Norfolk Southern - Q1 2013
April 23, 2013
Transcript
Operator (participant)
Greetings, and welcome to the Norfolk Southern Corporation's first quarter 2013 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Michael Hostutler, Norfolk Southern Director of Investor Relations. Thank you, Mr. Hostutler. You may begin.
Michael Hostetler (Director of Investor Relations)
Thank you, and good afternoon. Before we begin today's call, I would like to mention a few items. First, the slides of the presenters are available on our website at nscorp.com in the Investors section. Additionally, transcripts and MP3 downloads of today's call will be posted on our website for your convenience. Please be advised that any forward-looking statements made during the course of the call represent our best good faith judgment as to what may occur in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate, and project. Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control.
Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important. Additionally, keep in mind that all references to results, excluding certain adjustments, that is, non-GAAP numbers, have been reconciled on our website. Now, it is my pleasure to introduce Norfolk Southern Chairman, President, and CEO, Wick Moorman.
Charles Moorman (Chairman, President and CEO)
Thank you, Michael, and good afternoon, everyone. It's my pleasure to welcome you to our first quarter 2013 earnings conference call. With me today are several members of our senior team, including Don Seale, our Chief Marketing Officer, Mark Manion, Chief Operating Officer, and John Rathbone, Chief Financial Officer, all of whom you will hear from this afternoon. Our first quarter net income was an all-time best of $450 million, or $1.41 per diluted share. It did include a large non-operating land sale, but even without the benefit of this gain, we posted our second-best-ever first quarter results in revenues, operating income, net income, and earnings per share. In addition, the operating ratio of 74.8% was our second best for a first quarter.
Looking at our top line, revenues for the quarter were $2.7 billion, a decrease of 2% from last year. Overall volumes were up 3%, as increases in intermodal units of 9% were offset by a 4% decline in coal traffic and flat merchandise volumes. Don will provide you with all of the revenue and volume details in a few minutes. On the expense side, our continued focus on productivity and efficiency resulted in operating expenses remaining flat with last year, and John will review all of those details with you. The big story for the quarter was the quality of our service. The Composite Service Index improved 50 basis points over last year to 83.3%. System average speed was 24.2 miles per hour, a 3% improvement.
This increased velocity created additional capacity, and our network is running as fluidly as I have ever seen it. Mark will provide you with all of the operating details in a few minutes, and as all of you who follow us know, all of these metrics are intertwined. The fluid network leads to better service and the ability to control costs, and the combination of continued investment in our system, along with efficient utilization of our capacity, will allow us to grow our franchise for years to come. Now, at this point, I'll turn the program over to Don and the rest of the team, and then I'll return with some closing remarks before we take questions.
Donald Seale (CMO)
Thank you, Wick, and good afternoon, everyone. First quarter revenue of $2.7 billion was down $51 million, or 2%, compared to first quarter of last year, as a $131 million decline in our coal market more than offset revenue gains achieved in intermodal and merchandise. With respect to yield, revenue per unit declined by 5% due to a 13% decline in coal RPU. Merchandise revenue per unit was up $70, or 3%, and intermodal revenue per unit was flat compared to first quarter 2012. Negative mix and price, mostly associated with export coal, accounted for $85 million of the overall revenue decline for the quarter, and fuel surcharge revenue was down $51 million. On the plus side, higher volume contributed a positive $85 million into the revenue variance.
With respect to volume, total shipments for the quarter were up 3%, as strong intermodal gains more than offset declines in coal and merchandise. Merchandise results were mixed, as two of the groups, metals and construction and agriculture, experienced declines, while first quarter volumes for chemicals and automotive increased year-over-year, while paper volumes were flat. Now turning to the individual market segments. Coal revenue of $635 million was down $131 million, or 17%, for the quarter. As we saw in the fourth quarter of 2012, weaker demand across most markets contributed to this decline, along with a materially weaker pricing environment for export metallurgical coal.... Our largest decline in volume occurred within the utility sector, which experienced a decrease of 21,000 loads or 9%.
Continued reduction of stockpiles, which were built as a result of weak demand in the 2011, 2012 winter, was the largest single contributor to this decline, coupled with competition from natural gas. Overall, this had a more pronounced volume impact at our longer haul southern utilities, which were down 16%, while shorter haul northern utility volumes declined by only 3%. Export volumes were up 21% in car loadings and 25% in tonnage for the quarter due to increased handling of thermal coal and increased met coal shipments through both ports of Baltimore and Lamberts Point. In the U.S. market, domestic metallurgical volumes were down 14% for the quarter due to weaker steel production and the continued impact of the RG Steel bankruptcy, which we reported last quarter, a comp which we will clear beginning in the third quarter of this year.
And finally, industrial coal volumes was down 10% due to weaker demand and improved equipment efficiency at selected coal-fired industrial plants. Now, turning to our intermodal network. Revenue in the quarter reached $573 million, up $46 million, or 9% over the first quarter of 2012, driven by 9% higher volumes. As depicted on slide 5, the volume gains in intermodal came from both our domestic and international markets. Domestic volume was up 7% due to continued highway conversions and the opening of new Crescent Corridor lanes in the quarter, while organic growth across our international accounts boosted international volume by 13%. As in previous quarters, we continued our strong focus on increased efficiency across our intermodal network.
During the quarter, 95% of containers in both domestic and international market segments moved on stack cars, a metric which highlights loading efficiency and equipment utilization. This was a 5 percentage point improvement compared to the first quarter of 2012, and in turn, total intermodal crew starts were only up 1% on a 9% volume increase for the quarter. Now, turning to our merchandise markets depicted on slide 7. Merchandise revenue was up 2%, reaching $1.5 billion for the quarter. This increase came as a result of higher revenue per unit for the quarter, which was up 3%. Reduced domestic raw steel production, which was down 8% in the quarter, combined with the impact of the RG Steel bankruptcy, contributed to an overall decline in steel volumes of 7%.
Aggregate shipments were also down for the quarter due to a weaker highway construction market and declines in frac sand as natural gas drilling rig counts continued to decline in the quarter. This combination of factors led to an overall 6% decline in metals and construction volume. In our agricultural markets, reduced corn volumes to processors and the impact of ethanol plant closures contributed to a 3% decline in shipments, though we saw strong gains in fertilizer and soybeans for the quarter. Fertilizer demand is particularly strong this year due to low carryover grain inventories and anticipated increases in acreage to be planted this spring. On the plus side, chemicals volume was up 10%, due primarily to growth in crude by rail business, which accounted for over 13,000 shipments in the quarter.
Automotive volumes were up 2%, despite a slight decline in projected North American vehicle production during the quarter, and paper and forest products volumes were essentially flat for the quarter as a rebound in the housing market contributed to an 11% improvement in lumber volumes, which was offset by weaker volumes of graphic paper. Now, concluding with our outlook, the market ahead continues to be mostly positive, but we face continuing headwinds across our coal markets. Competition from natural gas and flat to declining electricity demand will continue to impact our utility coal franchise, but firming natural gas prices reflect some relief in utility dispatch curves looking ahead. With respect to export metallurgical coal demand, we see continued sluggish demand in Europe and slowing shipments into Asia. In the met export market, we've seen some marginal improvement in world pricing.
In this regard, we're continuing to price our services on a quarterly basis, and in view of improving world prices, some modest increases were applied for met coal exports starting April first for the second quarter. But with that said, U.S. coals will continue to be challenged to remain competitive from a total cost perspective, which makes this market choppy and uncertain at best. Also, thermal coal exports will face lower yields associated with the weak API2 index into Europe. In view of these challenges in both met and thermal coal exports, we do not expect our export volumes for the rest of the year to be as strong as those in the first quarter. And finally, with respect to domestic met coal here in the U.S., we see a weaker market ahead until we finally clear the RG Steel comp in the third quarter.
Turning to intermodal, we anticipate a continuation of solid opportunities for highway conversion as we launch new service lanes and ramp up volumes at our newly opened terminals. We also expect continued growth within our international segment, though at a more moderate pace than we saw in the first quarter. In merchandise, we continue to expect growth in three of our five business groups in the months ahead, led by chemicals, automotive, and housing-related materials... In the other two markets, metals and construction and agriculture, we anticipate flat to modest declines in the first half, with an improving outlook for the second half of the year. Wrapping up, in summary, we expect that our diverse market base will continue to provide volume growth ahead, despite the challenges that we face in the coal market.
We remain committed to market-based pricing at levels that equal or exceed the rate of rail inflation over time as we provide excellent service to our customers. Thank you for your time, and, Mark, I'll now turn it to you for the operations report.
Mark Manion (COO)
Good. Thanks, Don, and good afternoon, everyone. Based on preliminary safety data, our first quarter performance stands at 0.72. That's equal to the same period last year. Positive improvements in our safety processes continue to increase our employee engagement and provide a solid foundation for future performance. Moving to the next slide, our composite service metric continues a trend of year-over-year improvement. For the first quarter of 2013, composite performance stands at 83.3%. This represents an improvement over the full first quarter last year, and it's important to point out that this was accomplished despite a more normal winter this year compared to the very mild conditions we experienced last year. Turning to the next slide, and one of the key components of network velocity, train speed. System average train speed improved 3% over the same period last year.
Turning to terminal dwell, we did see a modest increase in terminal dwell of just under 1%, but that was driven primarily by a deeper reduction in our end-of-year operations in response to reduced customer demand over the Christmas and New Year holidays that abutted weekends. However, since the beginning of February, our terminal dwell performance has been improved over last year. Moving on to the next slide, building on the progress we've seen over the last several quarters, improved velocity and other productivity initiatives are the drivers behind the improvements you see here. Overall, we've reduced crew starts a significant 5% against a volume increase of 3% and a gross ton mile increase of 4%. As Don referenced, we've been able to manage 9% increase in intermodal volume with only a 1% increase in crew starts.
Coal volumes decreased 4%, but we were able to achieve an 11% reduction in crew starts. And similarly, despite general merchandise volumes being flat, we were able to reduce crew starts by 2%. Concurrently, we've reduced T&E overtime by 9%, in addition to a recrew reduction of 5% over the same period last year. Velocity-driven equipment rents have been reduced 4%, while car loads per locomotive have improved 6%, and gross ton miles per gallon have improved 2%. We continue to manage our manpower and asset base commensurate with our traffic volumes and improvements in our network velocity. Our active T&E workforce stands at 11,540, a nearly 6% reduction over last year. At the end of the quarter, we had approximately 600 employees furloughed or on retention boards within the transportation and mechanical departments.
From an asset perspective, we had 239 locomotives in storage, along with approximately 8,500 freight cars. In addition to the velocity and productivity improvements that we reviewed on the previous slide, we will continue to adjust the manpower and asset base commensurate with our traffic volumes. As I mentioned last quarter, we're also pursuing opportunities to rightsize the network. Turning to the next slide, this is a great example of a rightsizing opportunity, the closure of the Roanoke, Virginia, hump operation. Enabled by network velocity, efficiency, and changing traffic flows, on February 25, we ceased humping operations at Roanoke. Traffic once handled at Roanoke was redistributed to other yards, utilizing existing capacity without impacting network velocity.
Along with the projects I outlined last quarter, and with additional initiatives like Roanoke, we are solidly on track to meet and exceed our $100 million expense saving target for 2013. Thank you. Now, John, I'll turn it over to you.
John Rathbone (CFO)
Thank you, Mark. I'll now review our financial results for the first quarter. Let's start with a summary of our revenue. As Don described, our 2013 railway operating revenue of $2.7 billion was the second-highest first quarter revenues on record. Total revenues declined $51 million, or 2%, compared to last year's $2.8 billion first quarter record. Fuel revenue of $274 million were $51 million less than last year, and we experienced an unfavorable fuel lag of $23 million during the quarter. Slide 3 displays our total operating expenses, which increased slightly for the quarter. The resulting $691 million of operating income was down 7% compared to 2012, and our operating ratio increased 1.5 points to 74.8%. Both measures rank as second best first quarter operating results.
Turning to our expenses, the next slide shows the components of the $3 million increase, and I'll go over each of the components in detail. As displayed on slide 5, fuel expense increased by $16 million or 4%, driven largely by higher diesel fuel consumption and prices. Diesel fuel usage grew 2% relative to a 4% increase in gross ton miles, a reflection of operating efficiencies and ongoing fuel saving initiatives. Our diesel fuel price for the quarter decreased to $3.19, or 1%. Depreciation expense increased by $3 million or 1%, reflecting slightly lower depreciation rates resulting from a recently completed equipment study that partially offset the effect of a larger capital base. The new rates reduced depreciation expense by $8 million this quarter. This favorable effect will continue for the remainder of the year.
Purchase services and rents increased by $2 million, reflecting higher professional fees and increased automotive and joint facility costs that offset lower engineering and haulage services. Equipment rents decreased slightly due to improved network performance, which more than offset the effect of increased intermodal volumes. Materials and others fell $12 million or 5%, due primarily to reduced equipment and roadway material usage from lower repair activity, which should increase as the year unfolds. Also, for the remainder of the year, we anticipate higher casualty expenses as we lap the favorable personal injury claims development we described in the second and fourth quarter of last year. Next, compensation and benefits decreased by six million dollars, or 1%. Reduction in employee activity levels, reflecting improved productivity and reduced payroll taxes, more than offset $15 million of increased pay rates.
Turning to our non-operating items, other income is up $106 million, including a $97 million land sale gain in Michigan. This involved the sale of 135 miles of track to the state of Michigan for high-speed passenger service. Returns on company-owned life insurance were up $7 million, and interest expense on debt was up by $9 million due to increased net borrowing. Income before income taxes increased $43 million or 7%, due primarily to higher non-operating income, partly offset by lower operating income. Excluding the land sale, pre-tax income would have been $600 million or 8% lower. Income taxes total $247 million, and the effective tax rate was 35.4%, compared to 37.3% in 2012.
The decrease was primarily related to a $9 million retroactive benefit from January's tax law changes. Net income from the quarter was $450 million, an increase of $40 million or 10% compared to 2012. Diluted earnings per share were $1.41, up 18 cents or 15% compared to last year. As noted earlier, our first quarter record results included the land sale in Michigan that generated net income of $60 million and increased earnings per share by 19 cents. As shown on the next slide, cash from operations covered our capital spending and produced $344 million in free cash flow. Cash from operations was amplified in the first quarter of 2012 as accounts payable returned to normal levels.
We accelerated pre-payments at the end of 2011 as part of our SAP implementation. Our 2013 free cash flow supported $157 million in dividends and $33 million of share repurchases. Last year's results included higher share repurchases as well as proceeds from borrowings. Our first quarter 2013 share repurchases reflected a cautious approach as we weighed uncertainties in Washington. As the economy continues to grow, for the remainder of the year, we intend to increase share purchases. We remain confident in our ability to generate free cash flow and access debt markets. We'll continue to prioritize investing in our business, committing to our dividend, and applying incremental cash towards share repurchases, guided, of course, by our economic outlook. Thank you for your attention, and I'll now turn the program back to Wick.
Charles Moorman (Chairman, President and CEO)
Thank you, John. As you've heard, Norfolk Southern had a good first quarter this year, with near record operating income and operating ratio, even in the face of continued significant weakness in our coal business. As I've said previously, coal continues to be the wild card in our business outlook, although we do see some signs of stability with gas prices now at $4+ per million BTUs, slow growth in generation demand, and the price of met coal stabilizing and possibly even starting to tick up. On the intermodal side, we're continuing to see growth in our business, driven in part by the completion of most of our Crescent Corridor infrastructure, along with a great service product. And as Don told you, the outlook for our merchandise business is somewhat mixed, but with some anticipated growth in 3 of the 5 business groups.
In general, we see an economy that will continue to grow, albeit at a slow pace. As I stated, as I stated at the outset, the other big story at Norfolk Southern continues to be the level of our network operations. As Mark told you, our first quarter 2013 metrics exceeded the first quarter of 2012, even with more adverse weather conditions. The economies we are recognizing as a result are significant, and at the same time, our customers are receiving a constantly improving service product, which will help drive further volume growth and pricing improvement. As I've stated many times, at Norfolk Southern, we believe that superior service, going hand in hand with a focus on safety and operating efficiency, are the best ways to grow our volumes and revenues, which in turn will drive increasing returns for our shareholders.
We're confident in our strategy and our ability to execute it, and our first quarter results are a strong indication that it's working. Thanks, and I'll now turn it over to the operator to field your questions.
Operator (participant)
Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. One moment while we pull for questions. Our first question comes from the line of Chris Ceraso with Credit Suisse. Please proceed with your question.
Christopher Ceraso (Managing Director)
Oh, thanks. Good afternoon. I was hoping you could give us a little bit more color on the decline in the yield in coal, maybe just bracketing how much of that is associated with the change in mix versus how much is the reductions you had to take in price for export coal.
Donald Seale (CMO)
Good afternoon, Chris. This is Don. As we discussed in the calls in the past, over the last few quarters, our met coal pricing has been adjusted downward to reflect the world market, which, as you know, declined from $330 per ton down to $160. It has improved back up to $170, but we're still in the range of 25%-30% declines year-over-year in met coal pricing, and we will continue to face those headwinds until we clear part of the second quarter, as we complete the second quarter.
Also, with respect to mix, we handled 2 million tons of export thermal coal in the first quarter versus about 600,000 tons of thermal coal handled in the first quarter of 2012. It's good business for us, but it is lower revenue per car, lower revenue per ton than the met coal, as you know. The other moving parts that I mentioned in my remarks was our longer-haul Southern utility business was down 16% in the quarter. Our northern utility coal was only down 3%, and as we've discussed in the past, the revenue per car differential of those two books of business is 50%, so it's material. One other quick comment, a little color, Chris, hopefully, that will answer your question fully.
Our utility business for the quarter, 31% of that book was shorter-haul utility business in Illinois, Ohio, and Indiana, and averaged only about 25%-30% of our normal revenue per unit of utility coal as a whole.
Christopher Ceraso (Managing Director)
Okay, that's really helpful. I had just one quick, follow-up, not to give you a hard time, but can you just talk about the rationale behind, not buying back stock and waiting to see what's happening in Washington? I mean, you've got a very strong balance sheet. You generated a lot of cash flow in the quarter, and now the stock's 20% higher than it was, you know, three, four months ago. So maybe you've missed out on an opportunity. Can you just take us through your rationale there?
Charles Moorman (Chairman, President and CEO)
Yeah. As you know, you have to use a planned purchase, and as we looked at the Fiscal Cliff, one of the issues as we slowed down purchases going into the Fiscal Cliff because of the way those programs work, we were precluded from entering the market until after earnings release in January. So the whole month of January was basically lost to us as far as purchases. Then we reentered, we reentered the market. Our intention, but but albeit at a lower rate, and you're quite right, we did miss certainly a buying opportunity during that at very favorable pricing. But going forward, we expect to resume our share repurchases at levels that at more historic levels.
Christopher Ceraso (Managing Director)
Okay. Thank you very much.
Operator (participant)
Thank you. Our next question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.
Christian Wetherbee (Senior Research Analyst)
Thanks. Good afternoon. Maybe just sticking on coal, could you talk a little bit about where inventories kind of ended the quarter, or maybe where you think we are kind of in April with utilities?
Donald Seale (CMO)
Good afternoon, Chris. Our utility stockpiles, we ended the quarter with 41 days on average through the network. That's about a 7.5% reduction from the fourth quarter.
Christian Wetherbee (Senior Research Analyst)
Okay. And relative to normals, how does that look?
Donald Seale (CMO)
The northern utilities in our network are normalized now. We are approaching normal throughout the north. The stockpiles have been pulled down. The weather's been colder through the Midwest and Northeast. Our southern utilities are still marginally above target.
Christian Wetherbee (Senior Research Analyst)
Okay. Then, you know, maybe just a quick follow-up on the coal to gas switching or maybe gas back to coal. With prices above $4, I know in the app region, it's maybe a little bit higher in some cases on the break point between the two. But have you seen any, you know, kind of marginal demand come back to coal from gas?
Donald Seale (CMO)
Yes, we have, Chris. Yeah, the NYMEX delivered price of gas is now $4.25 per million BTU for May. And the shoulder months of March and April have been fairly cold, so we've seen demand, electricity production, continue fairly strong, or at least an uptick in it. So, with those gas prices and the pull down in gas storage, we have seen marginal dispatch of coal in our network pick up.
Christian Wetherbee (Senior Research Analyst)
Okay, that's helpful. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Tom Wadewitz with JP Morgan. Please proceed with your question.
Thomas Wadewitz (Senior Equity Research Analyst)
Yeah, good afternoon. I wanted to ask you one on the export coal side. I guess if I look at the coal stocks in general, they haven't been so healthy recently, so that would kind of keep me concerned about the coal market. I'm trying to figure out how to interpret your comments. I think, Don, you said that your pricing on export coal on met would be up a little bit, which obviously is favorable. But, you know, it seems like you're also saying maybe tonnage is down. So I was just wondering if you could lend a little more, provide some more comments on how you look at the met export market and, you know, kind of, you know, tonnage and pricing in, say, second quarter versus first.
Donald Seale (CMO)
Tom, I'd be glad to. We see the second quarter met coal pricing being marginally better than the fourth quarter and first quarter. There's been an uptick, as I mentioned, back up into the mid-170s on worldwide met coal prices. The spot increases we took for a quarter, April 1 for the second quarter, I will tell you, were very modest. So on met coal in general, continued headwinds with respect to demand. We do see a little bit of slowing of demand in Asia. So we expect met coal pricing to hold, but we certainly don't see it rebounding. Now, with respect to thermal coal, the API2 index into Europe got as low as $82. It's moved back up to the 86 range, $86 per ton, so it's recovered somewhat.
We still see opportunities for thermal coal exports in the second quarter moving through the year, probably not at the 2 million ton level that we handled in the first quarter, though.
Thomas Wadewitz (Senior Equity Research Analyst)
So how, how would you think about the met tonnage in second versus met export in second versus first? Is it kind of similar, or what would you think about the tonnage side?
Donald Seale (CMO)
I would say, that we see some softening in the second quarter versus the first.
Thomas Wadewitz (Senior Equity Research Analyst)
Oh, okay. And can you offer an overall comment on pricing? I guess if I look at some of your other yield lines, you know, setting aside coal, they're probably a little, little weaker than I might have anticipated. Paper and clay was down, chemicals was down, maybe that's mixed. Intermodal was down a touch. But what, what do you... You know, how do you view the overall pricing environment outside of the coal market?
Donald Seale (CMO)
Pricing market remains solid, Tom. Let me take one business group and give you some color in the merchandise area, which may help with your question. And I'll take the chemical group. In chemicals, as I mentioned, we handled about 13,000 carloads of crude oil in the quarter.
Thomas Wadewitz (Senior Equity Research Analyst)
Mm-hmm.
Donald Seale (CMO)
Substantial increase. That's very good business for us, but it, it is not moving at the average revenue per unit for chemicals as a whole. Also, we had a polypropylene movement out of Chicago that was high rated, that is no longer moving. That will be a negative comp for chemicals at about $6 million per quarter for the balance of 2013. So when you look at chemicals and look at RPU, just those two things, if you, you know, if you take those into account, then it starts to explain how the RPU looks versus the overall pricing, which continues, pricing continues to be solid.
Thomas Wadewitz (Senior Equity Research Analyst)
Great. Thanks for the time.
Donald Seale (CMO)
You bet.
Charles Moorman (Chairman, President and CEO)
Thank you, Tom.
Operator (participant)
Thank you. Our next question comes from the line of Matt Troy with Susquehanna International. Please proceed with your question.
Matthew Troy (Director)
Thank you. Just looking at the coal business, which seems to have stabilized at a run rate of, I don't know, 25-27,000 carloads a week. You know, while that's a far cry from the 33-34 you were at several years ago, it seems as if things have bottomed, which, as we know, is the first and the most important step. Do you, is your sense that that 26 or 27 thousand run rate, and I know there's a lot of moving parts and pieces in it, is a substantial enough baseline for you to move off of and drive the cost savings? I guess you, someone answered the question earlier with the $100 million target and your confidence around the cost savings there.
But maybe if you could just talk about, you know, is your sense that the absolute coal traffic on the network today is roughly where it's going to be, at least for the foreseeable future? And, and what gives you confidence in your targets on the $100 million in expense takeout?
Donald Seale (CMO)
...With respect to where the coal market is, it appears to us that we are approaching or we are at the bottom of the trough, possibly. And as you well said, there are a lot of moving parts in that, a lot of changes in length of haul. So as Southern Utility Coal is down double digits, 16%, Northern Utility Coal down only 3%, and then we have a lot of our utility coal as a total, moving shorter haul up in the Midwest. It's good business, and we're getting rapid turns on the equipment, so revenue per asset is very high. And as Mark mentioned, we had a 4% decline in volume and 11% reduction in crew starts for the coal business.
So we are seeing some operating leverage and cost leverage in the way we're managing that book of business. So we think we are seeing a bottom here. One of the things that we also think we're seeing is natural gas production in terms of rig counts, going to a level that might support $4-$5 gas. And if we stay in that $4-$5 per million BTU gas range, coal is going to dispatch at a higher rate than we saw it dispatch in 2012.
Matthew Troy (Director)
Got it. Well, my follow-up would be simply, the other big piece of the puzzle here in terms of traffic mix being intermodal, you know, to be able to grow volumes 9% on top of, I think you said crew starts were up 1% or so, demonstrates, I think, yeah, some of the leverage there. Could you talk about just intermodal network capacity? I know you said you're at 95% double stack, but whether it's train length or whether you can drive it through better yard productivity, handling and asset turns, you know, how much more intermodal business do you think you could handle without adding significant resources to the network? Thank you.
Mark Manion (COO)
Yeah, let me take a stab at this. This is Mark. The, keeping in mind that, of course, we've got some intermodal trains out there that are, upwards of 10,000 feet long, but on the average, those trains are more in the neighborhood of 5,500 feet. So you can see that, there are a lot of trains that have a lot of capacity. And, when you look at the good story of these intermodal terminals that have been, newly built and expanded, and we're in the process of, growing the business in those, that's just a great opportunity to fill those trains out.
Matthew Troy (Director)
Understood. Thank you.
Donald Seale (CMO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Bill Greene with Morgan Stanley. Please proceed with your question.
William Greene (Senior Transportation Analyst of North America)
Yeah. Hi there. Good afternoon. Don, did you mention, I might have missed this, but, were there any liquidated damages or taker pay revenues that occurred this quarter that we need to think about as we model forward?
Donald Seale (CMO)
Good afternoon, Bill. No, we, we did not have liquidated damages revenue in the quarter.
William Greene (Senior Transportation Analyst of North America)
Okay, do you expect to have any going forward? Would this be something that'll be material enough that we should be modeling it?
Donald Seale (CMO)
No.
William Greene (Senior Transportation Analyst of North America)
Okay. Then, Wick, I'm hoping we can get your views on the trade-off between kind of volumes and price. We've talked a long time in the rail industry about inflation plus pricing, and clearly, Norfolk's having success, kind of winning share, if you will, or getting the volume, whether it's from new customers starting on your lines or whatnot. But if we look at the OR metric, Norfolk for a long time was sort of top of industry. That slipped a little bit. There's some mix effect there, but maybe you can talk a little bit about price and volume and how you think about that, and getting back toward the top of the industry on margin, how you think about these things? That'd be helpful.
Charles Moorman (Chairman, President and CEO)
Well, when my good friend Don and I talk about the trade-offs between volume and price, we always end up saying we want both. And I will tell you that we are very rigorous in our thinking about margin and about price whenever we are pursuing new business or, for that matter, renewing a contract with current business. And I think we'll be able to continue to do that in the future successfully, if at least in part, in substantial part, because we are really giving our customers a very, very good product.
I will say, parenthetically, that over the past year, the number of our customers that I meet, and I meet a lot of them, who have, just without any prompting at all, started to talk about how well we are doing for them, is really unprecedented in my career. So I think that we have that capacity to do both. But I do think that you raise a good point and something you've got to, we have to think about with our franchise, which is that we have a different mix. Every franchise is different. We clearly have a big intermodal business, which has a different operating ratio, set of characteristics than coal. We like our intermodal business.
We think there are great opportunities out there, and they're great opportunities at prices and at margins that will ensure that we earn an adequate return and grow our income. And those are the two goals that we always have in mind. We have to earn an adequate return, obviously, first of all, but then we want to grow our operating income and our earnings per share, and we see the intermodal business as one of the levers that we can pull, continue to pull to do so. So, you know, in terms of getting to where we rate with other folks in terms of overall operating margin, I think you have to take mix into account.
But I can assure you, we're focused on getting the right price, continuing to grow volume, and grow our earnings at good levels of return.
William Greene (Senior Transportation Analyst of North America)
Okay. Thank you for the time.
Operator (participant)
Thank you. Our next question comes from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your question.
Scott Group (Managing Director)
Thanks very much. Good afternoon, everyone. Just wanted to follow up a little bit here on the intermodal question. You've painted, both CSX and yourselves, have painted a nice picture of the conversion opportunity from truck. Many of the factors that have led to that conversion have been around for a while, but we really are seeing it pick up now, and I think it's on the basis of your improved service offering and the capacity you've built out there. When you look at that opportunity, it's still a really big number that you've identified as a potential conversion. Can you talk to us about your strategy on how to convert that over to rail?
Is this something that we continue to see high rates in the early days, or is it more of a longer-term, kind of grind away at it over, over a number of years?
Charles Moorman (Chairman, President and CEO)
Well, we think there's clearly a very large opportunity, and let me just kind of take as a microcosm of the way we think about the world. You're very familiar, all of you, I know, with our Crescent Corridor initiative. That set of initiatives, which includes new capacity and new services, a number of which we turned on early this year, is aimed at a truckload market that today is running between 5 and 6 million truckloads per year, out moving between the South and the Southwest to the North and the Northeast. Our initial efforts are targeted at trying to pick up about 1 million of those loads.
But when we're successful doing that, we can continue to add capacity, we can continue to add infrastructure, and we think this is a long-term game in terms of converting truckload traffic to the rails for all of the reasons that we've talked about before. You know, our the issues with the highways and congestion, the very significant issues that many truckload carriers have of finding drivers, our economies and our emissions, and all of the things that make us a in many ways, to many of our customers, a more desirable way to ship. So we think this is a long-term growth opportunity for us, and we're gonna continue to pursue it aggressively.
Scott Group (Managing Director)
As you build density, I think density is a really important part of that game, and I think, you know, whereas intermodal has been an average contributor from a profitability standpoint, that would indicate that it's gonna get, you know, obviously better than average. Can you talk to us without talking about profitability? I know you're careful around there, but just as an improvement, is this something that improves, you know, slightly compared to historical, or are we seeing a big step function in profit improvement as you build density?
Charles Moorman (Chairman, President and CEO)
Well, I don't think it's a single big step function, but there is absolutely no doubt that the more units we put over the network, particularly as we do it efficiently in terms of crew starts and the like, the profitability of the traffic improves. The other thing, which Don talked to you about, which I think is very important over the long term, is all of the other initiatives on the productivity side that we have involved in our intermodal network today. Certainly, the more efficient use of equipment is good, and we have seen margin improvement as a result. We have more initiatives out there. So I would tell you that, while we're always working on our...
Not only the profitability of intermodal, the profitability of all of our traffic, we will continue to see it rise, and certainly growing volume and managing, while managing costs, will be a significant component of margin improvement.
Scott Group (Managing Director)
That's great. If just a quick housekeeping, if I may. Mark, you were guiding us down for employee headcount toward the end of the year. You've had a good, you know, you declined a little bit here again in the first quarter. Is this, should we consider this to be the staffing level you're comfortable with through the year, or do we see further declines from this point?
Mark Manion (COO)
We'll see. We'll see a little bit more decline as the year goes on. Our T&E probably is gonna stabilize at, at around the number we are right now. And as I think I mentioned on the last call, our engineering department, we've got an initiative to, to reduce throughout the year, about 300 people. So not a lot, but, reduction throughout the year from, attrition in engineering.
Scott Group (Managing Director)
Great. Thank you very much.
Operator (participant)
Thank you. Our next question comes from the line of Brandon Oglenski with Barclays Capital. Please proceed with your question.
Brandon Oglenski (Director and Senior Equity Analyst)
Yeah, good afternoon, everyone. You know, Wick, I just wanted to follow up with some comments that you had following Bill Greene's question there. You know, obviously, a lot of railroads are targeting improved profitability across North America, but it sounds like, you know, there's some different ORs on the business on the East Coast. Does that mean structurally, that the East Coast carriers just aren't going to be able to see as much improvement as targeted in the other regions of North America for railroad performance?
Charles Moorman (Chairman, President and CEO)
No, I wouldn't say that. I think we, you know, internally, we have targets for improved profitability, just like all of the other carriers. You know, the railroads are a franchise business, and every one of these franchises is different in terms of where we go, who we serve, and the breakdown of our relative lines of business. But we have good goals for improved profitability, and we're pursuing them. And I wouldn't say that we, you know, that we would compare unfavorably to other folks. The other difference, if you're comparing the East to West, is clearly length of haul, and that has some impacts on the financial side as well.
Brandon Oglenski (Director and Senior Equity Analyst)
Well, and if maybe I can just follow up on that. Wick, you know, your intermodal pricing, obviously, there's a lot of mix shifting across your book of business, but we've heard that intermodal rates are just harder to get up in this environment with, you know, trucking struggling to get rate increases with their customers. Is this just an investment phase that we should view Norfolk really building out the density of the network, and pricing will come on the back end?
Charles Moorman (Chairman, President and CEO)
Well, let me, let me say that, obviously, and I'll let Don comment on it, too. Obviously, we're in a slightly different business in most of our intermodal activities in that, we're a wholesale function, working with some terrific partners. So that has an impact on pricing as well. And clearly, as you mentioned, and Don has shown this to you before, the world of truckload pricing has a big, big effect on what happens in the intermodal world. But Don?
Donald Seale (CMO)
Yeah, you know, truckload pricing continues to evolve. We have the hours of service changes that are pending, that more than likely, they look like they will be applied in July. That could take out as much as 5% productivity out of the current truckload carrier driver base, which we think will start to move truckload prices later in this year. Something, though, that hasn't come up in this last couple of questions is we're talking about highway conversions, but I want to remind everyone on the call that we also have a very healthy portfolio of international business, which was up 13% in the first quarter. Our domestic business was up 7%. So, you know, the international business is very good business for us as well.
It is lower revenue per unit because of marine containers, moving in marine containers, than, say, the domestic freight that is generally moving in boxes supplied by us or one of our intermodal marketing companies. So you have to take that into account in terms of the overall mix, but I would just remind you that international business continues to expand as well. And we think truckload pricing, with, especially with respect to domestic, will continue to evolve, and the hours of service is something you should look at.
Brandon Oglenski (Director and Senior Equity Analyst)
Okay. Thank you very much, gentlemen.
Charles Moorman (Chairman, President and CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.
Ken Hoexter (Senior Airfreight and Surface Transportation Analyst)
Hey, great. Good afternoon. Don, if I can just hit on the coal again, just on the overall pricing, you were down double digits the last two quarters. You noted you comp against the down 20% declines on the export, particularly as you wrap around April. The thoughts on the back half here, you've got easier comps, or do you still expect pricing to be down double digits?
Donald Seale (CMO)
Ken, good afternoon. As we, as we move through the second quarter and finish the second quarter, get into the beginning of the third, those headwinds will start to diminish with respect to the year-over-year price comparisons, with respect to met coal. The thermal coal that we're taking on is new business. As I mentioned, in the first quarter of last year, we only handled 600,000 tons of thermal coal. We had 2,000,000 tons in the first quarter. We expect thermal coal to continue to move, maybe not at that first quarter level, but it will be up compared to last year, and that has a lower RPU that you'll have to take into account with respect to revenue per unit.
Ken Hoexter (Senior Airfreight and Surface Transportation Analyst)
Wonderful. And just on the, following up on the intermodal side, you noted a lot of new, I guess, with the expansion on the terminals, are these new customers? Are these expansion now that you've got more capacity? Maybe, you can kind of walk through a little bit on where the volumes are coming from. And then, just a quick one for Mark. I guess, what do you do with the locomotives after they're stored for a while? Do you eventually just get rid of them, same with the cars, or do you keep them for volume rebounds?
Donald Seale (CMO)
Yeah, on the first question, and then I'll pass it over to Mark on the locomotives. We're seeing new customers enter the lanes that we are opening up, the 34 new lanes with respect to Crescent. And I'll give you an example. We are seeing increased activity from the Southwest into the Mid-Atlantic, as well as Mexico into the Mid-Atlantic, with new customers, new shippers that have not been in that particular point, set of point pairs with us before. Of course, we've also got business ramping up with existing customers, and those existing customers would be beneficial cargo owners like Walmart, Target, Procter & Gamble, Lowe's, Home Depot, et cetera.
Charles Moorman (Chairman, President and CEO)
Ken, if I could answer your locomotive question. Our locomotives that are in storage essentially fall into two categories. One is as a surge fleet, and that's approximately 100 locomotives that are high horsepower, ready to go, that we put out-
Donald Seale (CMO)
... for business volumes or weather conditions or whatever the situation may be. The balance of the locomotives, for the most part, are your lower horsepower yard and local locomotives. And those are older locomotives that we primarily use for rebuild opportunity. As you may know, we have had an aggressive rebuild program for about 10 years now, primarily up in our Juniata Locomotive Shop, and many of you on the call have seen that facility. It's a real great asset for the corporation. And we take a locomotive that is essentially 30 years old or so, and rebuild it and give it another life for another 20 years. So that's what those locomotives are used for.
Ken Hoexter (Senior Airfreight and Surface Transportation Analyst)
Appreciate the insight. Thanks.
Donald Seale (CMO)
Thanks, Ken.
Operator (participant)
Thank you. Our next question comes from the line of Justin Yagerman with Deutsche Bank. Please proceed with your question.
Justin Yagerman (Senior Transportation and Shipping Equity Research Analyst)
Hey, good afternoon. Wanted to ask, you know, you mentioned that gas has moved up, and certainly that's been a bit of a change, and that could be a positive on the coal side in terms of dispatches, from a utility coal standpoint. But I would think it also could mean some kind of resumption of drilling in the Marcellus, as gas becomes more profitable again. Where's the threshold where you would expect to see some of that merchandise traffic that's fallen off begin to really pick up? I mean, we saw that hit you guys in Q3, so obviously, the comp probably gets better then. But even before that, in Q2, you know, is there an expectation, if gas really moves, that we could start to see some more activity there?
Donald Seale (CMO)
Justin, this is Don. In our view, in my view, the producers of gas are seeking a realistic market price, and I think that we'll see production coincide with market prices, where returns can be generated for the activity of drilling. Certainly, if we see demand continue to pick up, should we see LNG exports or should we see more alternative uses of natural gas for chemical production and demand pick up, we could see production increase, which in turn would provide us with an uplift in frac sand shipments and additional input, put, commodities to support the drilling. But my view is that the gas producers are looking to produce gas at acceptable returns, and $2.50, which was the average in 2012, was not an acceptable price.
Justin Yagerman (Senior Transportation and Shipping Equity Research Analyst)
Sure. But we're not there, so what's the price that you think that, you know, is kind of the cutoff in terms of that friction point?
Donald Seale (CMO)
I, as I indicated earlier, I think, that that $4-$5 range, we've got a lot of people telling us that $5 average gas may be a settling out point ahead. If that's the case, I think, it's good for the economy. We're competitive in the world market for sure. The chemical industry continues to prosper. And certainly, coal competes much more effectively at $5 gas across all the basins, including Central App, on the dispatch curves.
Justin Yagerman (Senior Transportation and Shipping Equity Research Analyst)
Yeah. In terms of train length on the intermodal side, I mean, 10,000 feet sounds like a pretty lofty goal. I mean, how much of your network do you think you could actually get to that type of a train length? And, you know, when you think about the incremental margin on going from 5,500 to 10,000 feet on a train, it, you know, is it, is it right to think that there's very little cost involved with actually lengthening the train out that much?
Donald Seale (CMO)
Those longer trains are pretty much reserved for our hot corridor between Chicago and the East. That, as you probably know, is a double track and in some places, triple track and four tracks. For the most part, the rest of our system is pretty well aligned with a maximum train length of about 8,000 feet, in some places a little bit less than that, and that has to do with the length of our sidings. We're selective by lane as far as filling out our trains, but keeping in mind that that, with that average train length of 5,500 feet, there's still, there's still a lot of opportunity, including a lot of opportunity in that Crescent Corridor, that's gauged along the 8,000-foot range.
Justin Yagerman (Senior Transportation and Shipping Equity Research Analyst)
Got it. And then, you know, in thinking about the cost involved with lengthening a train from, let's say, average to that 8,000-foot mark, I mean, you know, is there an extra locomotive, you know, a lot more handling involved? How do you think about, you know, the additional cost as you lengthen out that train?
Donald Seale (CMO)
No, that's the beauty of it. You still have one crew. In most cases, you've got the same complement of locomotive power. So, as we add volume onto trains, it's a real win for us.
Justin Yagerman (Senior Transportation and Shipping Equity Research Analyst)
That's great. And one last one. Just curious, you know, as I think about this crude by rail franchise that you guys have been building out, it's obviously small. Some of the properties fall in Conrail territory, and I'm just curious how you guys think about the competitive dynamic for any jump ball business that you may go against CSX for, and how those competitions will be structured?
Donald Seale (CMO)
...Justin, we're looking at our crude oil franchise like we look at all of our business. We're looking to provide very good service to the refineries that we are working with. We're customizing the service, and we're pricing it at levels where it generates the proper reflection of that value for the service. So we're fortunate that we serve multiple refineries in the Delaware, Pennsylvania, Ohio, New Jersey area, and a couple down in the Louisiana and Alabama markets as well. So we're looking at it as we look at all business, and we're looking to provide really solid service for the refineries, as well as making sure that we generate the proper value for that.
Charles Moorman (Chairman, President and CEO)
And let me build on the point Don is making, too, here, which is that this is a business in which competing on service matters because these are very expensive assets that they are employing in the terms of the rail cars. And if we can provide a faster, more efficient service, it means lower capital investment for someone who's providing those cars, and that can be a big factor in this business.
Justin Yagerman (Senior Transportation and Shipping Equity Research Analyst)
Great. Thanks so much for the time, guys. I appreciate it.
Operator (participant)
Thank you. Our next question comes from the line of Jason Seidl with Cowen Securities. Please proceed with your question.
Jason Seidl (Managing Director)
Good afternoon, gentlemen. I'm gonna go back to intermodal for a moment here. You know, obviously, you mentioned the hours of service. Has some of this growth that you've been seeing in intermodal been because the hours of service fear in the shipping community? And do you expect that maybe to ramp up a little bit here in 2Q, just before the change?
Donald Seale (CMO)
No, we don't think there's a ship ahead or conversion ahead. We've been experiencing double-digit growth in our domestic business for the last three or four years. I think it's more of a function of our intermodal network and the value of our service across that network, and the fact that we're delivering a very good service right now at a very high level.
Jason Seidl (Managing Director)
And in terms of the pricing, obviously, you know, thinking of truckload as maybe the ceiling, that's been kind of sluggish right now in that sort of 2% type range. You know, but post the HOS changes, do you think there's going to be an ability for Norfolk to take some of those domestic intermodal rates up?
Donald Seale (CMO)
We certainly hope so, as trucking capacity and productivity is impacted by the hours of service. And of course, as Wick mentioned, fuel efficiency, highway congestion, driver challenges, all of that remain as obstacles in trucking. And we certainly see a wide range of customers wanting to increase their participation in the intermodal space.
Jason Seidl (Managing Director)
Okay, great. And if I can-
Donald Seale (CMO)
Excuse me, go ahead.
Jason Seidl (Managing Director)
No, I'm sorry. Please keep going.
Donald Seale (CMO)
I was going to mention sustainability from an environmental standpoint. A lot of our receivers, a lot of the beneficial cargo owners, have targets for sustainability to actually put more of their traffic on rail, to improve their carbon footprint.
Jason Seidl (Managing Director)
Okay, that's great color. If I can, one quick housekeeping. I think there was a call out for a tax item in the quarter. Was that a $9 million retroactive tax gain, did I hear?
Charles Moorman (Chairman, President and CEO)
Yes, it was, based on the legislation that passed January the 2nd.
Jason Seidl (Managing Director)
Okay. Thanks for the time, as always, guys.
Donald Seale (CMO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Scott Group with Wolfe Trahan. Please proceed with your question.
Scott Group (Managing Director)
Hey, guys, good evening. Sorry to interrupt, but I got one last one on coal. Maybe if we could think about the yields sequentially. So we've got the met rates that you took up a little bit in second quarter, but maybe the met or the overall export volumes ticking down a little bit and the domestic volumes starting to recover a little bit. Should we be thinking about, just on a sequential basis relative to that $1,850 a car in first quarter, should that be coming down a little bit in second quarter? Or because of taking up the met rates a little, that can go up just sequentially?
Donald Seale (CMO)
Sequentially, in terms of revenue per car, it all depends on the ultimate mix of metallurgical coal to thermal coal in the export market. If thermal holds a little bit better than we think it will at this point, obviously, that will have an impact on revenue per car. I will tell you, though, that the increases that we took on met coal April first, I used the term modest, and I will reemphasize modest. They're not large enough to start driving revenue per car in a material way.
Scott Group (Managing Director)
Okay, and you just—it's too early to know based on your... But your sense of, of exports coming down a little bit sequentially and thermal coming up a little bit sequentially, directionally, does that, does that feel like yields should be, should be down sequentially?
Donald Seale (CMO)
Yeah, from the first quarter to second quarter, we think both thermal and met will be at a lower level in the second quarter than we saw in the first. In fact, we think it'll be at lower levels than across second, third, and fourth quarter for the balance of the year.
Scott Group (Managing Director)
That was a comment on volume, though, right, Don?
Donald Seale (CMO)
That's correct.
Scott Group (Managing Director)
Okay. And then with the met increases that you put in, the spot rates that we're seeing seem to be right now a good amount below the second quarter benchmark. Are your increases holding, or are you not able to keep those?
Donald Seale (CMO)
... at this point, they're holding.
Scott Group (Managing Director)
Okay, great. All right, it's been a long call. I'll pass it off to somebody else. Thanks.
Donald Seale (CMO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Justin Long with Stephens. Please proceed with your question.
Justin Long (Equity Research Analyst of Transportation)
Thanks. Good evening. Could you remind me how much capacity the intermodal terminal expansions will add on the Crescent in terms of the number of incremental car loads that will create? And how much of that has already been completed at this point versus what's planned in the next year or so?
Donald Seale (CMO)
We could barely hear that question here, but I think you were, you were asking about incremental lifts across the corridor, specifically the Crescent Corridor?
Justin Long (Equity Research Analyst of Transportation)
That's correct. And in terms of the incremental carload opportunity that could create.
Donald Seale (CMO)
We, we have added in our terminal network about 850,000 lifts of incremental capacity. Now, a lift, obviously, it generates more than one load over the course of a year. Wick had mentioned 1 million loads that we're targeting in the Crescent Corridor. We have adequate, more than adequate capacity to obviously take that 1 million loads on, plus more.
Justin Long (Equity Research Analyst of Transportation)
Okay, and that's based on, you know, the terminal capacity that's come online as it stands today?
Donald Seale (CMO)
Correct.
Justin Long (Equity Research Analyst of Transportation)
Okay. And is there any way of framing up how much these projects are impacting your volumes today? And I guess I'm trying to get a sense of, you know, if this was a key driver to growth in intermodal in the first quarter, or if you think the more significant benefit will be felt, you know, when this capacity starts to really get filled in the second half of this year and into 2014.
Donald Seale (CMO)
I'll just give you some percentages of growth in the first quarter, year-over-year. The Pan Am Southern Corridor was up 9%. Our Crescent Corridor volumes were up 7%. The Heartland Corridor was up 20%, and the Meridian Speedway volume was up 15% year-over-year.
Justin Long (Equity Research Analyst of Transportation)
Got it. Thank you. That's helpful, and I appreciate the time.
Donald Seale (CMO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Keith Schoonmaker with Morningstar. Please proceed with your question.
Keith Schoonmaker (Director of Industrial Equity Research)
Thanks. Quick question on a couple of expanding sectors. Through week 16, I think motor vehicles year to date look up over 3.5%, and first quarter RPU looked like it's improved more than 5%, both pretty good. Can you comment on your auto franchise expectations for the midterm? As well, do you expect to benefit from the new capacity coming online in Mexico in the next few years?
Donald Seale (CMO)
With the latter part of the question first, we do expect to benefit from the five new assembly plants under construction in Mexico. We also expect to benefit from new production that is moving from Japan and from Europe to the U.S., where the U.S. is being used as a manufacturing platform for both the domestic U.S. market, as well as the export market abroad. You probably have noticed or heard that Toyota just announced this week that they're moving the ES 300 Lexus production from Japan to Georgetown, Kentucky. We serve that plant for Toyota at Georgetown, so that will be a source of growth ahead. We continue to have dialogue with other manufacturers with respect to potential new auto plant locations.
In addition to that, we've seen major expansions at BMW at Greenville, South Carolina, Mercedes at Vance, Alabama, that we serve, as well as Honda at Lincoln, Alabama. We've got some major expansions with our current automotive production base, and more is coming from abroad, and we see, we see good growth opportunities ahead in our automotive network.
Keith Schoonmaker (Director of Industrial Equity Research)
Thanks. And the other sector I wanted to ask about is housing, finally improving in some regions. And I think also, year to date, you've increased lumber and wood products volume over 13% from the prior year, something like that. A strong improvement. Sorry?
Donald Seale (CMO)
Yeah, 11% up in lumber. Yeah.
Keith Schoonmaker (Director of Industrial Equity Research)
A strong improvement, but based on what you're seeing from your customers, do you expect this to even accelerate this year? And I guess not just center beam, but also in intermodal box car, aggregates, et cetera, all across sectors. Can you comment on your expectations for total exposure to housing?
Donald Seale (CMO)
I can't give you a number at the current run rate of our exposure to housing. You've seen that starts are now approximating 1 million, which is a good recovery from a low of 520,000. That was the trough. Certainly, we have a range of products that we handle in housing as it recovers, and it's everything from lumber, plywood, OSB, different products like polyvinyl chloride on the chemical side that goes into pipe manufacturing for housing. So there is a range of products from cement, chemicals, aggregates, lumber that go into housing that would benefit us as it continues to improve. And we're seeing some of that across not only our Center beam traffic for lumber, but we have a healthy cement franchise as well as products moving in boxcars.
Keith Schoonmaker (Director of Industrial Equity Research)
Do you think the current improvement year over year, year to date, is representative of what you expect for the rest of the year?
Donald Seale (CMO)
We do. If we stay at this current level of housing start volume over the 1 million unit level, we see that type of activity we saw in the first quarter. We've got the favorable comps year-over-year, and we will see that level of growth for the rest of the year.
Operator (participant)
Thank you. Our next question comes from the line of David Vernon with AllianceBernstein. Please proceed with your question.
David Vernon (Managing Director and Senior Analyst)
Hey, just a quick follow-up on the comp line. There was a $7 million payroll tax in there. Is that just a one-time thing, or is that a recurring thing that's gonna be going on throughout the year?
John Rathbone (CFO)
That's recurring. That was the railroad unemployment insurance was reduced by 1.5%. That affected all of us and, or, well, affected us by that $7 million and should not, it should carry on.
David Vernon (Managing Director and Senior Analyst)
Okay, great. And then, just, Don, a quick follow-up on the coal length of haul. It seemed like you were saying the longer haul southern utility business was coming down, and that was having a negative impact on length of haul. What else was going on inside of coal that was actually compensating for that? Because it looks like the overall length of haul was up by about 5% in the quarter, year-over-year.
Donald Seale (CMO)
The export increase of 21% volume, 25% in tons, was generally longer haul to the ports.
David Vernon (Managing Director and Senior Analyst)
Okay.
Donald Seale (CMO)
That was a counterbalance. Then, as I mentioned previously, we had another counterbalance in the other way, with about 8 million tons of short-haul utility coal up in the Midwest, that averaged somewhere in the range of about 60 miles per car.
David Vernon (Managing Director and Senior Analyst)
Okay. Excellent. Thank you.
Donald Seale (CMO)
Yes.
Operator (participant)
Thank you. Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
Tyler Brown (Associate VP of Investments)
Hey, good afternoon. Hey, just a quick question for Mark. But Mark, can you provide any update on where we are with the Movement Planner rollout, maybe in terms of, like, your gross ton mile coverage, and when do you think you'll be fully rolled out there? And has this been a component of your efficiency gains, or is that something we'll see in the future?
Donald Seale (CMO)
I think we've seen the kind of the beginning of the efficiencies from Movement Planner. Still really early, because it is fully deployed on 2, and we're working on 3 of our divisions, but we see that being a pretty aggressive rollout as we continue and, we should have that completely rolled out by the end of 2014.
Tyler Brown (Associate VP of Investments)
Okay, perfect. And then just kind of one other operations question. Just in terms of network planning, you know, how difficult is it for the network to take on maybe kind of a coal basin shift, let's say, to Illinois, in conjunction with your crude oil business that continues to grow? I assume most of that traffic is kind of east-west. Does that pose any design issues, or do you feel that the capacity is adequate there?
Donald Seale (CMO)
No, absolutely adequate there. And, you know, when you think about, when you think about that lane, we have a tremendous amount of capacity there.
Tyler Brown (Associate VP of Investments)
Okay, perfect. And then just kind of housekeeping, any update on CapEx?
Donald Seale (CMO)
We're still targeting it a little over, well, $2 billion for the year.
Tyler Brown (Associate VP of Investments)
Perfect. Thanks.
Operator (participant)
Thank you. Ladies and gentlemen, our next question comes from the line of Jeff Kauffman. Please proceed with your question.
Jeffrey Kauffman (President of Global Family and Private Investment Office)
It's been a long call. Thank you for taking my question. Kind of the tail wagging the dog, but when I look at crude by rail, you gave a nice breakdown of intermodal and how the economics change as you add cars to trains. How much of the crude by rail is moving in manifest versus unit train right now? And as you grow this business at 20, 25, 30% rates, can you talk about where the critical mass is to where you start moving more on a unit train basis?
Donald Seale (CMO)
Our current split on crude oil is about 65% unit train, and the balance is moving manifest. And if someone has a car set where they have 100 cars plus, they generally want to move that in a unit train. We don't dictate whether it moves in a unit train or manifest. The shipper and the refinery working in concert with each other does that.
Jeffrey Kauffman (President of Global Family and Private Investment Office)
Okay. Thank you very much.
Donald Seale (CMO)
Thanks, Jeff.
Operator (participant)
Thank you. There are no further questions at this time. I'd like to turn the floor back to management for closing comments.
John Rathbone (CFO)
Well, thank you, everyone, for your patience and for the excellent questions. And we look forward to talking to you again next quarter. Thanks, everyone.
Operator (participant)
This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.