets were offset by the impact of mix and lower coal revenue per unit. Finally, let's move to core pricing. Recall that same-store sales are defined as shipments with the same customer, commodity, and car type, and the same origin and destination. These shipments represent 75% of CSX's traffic base for the quarter. On this basis, all-in pricing was a negative 0.6% in the quarter, reflecting continued rate pressure in export coal markets and the impact of fixed-variable contracts in the domestic utility market, where volumes are now increasing.
Since we continue to have greater variability in both our export and domestic coal business, reflecting global market conditions and our fixed-variable contract structure, and since our merchandise and intermodal markets are becoming a larger portion of our business, we have again provided you with the same-store sales pricing for these two markets on a combined basis. At the bottom of this panel, you can see pricing for merchandise and intermodal averaged 2.6% for the quarter. This pricing gain is smaller on a year-over-year basis, but is flat sequentially and represents a solid spread over rail inflation. That said, we remain confident that the value we create for our customers, combined with the increasing demand for our service product, provides a solid foundation for growth and pricing above rail inflation over the long term.
Now, let's look at the individual markets in more detail, starting with merchandise. Overall, merchandise revenue increased 11% to nearly $2 billion in the quarter. Volume in the agricultural sector was up 5%. Feed grain shipments, both domestic and export, increased sharply due to a strong 2013 harvest. In addition, ethanol shipments grew as lower corn prices resulted in higher ethanol production levels. The construction sector grew 8% overall, reflecting a rebound in shipments after the winter weather subsided and the ongoing recovery of housing and construction activity. Finally, the industrial sector grew 11%, led by strength in the energy-related commodities, including crude oil, liquefied petroleum gas, and frac sand. Moving to the next slide, let's review the intermodal business. Intermodal revenue increased 6% to nearly $450 million.
Total volume grew 7%, setting a new quarterly record for intermodal. Domestic volume was up 8%, driven by continued highway-to-rail conversions. International volume was up 6% year-over-year, reflecting continued economic growth, catch-up from the first quarter, and advanced shipments due to potential port labor issues. Total intermodal revenue per unit declined 2%, as continued core pricing gains and higher fuel recoveries were offset by unfavorable mix. Here, volume associated with our door-to-door domestic business, which has a higher revenue per unit, declined. Finally, we continued to grow our intermodal business by adding new service offerings and making strategic investments. These investments include the new terminal in Winter Haven, Florida, which opened early this quarter, the Montreal terminal, which will open later in the year. These two terminals together will add 350,000 in annual lift capacity.
In addition, the ongoing expansion of the Northwest Ohio facility will increase its capacity by 50%. Moving to the next slide, let's review the coal business. Coal volume increased 6%, while revenue declined 3% in the quarter to $744 million. Domestic coal volume increased 15%, with growth in both northern and southern utility shipments, reflecting higher gas prices, building of stockpiles for the summer cooling season, and a competitive gain. Export coal tonnage declined 12%, as global market conditions for both thermal and metallurgical coals remained soft. The API 2 benchmark for thermal coal remained below $75 per ton, a level where the U.S. coals are challenged to compete. The Queensland metallurgical coal benchmark has also remained at low levels, with a rate of $120 per ton.
Finally, total revenue per unit was down 9%, with lower export pricing, fixed-variable utility contracts, and unfavorable domestic mix negatively impacting revenue per unit. Now, let me wrap up with the outlook for the third quarter. Looking forward, we expect a positive demand environment in the third quarter, with stable to favorable, favorable conditions for 88% of our markets and unfavorable conditions for the remaining 12%. Looking at some of the key markets, agriculture is favorable and will continue to benefit from last year's record harvest. We expect growth in chemicals as we continue to capture opportunities created by expanding domestic oil and gas industry. The automotive market will grow, with North American light vehicle production expected to increase 9% in the quarter. Strong intermodal growth will continue as our strategic network investments and improving service reliability support highway-to-rail conversions.
We expect domestic coal volume will grow in the third quarter at double-digit rates as utilities continue to rebuild inventories. Forest Products is neutral, as growth in building products due to the continued recovery of the housing markets will be offset by lower paper shipments. Export coal volume is expected to be significantly lower in the third quarter, and our best estimate of 2014 volume remains in the mid-30-million-ton range, reflecting soft global market conditions, particularly in the thermal market. Overall, we expect high levels of demand for our service will continue into the third quarter. Thank you, and I'll now turn the presentation over to Oscar to review our operating results.
Oscar Munoz (COO)
Thank you, Clarence. It's great news, and good morning, everyone. As you know, we always start our operations review with a look at safety, as it is our first and foremost priority. We are proud to report that CSX remains a leader in safety amongst the Class I railroads, with the train accident and personal injury rates both improving year-over-year. For the quarter, the train accident rate declined to 2.07, and the personal injury rate declined to 0.90, reflecting the company's and our employees' continued commitment to community and employee safety. Now let's turn to service performance on the next slide. System-wide operating performance is still below the level customers have come to expect from CSX, especially across our Northern Tier.
In the second quarter, the robust demand we experienced has led to a decline in on-time originations and arrivals, as well as resource constraints in some areas of the network. In addition, line of road congestion has impacted train velocity and terminal dwell. On Slide 15, I'll discuss service in a bit more detail. As you can see on the chart on the left, service levels began to decline at the beginning of the year due to the historic winter we experienced. Towards the end of the first quarter, we experienced a rapid surge in volume. Now, even with a significantly higher volume, service levels have stabilized, albeit at a lower level. If we look at the map on the right, much of that volume growth this year has been concentrated in the northern part of our network.
Traffic levels for the Northern Tier are up approximately 20%, with certain areas experiencing even higher growth rates. Turning to Slide 6 to Slide 16, let's discuss some of the actions we are taking to support this continued growth in CSX's business. The map on the left shows four key areas where CSX has been making strategic capacity additions. You'll notice that many of these projects are along the Northern Tier and will help facilitate long-term growth across this part of our network. In the Chicago area, the addition of the Elsdon Subdivision provides CSX with additional double track miles. This allows us to operate a shorter, faster route for certain trains, diverting traffic away from other, more congested routes in the area.
As Clarence mentioned, we are also extending the processing capabilities of the Northwest Ohio terminal, which we expect to be complete by the end of this year. Along the River Line route in New York and New Jersey, we are adding more miles of double track to improve capacity along this growing and heavily traveled path from Chicago to New York. Finally, we are investing in a new coal unit train processing facility that will support the increased growth of coal coming out of the Illinois Basin. Now let's turn to the next slide and discuss crews and locomotives. The train and engine employee count is already up 200 since the beginning of the year, and we expect it to be up approximately 400 by the end of the year.
We also have some initiatives in place to enhance workforce levels in the near term, including temporary transfers, vacation buyouts, and incentives to delay retirements. On the chart on the right, you can see our available locomotive count has increased by 10% since September of last year, as we pulled units out of storage and taken on additional leases. Looking at the second half of the year, we expect our available count to further increase as we repair and reactivate approximately 100 more locomotives. These actions will help CSX gradually restore fluidity to the network and to support growth. Turning to the next slide, let me discuss the cost base. Now, Fredrik will provide more specifics on where the cost impacts were this quarter and what to expect going forward.
Let me outline a few of the key drivers behind the $32 million of additional cost in the second quarter associated with our network performance. On the chart on the left, the number of relief starts continues to be more than double prior year levels. In addition, overtime across the operating department also remains above prior year levels, although it has improved sequentially from the first quarter. Now, if I could, I would say a quick thank you to our employees for their continued hard work these past few months. I greatly appreciate your professionalism and dedication to serving our customers. Now, continuing with the chart and moving down, as I've discussed, our locomotive fleet has increased 10% since the beginning of the fourth quarter and 8% year-over-year in an effort to meet the growing demand.
With many of our additions coming from short-term sources, lease expense has increased. In addition, maintenance expense is up due to the higher overall fleet count. Finally, average freight car cycle days were up 3%, reflecting the increase in transit time and leading to higher rental expense. Looking forward, these costs will subside as service levels improve. Now, let me wrap up on the next slide. Overall, service has stabilized with this higher volume, although not at the levels our customers have come to expect from CSX. At a network level, the Northern Tier has experienced strong double-digit growth, and Chicago, in particular, has been challenged. In response, we are working closely with our rail peers and taking near-term actions to shift resources to these high-growth areas. We have plans in place to further improve our infrastructure, as well as add crews and locomotives to support ongoing growth initiatives.
Also, and importantly, we have been in regular contact with our customers to provide them visibility and sincerely thank them for their patience as we work to increase their increased demand. They, and you, should be confident that our dedicated operating employees remain fully committed to restoring service levels to what our customers have come to expect from CSX. So with that, let me turn over the presentation to Fredrik to review the financials.
Fredrik Eliasson (CFO)
Thank you, Oscar, and, good morning, everyone. Let me begin by providing a summary of our second quarter results. Revenue increased 7% versus the prior year on 8% higher volume, driven by broad-based strength across our merchandise, intermodal, and domestic coal markets. Expenses increased 7% versus last year, driven primarily by higher volume, the cycling of real estate gains, and costs associated with network performance, which I will discuss in more detail in the coming slides. Operating income was $997 million, up 6% or $57 million versus the prior year. Looking below the line, interest expense was down $5 million versus last year, driven by favorable interest rates on debt that was refinanced in 2013, and moderately lower debt levels.
Other income declined $21 million versus the prior year, primarily due to environmental charges for a non-operating site, and income taxes were $321 million in the quarter, for an effective tax rate of 37.8%. Overall, net earnings were $529 million, and EPS was $0.53 per share, up slightly from $521 million and $0.51, respectively, in the prior period. With that, let's turn to the next slide and 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 unfavorable by $9 million. This reflects $4 million of positive in-quarter lag during the second quarter of this year, versus $13 million of positive in-quarter lag for the same period in the prior year.
Based on the current forward curve, we expect the year-over-year fuel lag impact to be slightly favorable in the third quarter. Turning to the next slide, let's review our expenses. Overall expenses increased 7% in the quarter. I'll talk about the top three expense items in more detail on the next slide, but let me first briefly speak to the bottom two on this chart. Depreciation was up 4% to $287 million due to a higher net asset base. Going forward, we continue to expect depreciation to increase sequentially a few million dollars per quarter, reflecting the ongoing investment in our business. Equipment rent was up 19% to $114 million, driven by higher freight car rates, incremental volume, and longer car cycles. Now, turning to the next slide, let's discuss our other expenses.
Overall, labor and fringe, MS&O, and fuel expense each increased versus the prior year, driven primarily by 8% higher volume in the second quarter. As Oscar mentioned earlier, we incurred $32 million of additional expense in the quarter related to network performance. Of that amount, $14 million is attributable to labor and fringe, $9 million is in MS&O, and finally, there was $9 million of impact in equipment rent expense. This cost of network performance represents a significant improvement from the $90 million impact we experienced in the first quarter. Looking forward to the second half, we expect these costs to remain relatively consistent with the second quarter levels until we see meaningful improvement in network fluidity and service levels. Now, let me discuss the other drivers for each of the expense categories, beginning on the left with labor and fringe.
Total labor and fringe increased 4%, or $32 million, versus last year. $25 million of this increase was related to incremental volume, and $14 million related to inflation. For the second half of 2014, we expect labor inflation to continue to be around $15 million on a year-over-year basis each quarter. The $21 million improvement in other labor and fringe is driven by lower incentive compensation and pension expense versus the prior year, and it's split about 50/50 between those two items. Headcount was up about 1% versus our first quarter level, as T&E employees increased to accommodate higher volume. Looking ahead, we expect overall headcount to gradually increase during the second half, such that by year-end, our headcount will be up 1%-2% versus the end of 2013.
Moving to the right on the slide, MS&O expense increased 11%, or $61 million, versus last year. This included the cycling of $36 million in real estate gains, $19 million of expenses related to incremental volume, and $10 million of inflation. In addition, there was $13 million of decrease in other MS&O, spanning multiple items, none of which was individually significant. Looking at the remaining quarters of 2014, we continue to expect higher year-over-year MS&O expense related to inflation and volume growth, and there are no further real estate gains to be cycled in the second half. Finally, fuel expense increased 5%, or $19 million, versus last year, as the impact of higher volume was partially offset by favorable price and efficiency. Now, that concludes the expense review.
Turning to the next slide, I'd like to highlight our core earnings growth and operating margin in the second quarter. Looking at the second quarter financial results, and excluding the $36 million in real estate gains from last year, the company generated $198 million of revenue growth that was partially offset by $105 million of incremental expense. This netted to an increase in core operating income of $93 million versus the prior year, or an incremental operating margin of 47%. As a reminder, these results included the $32 million of network performance costs that I discussed earlier. With a positive outlook across most of the markets in our portfolio, the core earnings strength of CSX's business is now becoming more evident. We expect the core momentum experienced in this quarter to carry over in the second half.
produce modest earnings growth for the full year and double-digit growth starting next year. This expectation is the foundation for the increase in capital that we're now planning for 2014, which I'll discuss on the next slide. Total investment is now expected to be $2.4 billion, up from $2.3 billion we initially budgeted for the year. About $100 million of additional capital will be deployed for infrastructure and freight cars, both of which will support long-term growth. As a result, our revised core capital budget is now $2.1 billion, which is consistent with our guidance of 16%-17% of revenue. In addition, we still expect to invest $300 million in Positive Train Control this year. Now, let me wrap up on the next slide.
First, the core earnings improvement of CSX's business is becoming more apparent in our financial results, and we see broad-based strength across our diverse business portfolio, which will be key to drive sustainable long-term earnings growth. As a result, we are investing in infrastructure, crews, and locomotives to effectively serve demand and gradually return service to the superior levels that our customer expects. Looking forward, we expect third quarter earnings to be roughly flat versus the prior year, as we cycle $51 million in liquidated damages and tax favorability of $0.01 in EPS, while continuing to incur network performance costs. We expect more meaningful earnings growth in the fourth quarter.
As I mentioned earlier, we still expect modest earnings growth for the full year 2014, and we remain confident in CSX's ability to sustain double-digit EPS growth starting in 2015 and an operating ratio in the mid-60s longer term. With that, let me turn the presentation back to Michael for his closing remarks.
Michael Ward (Chairman, President and CEO)
Thank you, Fredrik. As we discussed this morning, CSX experienced substantial demand across nearly our entire portfolio and delivered record financial results for the quarter. Going forward, we see a strong economic environment that is expected to continue and operations that are stable and expected to gradually improve with the actions we are taking. What's even more exciting is that in a reshaped energy environment, and with intermodal and merchandise an ever-growing part of our portfolio, the core earnings strength of this company is apparent and attractive. For those reasons, we continue to expect double-digit earnings growth and margin expansion beginning in 2015. Now we'll be glad to take your questions.
Operator (participant)
Thank you. We will now be conducting the question-and-answer session. If you'd like to ask a question, please press star one. Make sure your phone is unmuted, and record your information. To withdraw that request, you may press star two. Our first question comes from Rob Salmon from Deutsche Bank. Your line is open.
Michael Ward (Chairman, President and CEO)
Good morning, Rob.
Thomas Kim (Senior Industrials Equity Research Analyst)
Hey, good morning, guys. I guess, to kind of follow up with regard to the service discussion, could you give us a little bit of a sense in terms of the timeline of how the network fluidity should be improving with regard to some of the capital investments that you're making, particularly on the intermodal side, where we've basically been seeing the velocity kind of come down since basically the May timeframe? I'm assuming this is related to the headwinds that you guys called out in the northern region. You know, any sort of incremental color and how we should be thinking about those costs coming out? It sounds like it's more of a probably a 2015 story in terms of getting the velocity and the dwell down to levels that you guys like.
Oscar Munoz (COO)
Yeah, Rob, this is Oscar. Yeah, I think all you say is generally correct. I just would rehighlight what we talked about before, is we do have a lot of plans to add the resources and are in constant communication with our customers across all areas. Now, assuming that demand remains as strong as we expect, which we do, and the recovery will be gradual as we work through the challenges, especially across the North, I can't provide a specific timeframe at this point for a lot of different reasons, but the recovery will not be necessarily linear.
And so, you know, that said, as you've seen in this quarter, even with this additional operating costs that we're seeing, our incremental margins are improving, so there is a lot of value and good things to look forward to.
Thomas Kim (Senior Industrials Equity Research Analyst)
Okay. And then, I guess, Fredrik, with regard to a follow-up on the guidance for the third quarter, what sort of volume growth are you assuming in that guidance?
Fredrik Eliasson (CFO)
Well, I think overall, I think right now what we're seeing here over the last month or so is in that mid-single-digit range that we're seeing volume growth. So I think that's probably a good place to start.
Thomas Kim (Senior Industrials Equity Research Analyst)
Okay. That's helpful. I appreciate the time, guys.
Operator (participant)
Thank you. Our next question or comment comes from Thomas Kim from Goldman Sachs. Your line is open.
Michael Ward (Chairman, President and CEO)
Hey, Thomas.
Thomas Kim (Senior Industrials Equity Research Analyst)
Hi, good morning. Could you provide a little bit more color on the incremental CapEx and where you plan to be allocating it?
Fredrik Eliasson (CFO)
Sure.
Thomas Kim (Senior Industrials Equity Research Analyst)
And then your time horizon as to when you anticipate the revenue generation from that? Thank you.
Fredrik Eliasson (CFO)
Sure. So about half of it is related to rolling stock, that we think we will be able to put in revenue generation, next year. And about half of it is in infrastructure around the Northern Tier of our network, and obviously, as we put that into effect throughout the fall, that should generate incremental fluidity in that part of our network.
Thomas Kim (Senior Industrials Equity Research Analyst)
Okay, that's very helpful. And then, just with regard to intermodal and the capital reinvestment there, to what extent do you can you elaborate on how much spillover traffic you see? And, you know, sort of given the strength of demand and your network, how much of the, how much sort of revenue do you anticipate actually, or do you sort of estimate it's actually being lost today because you don't have the capacity? And if you could just try to give us a sense of
Oscar Munoz (COO)
The ramp on the utilization of the two new facilities by year-end, that'd be helpful as well. Thank you.
Clarence Gooden (Chief Sales and Marketing Officer)
Well, this is Thomas, this is Clarence Gooden. I think it's gonna be very difficult for us to assess how much business we lost or gained during that period of time that you're asking. On the facilities coming online, are you referring to Valleyfield and to Winter Haven?
Thomas Kim (Senior Industrials Equity Research Analyst)
Yes, that's right.
Clarence Gooden (Chief Sales and Marketing Officer)
Okay. Winter Haven is progressing along as we expected it to be. Most of the volume that's in Winter Haven now was moved out of our Orlando facility, which was part of the SunRail deal we'd done earlier, several years ago with the state of Florida. So it'll be several years before we reach capacity, full capacity in Winter Haven. Valleyfield, which will open up in the early fourth quarter, late third quarter, we're in the process right now of seeing just how big that market total is gonna be on day one when we open. But we expect we'll be running initially a train in and a train out a day.
Thomas Kim (Senior Industrials Equity Research Analyst)
Okay, that helps a lot. Thank you.
Operator (participant)
Thank you. Our next question or comment is from Bill Greene from Morgan Stanley. Your line is open.
Clarence Gooden (Chief Sales and Marketing Officer)
Morning, Bill.
Thomas Kim (Senior Industrials Equity Research Analyst)
Okay, good morning. Thanks for taking the question. Clarence, I wanted to take your pulse on something. So we're starting to see throughout transportation, a lot of tightness, and it's not just rails, but obviously, you're seeing it in some of your markets as well. When do we get to the point where capacity is tight enough that you've got to start looking at ways to meter out the scarce capacity of your network? In other words, kind of using price as a way to sort of encourage the customers to get in line for access to that network. How do you think about where we are in that tightness on capacity?
Clarence Gooden (Chief Sales and Marketing Officer)
Well, I think we're a long way from where we should be on the tightness on capacity from just a sheer standpoint of how much we can handle. Remember that today, we're essentially at 2007 volume levels. The problem that we had was that the surge came fast and quick and furious on us, and that's what's tipped our hand here. So we have plenty of capacity to meet the demand of our customers and our common carrier obligation now.
Thomas Kim (Senior Industrials Equity Research Analyst)
So when you look at your core pricing that you just reported, so all in, down a little bit, is service an impediment to changing that direction? Even without coal, we've seen a deceleration. What sort of changes the direction in pricing in your mind?
Clarence Gooden (Chief Sales and Marketing Officer)
I think that the deceleration that you saw, particularly on the merchandise side on a year-over-year basis, was a result of weakness in the economy that we had had in the previous years and some duration, lingering effects of that and contracts that were in place. Going forward, I think all modes of transportation have an opportunity to price up, price up, significantly, particularly in this type of economic environment. When you couple that with what is happening in 2014, and you look at the projections for 2015, we're in a very robust pricing market in virtually all modes of transportation. So up, up is the way the direction looks to me.
Thomas Kim (Senior Industrials Equity Research Analyst)
Okay. All right, thank you for the time.
Operator (participant)
Thank you. Our next question or comment is from Ken Hoexter from Bank of America. Your line is open.
Clarence Gooden (Chief Sales and Marketing Officer)
Morning, Ken.
Thomas Kim (Senior Industrials Equity Research Analyst)
Great. Good morning. Clarence, just jumping back onto the looking at the revenue outlook there a bit for the quarter. Domestic coal, you mentioned double-digit growth for this upcoming quarter. But when you look at 2015, what are your thoughts in terms of volumes, knowing that you still have that 7 million tons that needs to be phased out or even moved to others? Is that why you're sourcing more to Illinois Basin? Does that make up for it? What are your thoughts as you're looking at 2015?
Clarence Gooden (Chief Sales and Marketing Officer)
I think, Ken, I think 2015 for domestic, utility coal is still gonna be a robust year for multiple reasons. One, the stockpiles now are way down. Two, as long as gas stays, particularly for Illinois Basin, above $3.50 for the Southeast, it makes coal competitive in the mix. Three, is that we still don't know if we're gonna have what, what'll be the winter of 2014's effect that's going in. Four, I think the utilities are tending to lean more now to having sufficient stockpiles rather than having insufficient stockpiles, to meet their customers' demand.
Thomas Kim (Senior Industrials Equity Research Analyst)
That's great. So, you're still seeing the outlook for growth in, as you move forward, not falling back to the continued annual declines?
Clarence Gooden (Chief Sales and Marketing Officer)
Absolutely.
Thomas Kim (Senior Industrials Equity Research Analyst)
Okay.
Clarence Gooden (Chief Sales and Marketing Officer)
Growth for coal in 2015.
Thomas Kim (Senior Industrials Equity Research Analyst)
Wonderful. And Oscar, just a follow-up with you on the service side. Is there. You mentioned the $32 million of internal costs, and I know you were talking about velocity before, but with on-time originations down at 56%, what can you do to get back on track on those metrics? Is there anything you need to do differently or kind of reset operations to get back to running fluidly?
Oscar Munoz (COO)
Yeah, Ken, as you might expect, we have, we have pretty much pulled out every playbook and every play in the playbook over the course of time. Service performance has such a large interrelated issues. You know, we talk a lot about power and we talk a lot about crews, but infrastructure is important as some of this growth in the Northern Tier, you know, has caused some, a little bit of congestion. But we feel very confident is our process, and we do have a really good playbook. And so really, it is, you know, we are focusing on service and safety, keeping in constant contact with our customers, and getting this business moved.
It's costing us a little bit, and that cost will decline, but there really isn't a whole lot else to be done than what we're already outlined as doing.
Thomas Kim (Senior Industrials Equity Research Analyst)
Appreciate the time. Thanks.
Operator (participant)
Thank you. Our next question or comment is from Brandon Oglenski from Barclays. Your line is open.
Clarence Gooden (Chief Sales and Marketing Officer)
Morning, Brandon.
Speaker 19
Good morning, this is Keith Morgan for Brandon. Congratulations on the strong quarter. Just one question here on service, Oscar. You know, we saw $32 million in the quarter. You know, can you maybe help us split out what was needed for maybe just returning metrics to after winter and
So how much of the costs were actually geared towards an increase in volume that we could think about going forward? How should we think about, I guess, those costs going forward to meet that rise in volume Clarence is speaking to?
Oscar Munoz (COO)
Yeah, I, I think we've already sort of bifurcated the volume-oriented cost, and that $30 million, unfortunately, is all related to sort of service impacts. I break that out between crew, cost, leased horsepower hours, and, and sort of the car hire that we're having to work through in those categories. And it, it's roughly, you know, Ryan, it's about $10 million a month, kind of split between the three components.
Speaker 19
Oh, should we think that could accelerate into the third quarter, given that, you know, we're gonna pick up a little bit here on labor and some other items that we didn't speak to?
Oscar Munoz (COO)
Our plan is to decelerate. I'm not sure what, how you're using that term. Our hope would be to reduce that cost as we, as the additional crews and power come on.
Speaker 19
Okay. Thank you.
Operator (participant)
Thank you. Our next question or comment is from Chris Wetherbee, from Citi. Your line is open.
Chris Wetherbee (Senior Research Analyst)
Great, thanks. Just touching on the on the volume outlook for the second quarter, just wanna get a rough sense. It looks like the last three weeks or so, we've seen some pretty elevated numbers. Is this just sort of a blip that we're working through when we think about the full quarter? Is, is mid-single digits, better to your point, the sort of right number to use? Just wanna roughly understand sort of what's going on now and maybe how we see the next month or so playing out.
Clarence Gooden (Chief Sales and Marketing Officer)
Well, the numbers you've been seeing in the last couple of weeks represent year-over-year comparison in July, which is normally a very down time of the year for us, and fortunately, it's been a very positive time of the year for us. So that's a reason that you're seeing the numbers that you've seen in the last two weeks. But I think Fredrik's number of 6%-7% going forward for the back half of the year is pretty strong.
Chris Wetherbee (Senior Research Analyst)
Okay, that's helpful. And then, you know, when you think about the pricing outlook as we roll into 2015, you have a, a better, you have good domestic coal environment. You have a couple of other things sort of working in your favor. But if you have sort of these trends continue, can you grow earnings double digits if core pricing is sort of flattish, or do you need it to pick up, and is that sort of inherent in your thoughts about growing double digits? Just wanna get a rough sense of how we think pricing might sort of translate into 2015 with a still good volume environment.
Fredrik Eliasson (CFO)
Well, this is Fredrik. I think the key thing for us that we follow is the spread between our RCAF and our pricing. And so, as Clarence indicated, we think that the pricing environment is favorable. It's getting more favorable. We're gonna continue to push price. But it's a spread that is the most important part of this thing, and it is assumed that we will get inflation plus pricing as we think about next year and double-digit earnings growth.
Chris Wetherbee (Senior Research Analyst)
Okay, that's helpful. Thanks for the time. I appreciate it.
Operator (participant)
Thank you. Our next question or comment is from Allison Landry from Credit Suisse. Your line is open.
Clarence Gooden (Chief Sales and Marketing Officer)
Morning, Allison.
Allison Landry (Senior Equity Research Analyst)
Good morning. Thanks for taking my question. In terms of the resource additions, how do we think about the incremental margins in the back half of the year? And, you know, I'm particularly curious to see if there's any parallels that we could draw, thinking back to the second half of 2011, you know, when you guys also had to add some additional resources to meet demand. You know, obviously, we're in a much different volume environment, but, you know, I wanted to see if there was any sort of consistent way to think about that relative to a couple of years ago.
Fredrik Eliasson (CFO)
Yeah, I mean, obviously, you're right. Volume environment is a little different, and the mix of business is different, but the outcome in 2011 was positive. As we added the resource, we got the fluidity back in the network, and we got to a better place, and that's essentially what we're trying to do here as well. In terms of the incremental margins, I mean, we've said longer term, we need to be in that kind of 50% and above range, and we expect that that will continue.
We'll see here in the second half, especially in the third quarter, as we're cycling the liquidated damages and continue to have network performance-related cost, it might not get all the way there, but our longer-term view is we should clearly, especially in this sort of a robust volume environment, be over 50% in terms of incremental margins.
Allison Landry (Senior Equity Research Analyst)
Okay. That actually was, is very helpful. And just sort of a housekeeping question. You know, just given you've made some restatements to the prior year numbers, could you confirm what the 3Q13 EPS number was? Was it $0.43?
Fredrik Eliasson (CFO)
The Q3 2013 number was, let me just make sure I have it. It was $0.45 last year.
Allison Landry (Senior Equity Research Analyst)
Okay, 45. So then, the guidance for flat is relative to that. Okay. Thank you so much.
Fredrik Eliasson (CFO)
Thank you.
Operator (participant)
Thank you. Our next question or comment comes from David Vernon from Bernstein. Your line is open.
Clarence Gooden (Chief Sales and Marketing Officer)
Morning, David.
David Vernon (Managing Director and Senior Analyst)
Hey, good morning, and thanks for taking the question. Just on the question for you on the intermodal yields and the RPU developing there, the door-to-door intermodal product, is that a conscious choice you guys are making to demarket that door-to-door service, or is that just sort of what's shaking out, given the difficulty finding drayage and the market conditions?
Clarence Gooden (Chief Sales and Marketing Officer)
The main factor was that the transcon part of that door-to-door business is what declined, and that carries a very high RPU. The eastern core part of that business remains reasonably robust. It just doesn't carry quite as high RPU as does the transcon.
David Vernon (Managing Director and Senior Analyst)
Would you expect that to continue through the rest of the year, or is this sort of like a temporary thing associated with maybe some of the service issues coming east-west?
Clarence Gooden (Chief Sales and Marketing Officer)
I would expect right now for the third quarter, at least, for it to continue.
David Vernon (Managing Director and Senior Analyst)
Okay. And then, Fredrik, maybe just a longer-term question. As you think about the model you need to get to that mid-sixties OR, the high fifties, high fifties incremental margin, what kind of top-line growth assumption do you kind of think about as a longer-term sustainable level of growth for you guys?
Fredrik Eliasson (CFO)
The guidance we've given is that going forward, we think it's gonna be a little bit more balanced between volume, inflation plus pricing, and productivity than perhaps it's been in the last decade. You know, we like to think that a large part of our business can grow faster than the economy as a whole because of opportunities and the secular trends that we're seeing. But more specific than that, I think it's really hard to be because it really depends on individual years and what sectors are doing well. But clearly, we feel that the volume environment is much more robust going forward than it's been in the last decade, after having gone through, obviously, the housing collapse, the recession that we saw, and now this energy transition that we've seen over the last few years.
We think the volume environment is gonna be much more constructive going forward than it's been in the past.
David Vernon (Managing Director and Senior Analyst)
And then the pricing stuff will obviously be suffering a little bit on some of the fixed-variable stuff with coal, though. Would that also kind of go forward in terms of yield pressure for next year?
Fredrik Eliasson (CFO)
Well.
David Vernon (Managing Director and Senior Analyst)
Just trying to get a sense for the top line growth rate to—that that's reasonable.
Fredrik Eliasson (CFO)
I mean, I think that the fixed variable, we'll have to see. We obviously have caps in terms of how much the utilities can grow within this current rate structure. So as we go through this year, we'll see what the impact is next year. But clearly, right now, it's a big negative. But as part of the way that we look at this, and we think that's the right strategic move on our part to make sure that we incentivize additional volumes. And as we go through next year, might be a little bit different as they cycle some of these large gains. So, I don't think that's gonna be as big of a drag next year as it was this year, at least.
David Vernon (Managing Director and Senior Analyst)
All right, great. Thanks very much for the time, guys.
Operator (participant)
Thank you. Our next question or comment comes from John Larkin from Stifel. Your line is open.
Fredrik Eliasson (CFO)
Morning, John.
John Larkin (Managing Director of Equity Research)
Hey, good morning, gentlemen, and thanks for taking my question. Had a question related to the surge in volume on the northern part of the network, and how much of that was originating and terminating on CSX, and how much of that is being delivered to you or you're delivering to the western railroads, which have had perhaps even more congestion problems, particularly the BNSF?
Clarence Gooden (Chief Sales and Marketing Officer)
John, this is Clarence. I would say that most of the surge that we had on the northern part of the railroad was interline business that came. The biggest part of our surge in the north was driven by crude by rail and by our coal business. And our coal business, particularly, was much higher than what we had expected it to be, primarily as a result of the gas prices, as a result of a colder winter, and as a result of the Great Lakes themselves, for the utility lake coal closing much earlier due to the weather and opening much later due to the weather.
John Larkin (Managing Director of Equity Research)
Is it safe to say that the recovery on service is at least partly a function of how soon Chicago cleans up its service act and how quickly some of the western carriers return to normal service levels?
Oscar Munoz (COO)
John, it's Oscar. No, I wouldn't ascribe it to anything. I think, remember, there's a lot of component pieces, and all of us are having the difficulty across that interchange. I think the heavy degree of volume concentrated in one area is a problem for all of us. So I think as we all collectively get our stuff together, I think that we'll all improve.
John Larkin (Managing Director of Equity Research)
Is there any possibility of a change in routing protocol to use perhaps other less congested hubs that could help solve the problem?
Oscar Munoz (COO)
Absolutely, and we are in active communication and conversations with almost every other carrier to do exactly that, and we have some great options around that, that I think make sense, both from a service perspective and also, frankly, economically, as we see longer-term growth coming through that same corridor.
John Larkin (Managing Director of Equity Research)
Got it. Thanks very much.
Operator (participant)
Thank you. Our next question or comment comes from Bascome Majors from Susquehanna. Your line is open.
Fredrik Eliasson (CFO)
Morning, Bascome.
Bascome Majors (Senior Equity Research Analyst)
Yeah, good morning, and thanks for the time. You know, we should see new draft safety regulations from PHMSA moving flammable liquids by rail in a few weeks here. And they're talking about an operational restriction on taking crude trains down to 30 miles per hour. Can you talk a little bit about how that could impact your business versus how you're moving that commodity today? And, you know, whether and how that could spill beyond crude oil if they do decide to go in that direction.
Michael Ward (Chairman, President and CEO)
Yeah, this is Michael. I think you're quite right. We have heard as well. We have not seen the proposals. Nobody really has yet, but we have heard, as you have, that 30 miles an hour is one of the options they're considering. We think that would be severely limit our ability to provide reliable freight service to our customers and to support a timely and efficient passenger and commuter service. So there's all kinds of corollary impacts of this, and I would hope, as we look at this with the federal government, we could show them the modeling of how disastrous that could be to the entire fluidity of the U.S. rail system, as well as the adverse impact that will have as trucks spill over onto the highway system.
So our view is it would be very bad, but our view is also that cooler heads will prevail when they see the facts behind it.
Bascome Majors (Senior Equity Research Analyst)
All right, well, thanks for that. Are there any other parts of this rulemaking that you're watching very closely that could potentially impact your business, whether operationally or, or from a risk management standpoint?
Michael Ward (Chairman, President and CEO)
Actually, we're quite excited about the potential for the new car design, as well as the retrofits to the existing cars, and I know that is part of the proposed rulemaking. As you know, as a railroad, we've done a number of things to improve our already very good safety record to make it even more safe. And we think the next big movement to make it even better is for a stronger car on new builds as well as retrofit to existing cars.
Bascome Majors (Senior Equity Research Analyst)
All right, well, thanks for the time this morning.
Operator (participant)
Thank you. Our next question or comment is from Jeff Kauffman from Buckingham Research. Your line is open.
Fredrik Eliasson (CFO)
Morning, Jeff.
Jeff Kauffman (Director of Transport, Logistics and Machinery/Equipment Equity Research)
Good morning, everyone. Thank you for taking my question.
You know, Mike, it's really great to hear you talking about coal being up double digits, and it may continue for a while. I'm just kind of curious, if export coal didn't exist, give us a sense for kind of what's going on with the yield on the domestic product.
Clarence Gooden (Chief Sales and Marketing Officer)
Jeff, this is Clarence. Then, if export coal didn't exist, what is going on with the yield on the domestic coal?
Jeff Kauffman (Director of Transport, Logistics and Machinery/Equipment Equity Research)
Mm-hmm.
Clarence Gooden (Chief Sales and Marketing Officer)
Well, I don't think export coal has any direct impact at all on what the yield is on our domestic coal, as it currently exists. Our yield is very positive on our domestic coal. It is actually, it's improving in our domestic coal business, that's coming along. The fixed-variable contracts and the nature of them have been proved very positive to us. They cover a good percentage of our contracts now, especially in our southern utility markets. There's coals that we're now moving and hauling that we would not have moved and haul had we not had the fixed-variable contracts with the caps in it, obviously, to help control how much of that moves at those rates that we're handling now that we would not have handled. I don't know if that helps or not.
Michael Ward (Chairman, President and CEO)
Let me try a little bit. So if we just look at our domestic portfolio, Jeff. So if I had to say, in general, are those rates heading upward? The answer is yes. So on the two-thirds, it's not on fixed variable, those rates are moving up. On the one-third, that is fixed variable, the base, you know, there's a minimum and a maximum. That base is moving up, but where they are in that range can have a fairly significant impact on overall RPU and coal. So all of it has an upward bias, but the, the fixed variable make it confusing where they are in that scale, that's allowed within the contract.
Jeff Kauffman (Director of Transport, Logistics and Machinery/Equipment Equity Research)
That's exactly what I was looking for. Thank you.
Operator (participant)
Thank you. Our next question or comment comes from Scott Group from Wolfe Research. Your line is open.
Clarence Gooden (Chief Sales and Marketing Officer)
Morning, Scott.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Morning, guys. I had a few things on coal. One, Clarence, do you have a view on coal yield sequentially from 2Q to 3Q? They were pretty flat this quarter. Is there a view there. Do you think that, that's one. Next, do you think that the kind of that mid-30s export number for this year would you do you think that's a good bottom, or do you think that can grow next year, or do you see more risk to that? And then just lastly, the 7 million tons of coal that you guys have talked about that's shutting next year, is that number changing much this year?
Meaning, is that growing a lot with coal this year, or is that not really seeing that much movement?
Clarence Gooden (Chief Sales and Marketing Officer)
Well, let's go in reverse. It's 4 million tons, not 7. And we don't see that number changing. It appears to be what it is, and we think the other plants that remain open will burn at higher burn rates, and it'll be a non-event number, essentially, for us. Number 2 was export rates for next year. Too early to tell. We'll revisit that in the fourth quarter.
Michael Ward (Chairman, President and CEO)
He's asking about volumes.
Clarence Gooden (Chief Sales and Marketing Officer)
Volumes. It's still too early to tell. We'll know more about that in the fourth quarter. Your first question was what? On the
Scott Group (Managing Director and Senior Analyst)
Just coal yields sequentially from second quarter to third quarter. Should we, should we think that they stay flat? I don't know if you made any additional pricing adjustments on the export side.
Clarence Gooden (Chief Sales and Marketing Officer)
Flat. We should expect them to be flat.
Scott Group (Managing Director and Senior Analyst)
Okay, great. And then just one other question, Clarence. It wasn't so clear to me that some of the questions on pricing earlier. Are you starting to or thinking about entering somewhat of like a demarketing phase to you know, push pricing a little bit more aggressively, even if it means giving up a little bit of volume?
Clarence Gooden (Chief Sales and Marketing Officer)
No, we're not demarketing, but we are aggressively pricing our products.
Scott Group (Managing Director and Senior Analyst)
Okay, great. Thanks for the time, guys.
Operator (participant)
Thank you. Our next question or comment comes from Jason Seidl from Cowen. Your line is open.
Clarence Gooden (Chief Sales and Marketing Officer)
Morning, Jason.
Jason Seidl (Managing Director)
Morning, guys. Real quickly, when you think about sort of the impacts of the service levels, obviously, you talked about on the cost side, do you think you left any money on the table, on the intermodal product in terms of your ability to take prices up, especially in a tight truckload market?
Clarence Gooden (Chief Sales and Marketing Officer)
Well, I tell our team that we're always leaving money on the table, so, I mean, I don't know what you want me to say. Yes.
Jason Seidl (Managing Director)
Okay, that, that's fair enough. And
Oscar Munoz (COO)
truck market changes, and we'll respond to the marketplace.
Jason Seidl (Managing Director)
Absolutely. Okay. Well, that's what I want to hear. What I'm thinking also about all the equipment that you're bringing on, you know, obviously, some of it's because service is down and some of it's because you're just getting more business. How much do you think you guys can start shedding in 2015, assuming your service levels come back?
Michael Ward (Chairman, President and CEO)
In terms of really the locomotives, I think you're referring to predominantly?
Jason Seidl (Managing Director)
The locomotives and even in terms of headcount, how should we start thinking about that? Because some of them, seems like you're just trying to extend some people, and put off their retirements a little bit.
Fredrik Eliasson (CFO)
Yeah, on the locomotive side, you know, for some reason, if there's no need for those locomotives, the network fluidity comes back, we do have a fair amount of leases that we can turn back. So that's part of the safety lever, so to speak, if the demand profile is not as strong as we would—we currently think it is. On the crew side, we're hiring obviously for attrition, but also for growth, and we always have the flexibility, if we need to, to do furloughs.
Or retention board, that's something that we normally don't look at, until unless we think it's a longer, more sustained period of time, that we don't need those crews, because we do hire them, and they are expensive to go put through the training school. You spend a fair amount of time and effort on there, so you don't want to do that unnecessarily. But we do have that ability if we're incorrect in our forecast, that the growth will continue.
Jason Seidl (Managing Director)
Fredrik, in terms of the total headcount for 2015, you would expect growth over 2014?
Fredrik Eliasson (CFO)
I think that based on the current volume assumptions that we have, that continues to be robust. I think the answer is yes. I don't think it's gonna be significant, because I think the operating leverage is going to be, especially as we get the network fluidity back. I think there's an opportunity to see great leverage there.
Jason Seidl (Managing Director)
Well, fantastic, gentlemen, I appreciate the time as always.
Operator (participant)
Thank you. Our next question and comment comes from Ben Hartford from Baird. Your line is open.
Fredrik Eliasson (CFO)
Morning, Ben.
Ben Hartford (Senior Equity Research Analyst)
Hey, good morning, guys. Fred, Fred, just wanted to clarify, the comment that you made about third quarter, 2013 EPS. You had said that the number that you're, that you're referring to is $0.45 from a year ago, correct?
Fredrik Eliasson (CFO)
That's correct.
Ben Hartford (Senior Equity Research Analyst)
Okay, good. And not to beat this pricing discussion to death, but, you know, I understand that you guys look at the spread between RCAF and price. But you're entering a bit of an unprecedented period with regard to pricing and the truckload rate growth, contractual rate growth is accelerating and faster than what you guys are realizing within the merchandise and intermodal product, first time in at least a cycle. And is it incorrect to look at core contractual truckload rates as setting the tone for both the intermodal business and even some of the merchandise business, when you do set and reprice, say, on an annualized basis?
So to the extent that truckload pricing growth continues to be above what you're seeing within those core segments, certainly above that 2.5% number that you saw this quarter, that there can be upside or that you can price to market. You're not, you're not beholden to some sort of fixed spread internally between RCAF and what you feel like that the market can digest, correct?
Clarence Gooden (Chief Sales and Marketing Officer)
That's correct, Ben. I think it's absolutely the right way to look at it.
Ben Hartford (Senior Equity Research Analyst)
Okay, good. Thank you.
Operator (participant)
Thank you. Our next question or comment comes from Cherilyn Radbourne from TD Securities. Your line is open.
Fredrik Eliasson (CFO)
Morning, Cherilyn.
Cherilyn Radbourne (Managing Director of Equity Research)
Thanks very much, and good morning. I'm just gonna ask one, and that relates to international intermodal, which for me, was probably the biggest surprise in terms of the volume performance for you and for the industry in the quarter, because it's been pretty tepid for a while. So I just wondered if you could give some color on how much of the growth you think was catch up from Q1, how much was a pull forward, related to the labor contract expiry on the West Coast, and how much you think was organic?
Clarence Gooden (Chief Sales and Marketing Officer)
Cherilyn, this is Clarence. I think it's difficult to segment into those three areas, but I will tell you this: Our customers told us that they shipped earlier this year, significantly earlier, in anticipation of ILWU work stoppages on the West Coast. So all the ships out of Asia were fully profiled, coming to the West Coast and via the canal, in order to avoid that. So that certainly had an impact. There was some impact due to winter weather, and we expect to see that international traffic in the low single digits going forward.
Cherilyn Radbourne (Managing Director of Equity Research)
Okay, that's helpful. Thank you, Clarence. That's it for me.
Operator (participant)
Thank you. Our next question comment is from Walter Spracklin, from RBC Capital Markets. Your line is open.
Fredrik Eliasson (CFO)
Hi, Walter.
Speaker 20
Good morning. This is Erin Lightollison for Walter. I was just hoping to get some more color on the expansion of crude capabilities across your network. I saw some fairly strong growth, and I was wondering where you see that business going forward and the timing of that coming online.
Clarence Gooden (Chief Sales and Marketing Officer)
Where do we see crude expansions?
Speaker 20
Yes.
Clarence Gooden (Chief Sales and Marketing Officer)
That's your question?
Speaker 20
Yes.
Clarence Gooden (Chief Sales and Marketing Officer)
Well, obviously, there's expansions going on on the East Coast as we speak. They're predominantly in the Philadelphia area. Some are in the New Jersey areas where we're seeing the current expansions. We have two customers that are looking at expanding in in the Jersey area. I'd rather, for obvious reasons, not mention their names, but that's where you're seeing the expansions occur.
Speaker 20
Okay, and then this is all coming on your network. Like, what sort of volume opportunity do you see from these expansions?
Clarence Gooden (Chief Sales and Marketing Officer)
Well, right now we're averaging around, for 2014, ±20 trains per week. We could see some slight increase in that as we go forward. There's a finite capacity number, both, as you know, from what the Bakken can produce and from what the refiners can consume.
Speaker 20
Perfect. Thanks very much for your time.
Operator (participant)
Thank you. Our next question or comment comes from Justin Long from Stephens. Your line is open.
Fredrik Eliasson (CFO)
Morning, Justin.
Justin Long (Managing Director of Equity Research)
Thanks. Good morning. Just wanted to clarify one thing quickly. Could you talk about the congestion-related costs that you're assuming in your guidance for the back half of the year? Are you assuming they stayed pretty consistent with what we saw in the second quarter?
Fredrik Eliasson (CFO)
Yes. What we said in prepared remark was that until we see meaningful improvement in the network fluidity and velocity, it is reasonable to assume that that run rate of about $10 million or so a period, or $30 million a quarter, is the right place to think about it.
Justin Long (Managing Director of Equity Research)
You're not assuming that, that fluidity improves until 2015?
Fredrik Eliasson (CFO)
No, I'm not, I'm not saying that. I'm just saying right now, from what we're seeing, we're saying if it doesn't improve, it's the right place to be in terms of thinking about what the incremental cost will be. If we see meaningful improvement here during the summer months, which is a possibility, as the demand is a little bit lower during the summer as we go through the period here until Labor Day, there is an opportunity where we can see a meaningful improvement and costs can come down, but that's yet to be seen.
Justin Long (Managing Director of Equity Research)
Okay, fair enough. That's, that's helpful. And as a second question, I was wondering if you could talk about what you're seeing in the intermodal pricing environment. What would you say that core pricing in intermodal is pretty close to that, you know, 2.6% average between merchandise and intermodal? Or is it a little bit more, you know, competitive and tracking below that level?
Clarence Gooden (Chief Sales and Marketing Officer)
I think you'd see intermodal is a little bit more competitive and tracking a little lower than that level that's in there right now.
Justin Long (Managing Director of Equity Research)
Okay, great. I know it's been a long call. I'll leave it at that. Thanks for the time.
Operator (participant)
Thank you. And our last question or comment comes from Cleo Zagrean from Macquarie Capital. Your line is open.
Clarence Gooden (Chief Sales and Marketing Officer)
Morning!
Cleo Zagrean (Utilities and Alternative Energy Analyst)
Good morning, and thank you. I have to follow up on the prior questions and some before it in terms of intermodal pricing. Can you help us with a little more detail on the split between door-to-door and what you would call your main business and the transport price there, and where do you see that going forward?
Clarence Gooden (Chief Sales and Marketing Officer)
You were fading on me there. The intermodal pricing on the domestic door-to-door, and where do we see that going?
Cleo Zagrean (Utilities and Alternative Energy Analyst)
What is the share of door-to-door within your overall intermodal business? How come that had such a significant impact on price? Or if you could break up what you would call core intermodal pricing trend versus door-to-door.
Clarence Gooden (Chief Sales and Marketing Officer)
It's a relatively small percent, the door-to-door is, of our overall pricing, if that's, if that's what your question is.
Cleo Zagrean (Utilities and Alternative Energy Analyst)
Okay. So therefore, we can infer that intermodal pricing across businesses was relatively weak. In other words, the decline was broad-based?
Clarence Gooden (Chief Sales and Marketing Officer)
No, I wouldn't infer that at all. I would say that if that our intermodal pricing was somewhere in the range of around 2%, a little bit above that.
Cleo Zagrean (Utilities and Alternative Energy Analyst)
Okay. The second question I had was in terms of the impact of business mix on margin as opposed to price. Can you help us understand how mix should play into your aspiration to get continued strong incremental margins in the 50% range? Thank you.
Fredrik Eliasson (CFO)
Well, you know, the margin mix continues in terms of favoring more intermodal, but because of the work that we've done over the last few years to improve the profitability of that business segment, it is now at par with the rest of our merchandise business. This quarter, we saw an increase in some of our coal business, which is a welcome sign, so that's certainly helpful, too. And so, you know, as we think about the future and the guidance we have in place, I think we have the right mix thoughts there, and I think we're, you know, all our business is profitable, and we would like to grow all our business as much as we possibly can going forward. So we're somewhat indifferent to the mix that we're seeing.
Cleo Zagrean (Utilities and Alternative Energy Analyst)
Thank you very much. Really appreciate it.
Clarence Gooden (Chief Sales and Marketing Officer)
Well, everyone, thank you for your attention, and we'll see you next quarter.
Operator (participant)
This concludes today's teleconference. Thank you for your participation in today's call. You may now disconnect your line.
