Norfolk Southern - Q3 2013
October 23, 2013
Transcript
Operator (participant)
Greetings, and welcome to the Norfolk Southern Third 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 Hostutler (Director of Investor Relations)
Thanks, Melissa, and good morning, everyone. 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 reported results, excluding certain adjustments, that is non-GAAP numbers, have been reconciled on our website in the Investors section. Now, it is my pleasure to introduce Norfolk Southern Chairman and CEO, Wick Moorman.
Wick Moorman (Chairman and CEO)
Thank you, Michael, and good morning, everyone. It's also my pleasure to welcome you to our third quarter 2013 earnings call. With me today are several members of our senior team, including Jim Squires, our President, Don Seale, Chief Marketing Officer, Mark Manion, our Chief Operating Officer, John Rathbone, our Chief Financial Officer, and Marta Stewart, who will take over as CFO upon John's retirement on November first. As per usual, Don, Mark, and John will provide commentary in their respective areas and then will be available for your questions. Norfolk Southern's earnings for the quarter were $1.53 per share, an increase of 23% compared with last year. These strong results were led by growth in our merchandise and intermodal businesses, combined with ongoing productivity improvements and despite continuing weakness in the coal markets.
Looking at our top line, revenues for the quarter were $2.8 billion, an increase of $131 million or 5%. Merchandise and intermodal revenues rose $153 million and $38 million, respectively, while coal revenues declined by $60 million compared with last year. These results are obviously a continuation of the significant changes that we have been experiencing in the markets we serve, and I am proud of how our team continues to respond. Through coordinated efforts between marketing and operations, we have been able to handle the growing merchandise volumes with fewer crew starts, thereby enhancing the strong operating leverage in our merchandise network. We achieved similar efficiencies in our intermodal and coal networks with reduced crew starts, as Mark will show you. Importantly, all of these efficiencies were achieved while maintaining strong service.
In fact, this quarter represents the fifth consecutive quarter in which we have posted a service composite metric at 83% or better. Don will give you all of the revenue details, and then Mark will discuss the execution of our operating plan. On the expense side, the continued focus on productivity kept our costs in check, and railway operating expenses rose only 1% on the 4% increase in volume, resulting in an operating ratio of 69.9%. And John will review the financial results in detail with you in a few minutes. 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 answer your questions. Don?
Don Seale (CMO)
Thank you, Wick, and good morning to everyone. During the third quarter, strong merchandise and intermodal gains more than offset continuing declines in coal revenue to generate $2.8 billion in total revenue, up $131 million or 5% compared to third quarter of 2012. Merchandise increased by $153 million or 11%, and intermodal had a quarterly revenue record of $605 million, which was up $38 million or 7% over last year. Our coal markets continued to be impacted by weaker market conditions, leading to a decline of $60 million in revenue, which was 9% below the third quarter of 2012.
With respect to revenue variance for the quarter, total revenue increased by $131 million, primarily driven by 4% higher volume, coupled with increased revenue per unit in the merchandise and intermodal sectors, which offset negative mix associated with higher intermodal shipments and lower coal volumes. As shown on the next slide, revenue per unit for the quarter was up $12 or 1% versus third quarter of last year.
During the quarter, all of our merchandise commodities achieved yield growth with an average of $109 per unit increase, or 4%, led by metals and construction, which was up 9%, followed by agriculture, which was up 4%, and automotive, up 3%. Coal revenue per unit declined to $129, or 6% year-over-year, due to pricing pressure in the export market and mix changes in our utility network. Now turning to total volume for the quarter, shipments increased by 4% due to gains in intermodal and merchandise, which offset a 2% decline in coal volume. Intermodal volume was up 5%, driven by strong domestic market and road-to-rail conversions, while merchandise volume increased in all markets except agriculture, which declined 3% due to the poor 2012 grain crop.
As noted here, our chemicals volume was up 14%, followed by metals and construction traffic up 9%, automotive up 9%, and paper up 4%. Drilling down to our individual market segments on the next slide, starting with coal. Coal revenue was $641 million, down 9% or $60 million compared to third quarter 2012. Continued weak demand across the domestic met and industrial sectors, pricing pressure in the export coal sector, and negative mix and reduced demand in the utility sector all contributed to this quarterly decline. Stagnant economic conditions in Europe and excess coal supply in the global market continues to impact the U.S. seaboard market for both thermal and metallurgical coal. The weaker Australian dollar, now down 11% against the U.S. dollar since January, has driven increased Australian coal production and exports.
Despite these headwinds, we continue to partner with our coal producers, which helped us generate a 3% increase in export volume in the quarter. In our utility markets, continuing competition from natural gas, excess stockpiles at southern utilities, and reduced demand for electricity, which was down 4% in our service region during the quarter, resulted in a 2% reduction in utility coal volume. Both domestic met and industrial coal shipments were off 8% and 5%, respectively, as soft demand and excess inventories impacted both market segments. In our intermodal business, revenue in the quarter reached an all-time high of $605 million, up $38 million or 7% over third quarter 2012, driven by 5% higher volume and a 2% increase in revenue per unit.
As depicted on Slide 6, the volume gains in intermodal came from both our domestic and international markets. Domestic volume was up 7% due to continued highway conversions, while organic growth across our international accounts boosted international volume by 2%. Much of our volume increase occurred over our expanded and enhanced intermodal corridors. For example, the Heartland Corridor continues to generate double-digit growth, up 19% in the quarter, again, reflecting the efficiency and productivity of double stack service into the Ohio Valley and points beyond. As you can see on this slide, our Crescent, Pan Am Southern, and Meridian Speedway lanes continued to generate solid growth as well.
Concluding our review of third quarter growth drivers with our merchandise results, our merchandise services generated quarterly revenue of $1.6 billion, up 11%, with broad gains across all market groups, with the exception of agriculture, which was impacted by lower corn and soybean shipments. In our metals and construction business, which was up 9%, higher volume was driven by increases in new aggregates business and new terminals for sand and gravel, as well as miscellaneous construction materials. Crude oil continued to drive our growth in the chemical sector during the quarter, with an 11,000-car increase over third quarter 2012, but was down 2,000 carloads sequentially, due primarily to maintenance at a major refinery. Increased shipments of natural gas liquids, plastics, and industrial intermediates also boosted growth in this group.
Our automotive volumes were up 9%, almost double the projected North American vehicle production for the quarter, as a result of new business and increased production at NS served plants. The rebound in the housing and consumer products markets helped us increase both lumber and pulpboard volumes by 7%, which partially offset a 13% decline in graphic paper. Now, concluding with our outlook, we see ongoing growth opportunity in intermodal and merchandise, while the coal market continues to face pricing, mix, and global oversupply challenges. In this regard, thermal coal into Europe continues to be challenged as the API2 index continues to hover in the low $80 per ton range. This is a price point at which U.S. producers are generally at a clear cost disadvantage.
With respect to domestic met and met coal exports, both face excess supply challenges, and in the export sector, the weaker Australian dollar and the possible repeal of the Australian carbon tax could place added pressure on U.S. suppliers. Finally, sluggish electricity demand and excess stockpiles in the South, coupled with pressure from natural gas, will challenge volumes into our utility plants. On the upside, our outlook for intermodal remains bright as we complete new facilities and launch new services, such as the South Carolina Inland Port project at Greer, South Carolina, which will convert highway shipments from the Port of Charleston to Greer for BMW and other customers. This new service begins this quarter and represents our latest road-to-rail conversion initiative. Highway conversion and international growth both represent continued opportunity ahead for our intermodal network.
and we will remain laser-focused on delivering superior intermodal service more productively and more efficiently across our double stack network. Wrapping up with our merchandise markets, we continue to see growth ahead in crude by rail, as well as plastics and shale-related liquid petroleum gases. And frac sand shipments into the shale production region should increase as hydraulic fracturing technology evolves and requires higher volumes of sand. In our metals markets, domestic steel production is projected to expand by 4% during 2014. Automotive production will also continue to see solid growth, as North American vehicle production is projected to increase 6% in the fourth quarter and 3% next year.
In agriculture, the larger corn crop this year will change sourcing from the drought-driven patterns, where corn was being sourced in Iowa and Nebraska, moving to our Midwest processors, reverting back to traditional patterns of shorter-hauled shuttle trains from online elevators located in Illinois, Indiana, and Ohio. We also expect more export grain shipments as a result of this robust harvest. Lastly, our paper and lumber market should continue to rise with the housing market, offsetting weaknesses in graphic and printing paper. Now I'll summarize. We expect our merchandise and intermodal markets to generate overall volume and revenue growth ahead, despite continuing headwinds in the coal sector. With respect to yield management, we remain committed to providing strong service to our customers that supports our ability to price to the market at levels that equal or exceed the rate of rail inflation.
However, the negative mix effect of lower coal volumes and higher intermodal shipments will continue to be seen in overall revenue per unit trends. Thanks for your attention, and I'll now turn it over to Mark for our operations report. Mark?
Mark Manion (COO)
Thank you, Don. Starting with safety, for the first nine months of the year, our personal injury performance stands at 1.08. While we've seen an increase in our safety ratio, we're confident we're doing the right things to reduce injuries in our workplace. Our workforce is more engaged than ever before in safety. This is a direct result of our continuing implementation of behavior-based safety training and processes. Our operations management team has concluded their training, and our 24,000-person workforce will conclude training by year-end. While implementing behavior-based safety training, we do closely monitor our serious injuries, and they have not increased year-over-year. Looking at our train incidents, you see a pretty good trend, with a slight uptick this year in incidents related to switching and storm-related occurrences. Train incidents after nine months is at 2.3 per million train miles.
Crossing accidents for the first nine months is down slightly from the prior year, at 3.5 per million train miles. Moving on to service performance. Our composite service metric remains at a very high level and continues to show year-over-year improvement. For the third quarter, composite performance stands at 83.6%. Consistent with recent performance, the gain was led by improvements in train performance. Consistently high service performance drives network velocity and improves the efficiency of our operation, primarily through improved asset and resource utilization. Turning to the next slide, train speed, a primary component of network velocity, continues at high levels, consistent with the performance we've seen for a number of consecutive quarters. Moving on to terminal dwell, the other major component of network velocity, we continue to see quarter-over-quarter improvements.
In the third quarter, average terminal dwell was 21.2 hours, a modest improvement over the third quarter last year. Moving to the next slide, we provided a comparison of changes in volume by business type and the corresponding change in crew starts. As this shows, we're seeing consistent improvements in operating efficiencies across all business areas. In general merchandise, we saw a 6% increase in volume with a 2% reduction in crew starts. While volumes in intermodal increased 5% for the quarter, we managed a 2% reduction in crew starts. This was due in part to a 4 percentage point improvement over 2012 to reach 95% of all containers moving in double stack service. The improvement in loading efficiency allows trains to carry a higher volume with reduced crew starts.
Similarly, coal volume was down 2%, but crew starts were reduced 8%. Overall, volumes grew 4%, while total crew starts were reduced 3%. As you can see on the next slide, these improvements are not limited to crew starts. Higher network velocity, along with other productivity initiatives, continue to drive operating improvements in a number of areas. Against a volume increase of 4% in the third quarter and concurrent with the crew start reductions that you saw in the previous slide, we also reduced T&E overtime hours by 11% and saw a recrew reduction of 12% over the same period last year. Velocity-driven equipment rents were essentially flat, increasing less than 1%, with high velocity levels now sustained for 7 quarters, and taking advantage of existing train capacity, carloads per locomotive have improved 7%.
We continue to make improvements in fuel efficiency, with gross ton miles per gallon improving 2% over the same period last year. Taking these trends back even further, on the next slide, you can see that these are sustained, improving trends in operating efficiency. The two graphs across the top show the longer-term declining trends in crew starts and recrews against an increasing volume trend, down 6% and 51%, respectively, from their peak in the first quarter of 2011. On the bottom left, the reduction in T&E overtime hours down 40% from the peak in the first quarter of 2011. And on the bottom right, the increase in units per locomotive, up 17% since first quarter 2011.
These and other productivity improvements have come about through improved network velocity, technology applications, strategic investments in infrastructure, better use of existing train capacity through improved network planning, and a number of individual projects implemented by employee teams across our network. We expect to see ongoing benefits and are on target to exceed our $100 million in productivity gains this year alone. And these and other initiatives will continue to drive further productivity gains as we move into next year. Thank you. And now I'll turn it over to you, John.
John Rathbone (CFO)
Thank you, Mark. I'll now review our financial results for the third quarter. Starting with our operating results, as Don described, revenues for the quarter totaled $2.8 billion, up $131 million, or 5%, as merchandise gains and intermodal volume growth outpaced coal declines. For the quarter, railway operating expenses increased $13 million, or 1%, a rate well below our 4% growth in volume. Income from railway operations totaled $849 million, up $118 million, or 16%, and our operating ratio improved 300 basis points to 69.9%. Turning to our expenses, the next slide shows the major components of the $13 million increase. Now, let's take a closer look at each of these changes by expense category. Purchased services and rents increased $17 million, or 4%, largely reflecting increased volume-related activities.
These increases were partially offset by lower roadway repair costs. Fuel expenses increased $11 million, due largely to slightly higher diesel fuel consumption. Turning to compensation and benefit expenses, performance-based compensation and pay rate headwinds were partly offset by productivity improvements and lower payroll taxes. Recall, our compensation is performance-based. Last year included a favorable variance of $19 million for incentive and stock-based compensation. Materials and others decreased $26 million, or 12%, driven by favorable personal injury claims development and reduced materials and supplies, and was partially offset by higher environmental expenses. Third quarter's personal injury costs were $18 million favorable compared to last year. As I mentioned last quarter, our casualty and other expenses could face moderate headwinds in the fourth quarter, as last year's results included a $17 million reduction in personal injury-related expenses.
Turning to our non-operating items, other income was down $3 million, or 9%, due largely to lower coal royalties, driven by lower coal production. Interest expense on debt was up $7 million, primarily due to new debt issuances, including $500 million issued in August of this year and $600 million issued last year in September. Income before income taxes increased $108 million, or 17%, primarily due to higher operating income. Income taxes totaled $266 million, and the effective tax rate was 35.6% compared to 37.2% in 2012. The decrease was largely related to an $8 million benefit from state tax law changes enacted in the third quarter of 2013, as well as tax credits from legislation enacted at the beginning of this year.
We expect our effective tax rate for the full year to approximate 36%. Net income from the quarter was $482 million, an increase of $80 million, or 20%, compared to 2012. Diluted earnings per share were $1.53, up $0.29 per share or 23% compared to last year. Overall, a very solid quarter. As shown on the next slide, cash from operation covered capital spending and produced $934 million in free cash flow. In the first 9 months of 2013, we distributed $476 million in dividends and repurchased five hundred and sixty-four million dollars in shares.
$250 million of that activity was in the third quarter. In total, we have repurchased 7.5 million shares this year, approximately 3.3 million in the third quarter. Share repurchases and proceeds from borrowings were both lower compared to the same period last year. Our balance sheet is strong, and we maintain full confidence in our ability to generate liquidity through free cash flow and access to debt markets. Thank you for your attention, and I'll now turn the program back to Wick.
Wick Moorman (Chairman and CEO)
Thank you, John. Well, as you've heard, we had a very good third quarter in terms of operating performance and bottom-line results. As I said at the outset, we, along with the rest of the industry, are in a period of significant transition with respect to our markets, as our traditional coal business continues to be challenged, while merchandise, including new energy-related businesses and intermodal, continue to expand. To underscore the magnitude of that transition, if you look at our results this quarter as compared to the third quarter of 2011, two years ago, our coal revenues are down almost $260 million, and yet our total revenues are down only some $65 million.
To make up for the loss of so much revenue and operating income in what is one of our most profitable business segment, segments, we have remained intent on a strategy of growing volume and pricing in our other markets, coupled with driving productivity and velocity in our operations. While the changes in our markets are far from complete, our 2013 third quarter results, including our operating ratio, are a clear indication that we are on the right strategic path, and we will continue to focus on execution of all aspects of our plan. The keys to our success remain the people of Norfolk Southern. They're the best in the business, and I'm confident in their ability to continue to drive even better results for our customers and our shareholders.
Speaking of people, let me close by both personally and on behalf of all of the Norfolk Southern team, thanking John Rathbone for all of his years of service to our company. John has served 32 years with NS, and he has been a terrific employee and corporate officer, as well as a great friend to all of us. John, thanks, and on behalf of all of us, will you please just stop smiling so much? With that, I'll turn it back over to the operator to field your questions.
Operator (participant)
Thank you. We will now be conducting a question-and-answer session. If you'd 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 key. In order for everyone to have an opportunity to participate, please limit your inquiry to one primary and one follow-up question. One moment, please, while we pull for questions. Our first question comes from the line of Matt Troy with Susquehanna International. Please proceed with your question.
Matt Troy (Director)
Yeah, thanks. Good morning. I had a question on pricing. Specifically, we've watched the rails narrative on pricing go from market-based to inflation plus to now you've said equal or exceed rail inflation. I'm just curious, in what instances do you decide that equaling rail inflation is an okay hurdle or bogey to set? I'm just trying to understand the criteria. Is it business where the margins are at an acceptable level to go forward? Or how do you just make that decision as you're parsing new business bids and deciding what is rail inflation plus versus what is rail inflation equals?
Don Seale (CMO)
Good morning, Matt, this is Don. First, I would emphasize that, you know, we have reiterated in past calls that our ongoing goal is to equal or exceed rail inflation. And also, we have not veered off of our strategy of pricing to the market. That is what drives our mar-- our, our pricing. It, it is market-based. But with that said, we look at rail inflation ahead, and for next year, for example, the RCAF unadjusted is slated to come in slightly higher than 1%, and the all-inclusive less fuel is slated to come in around 2%, and our pricing targets are above both of those.
Matt Troy (Director)
Got it. So no change in essentially is what I'm hearing. I guess the second question or follow-up would be related to pricing. There's certainly been chatter, some real, some manufactured in the market about intermodal pricing behavior. Just wanted you again, to reiterate or frame your views there, that you continue to price that business for, you know, an acceptable margin level. That essentially, you know, what are the hurdles or the metrics when you're pricing new intermodal business on an organic basis, versus highway versus maybe competitive wins? What do you need to see, or what is the discipline you have that we know that the margins in that business, ex operational improvement, should, you know, hold the line or get better over time? Thanks.
Don Seale (CMO)
That intermodal continues to be a competitive market, and we're competing with the highway predominantly. You know, we were pleased with the 2% improvement in revenue per unit we saw in intermodal in this quarter. We will continue to price in a marketplace where we can be competitive, generate a sufficient margin for reinvestment in our assets and our network, and continue to provide the type of service that our customers expect.
Matt Troy (Director)
Thanks, and congrats, John.
Don Seale (CMO)
Thanks.
Wick Moorman (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Allison Landry (Senior Equity Research Analyst)
Thanks. Good morning. I wanted to ask about fuel during the quarter, and if there was any lag impact, benefit or negative?
John Rathbone (CFO)
Yeah, the net. There was a $41 million negative lag impact for the quarter. That compares with last year's quarter of $21 million lag impact.
Allison Landry (Senior Equity Research Analyst)
Okay, so it was a year-over-year negative of about $20 million?
John Rathbone (CFO)
Uh, correct.
Allison Landry (Senior Equity Research Analyst)
Okay. And then just, following up on the casualty line, it looked a little bit low relative to what we were modeling. What's a good run rate to use, for that category going forward?
John Rathbone (CFO)
I would say what you should model in on that, and because of that, that line does have some variability associated with our actuarial studies, and it's one that's difficult to get a, because of all the safety improvements we've had, we have a lot of benefits associated with that. I'd say, if you look at about $35 million run rate on that, ±, that should give you a good handle on that.
Allison Landry (Senior Equity Research Analyst)
Okay, great. Thank you.
Wick Moorman (Chairman and CEO)
Thanks, Allison.
Operator (participant)
Thank you. Our next question comes from the line of Bill Greene with Morgan Stanley. Please proceed with your question.
Bill Greene (Managing Director)
Yeah. Hi there, good morning. Don, I think in the past, maybe on the last call, you talked a little bit about coal RPU slowing sequentially, so I guess a sequential decline, but it actually went up. Can you tell us, was there anything with liquidated damages or anything in there that made that unusual, or was it just all mix?
John Rathbone (CFO)
Bill, it was, it was mix related. We had no material liquidated damages, amounts in the quarter. It's a reflection of increased export shipments over the Port of Norfolk. We had a decline in export shipments over the Port of Baltimore. We had increased shipments of northern utility coal and decreases in the south. So that's, in a nutshell, the mix effects.
Bill Greene (Managing Director)
Okay, thank you. And then the follow-up is just on seasonality. So a lot of mix changes going on in the business, as you guys have mentioned. How do we think about how that should affect how margins change sort of quarter-over-quarter? Is the fact that coal's now a smaller piece of the business and intermodal bigger, should that mean bigger seasonal swings between things like fourth quarter and third quarter on margins? How do we think about how that should affect the margins?
Don Seale (CMO)
Bill, I don't see that as being a seasonal or cyclical impact. What we are seeing is that coal in the quarter was 18% of our shipments and about 23% of our revenue. We're seeing our participation in other energy activities, obviously, continue to ramp up, and we see that as a sustainable source of volume and revenue ahead. So I think instead of cyclicality or seasonality, we're just seeing some substitution and replacement of commodities that we're transporting.
Bill Greene (Managing Director)
The mix on a margin basis isn't really that different, given what you've been able to do on the costs?
John Rathbone (CFO)
It is, it is comparable. I will tell you that it's not quite as good as coal was, but, it is very attractive business for us.
Bill Greene (Managing Director)
Okay, fair enough. Thank you for the time. Best of luck, John.
Operator (participant)
Thank you. Our next question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.
Chris Wetherbee (Senior Research Analyst)
Hi, thanks. Good morning. Maybe a question, Mark, on the, on the cost initiative side. You said that you're kind of trending out ahead of the $100 million target that you'd had for the year. I just want to get a sense, when you take a step back and think about maybe a longer term perspective, as you go through the initiative, does it appear that you have sort of equal opportunities as you move into 2014, i.e., are you going to be able to get sort of the same type of magnitude of changes, and improvement in productivity as you move forward here? Or are there any limiting factors from mix or otherwise?
Mark Manion (COO)
Chris, we are looking for the same trend in productivity improvement, and it just comes from the fact that we have got a pipeline of a multitude of productivity projects that are lined up. You know, think about things like LEADER that is less than halfway rolled out. We'll be working on that through all of 2014. Movement Planner falls into the same camp. And then on top of that, we've got yard initiative projects, we've got local operating plan projects. These are things that we'll be working on the rest of this year and next year.
Chris Wetherbee (Senior Research Analyst)
Okay. And just to follow up on the headcount side, I apologize if you missed it. Can you give us a rough sense of how you expect headcount to trend over the next quarter or two?
Mark Manion (COO)
Well, we have been methodically reducing our headcount. And, you know, as you see, year over year, just on the operations side, we've reduced about 4% in the last twelve months, 4.1, to be exact. And as we go into 2014, we're gonna continue to make reductions. And again, it'll be incremental, but we're looking at a reduction of at least several hundred people through attrition throughout the course of next year.
Chris Wetherbee (Senior Research Analyst)
That's great. Thanks very much for the time. I appreciate it.
Mark Manion (COO)
Sure.
Operator (participant)
Thank you. Our next question comes from the line of Tom Wadowitz with J.P. Morgan. Please proceed with your question.
Tom Wadewitz (Senior Equity Research Analyst)
Yeah, I guess, I think a follow-up for you, Mark, and I've got to say it's impressive performance on the reduction in crew starts with volume growth.
How do you think about the constraints on that? I know you touched on this a little bit with headcount next year, but you know, if volumes are up another 4% next year, can you reduce crew starts another couple of percent? That's a pretty wide and impressive gap. Or do you start to hit some train length considerations or other factors?
Mark Manion (COO)
Well, you know, if volumes are up, that'll be great, and we'll, we'll operate as many crews as we have to in order to handle the volume, obviously. But with the type of projects we have going on, we will continue to see improvement in some improvement even in velocity, we think, just due to projects such as what's going on in our, our yards, where we're doing a better and better jobs getting trains out on time, not having the delays and the recrews that would otherwise take place. We've got our Bellevue project that is gonna be coming into its own. That, that builds in efficiencies. So, we're, we're continually taking time out of schedules that has an effect of more efficiency.
So when you put all that together, we think we will continue to be favorable on the crew start size, but side. But again, it has everything to do with volume, and we'll take as much volume as we can get.
Tom Wadewitz (Senior Equity Research Analyst)
Okay, great. I appreciate that. And then a question on coal. What I don't think that you specified it, maybe I missed it, but how big was the impact from liquidated damages in third quarter? You know, absolute level of damages and the year-over-year. And is that something that kind of goes away fourth quarter or next year, or does that persist?
Don Seale (CMO)
Tom, we, as we stated previously, there was no material liquidated damages accrual in the third quarter.
Tom Wadewitz (Senior Equity Research Analyst)
Okay. Nothing this year, nothing meaningful last year?
Don Seale (CMO)
No.
Bill Greene (Managing Director)
Okay, great. Thanks for the time.
Wick Moorman (Chairman and CEO)
Thanks, Tom.
Operator (participant)
Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Nice to talk with you guys in the morning. Don-
Don Seale (CMO)
We're all kind of awake, Scott.
Scott Group (Managing Director and Senior Analyst)
Don, you talked in one of the earlier questions about how you think pricing is gonna be above that, kind of the inflation numbers that you see out there. But you also talked earlier about negative mix with coal and merchandise and intermodal. What, when you factor in mix, do you think that your overall yield should stay above that inflation number you talked about in that 1% range?
Don Seale (CMO)
We believe we're trending in that direction, and we also believe that coal is most likely at the trough in terms of where we will see it stabilize, and hopefully, we'll start to see it improve.
Scott Group (Managing Director and Senior Analyst)
Are you talking about from a pricing perspective or a total revenue perspective when you say call out the trough?
Don Seale (CMO)
The total revenue perspective and a revenue per unit perspective.
Scott Group (Managing Director and Senior Analyst)
Okay, great. And just second question on the Crescent Corridor. So I'm just wondering, what percent. When you first laid that out for us, there were some pretty big opportunities to take share. What percent of that corridor do you think you've utilized so far, and you have any views on kind of how much additionally you're planning for in terms of growth next year?
Don Seale (CMO)
We're in the first inning of our growth plan for the Crescent Corridor, and we identified well over a million loads in the initial approach for Crescent, and we're on track, but we're in the first inning of that.
Scott Group (Managing Director and Senior Analyst)
Why do you think we're only seeing single-digit growth on that corridor if it's kind of brand new?
Don Seale (CMO)
We are being judicious with respect to the business that we're seeking and gaining. We've made investments in that corridor, and our objective is to generate sufficient returns on those investments.
Chris Wetherbee (Senior Research Analyst)
All right. Thanks a lot for the time, guys.
Don Seale (CMO)
Thanks, guys.
Operator (participant)
Thank you. Our next question comes from the line of Justin Yagerman with Deutsche Bank. Please proceed with your question.
Justin Yagerman (Director and Transportation Analyst)
Hey, good morning, guys. Wanted to dig in a little bit on the outlook for coal here and get a sense. Your competitor has moved a decent chunk of business or will have by the end of this year, to fixed variable when they look at their coal business, and wanted to get your thoughts on how you think about that. And then when you look ahead to 2014, how much of your utility business is gonna be repricing, where you'd have, you know, an opportunity to relook at guaranteed minimums and pricing?
Wick Moorman (Chairman and CEO)
With respect to the first part of the question, fixed and variable, we continue to have dialogue with our major utility customers regarding the concept, but I will tell you that we do not have any of that type of formula in place today. And also, we're finding our utilities to be interested, but not overwhelmingly interested in the concept. So we're having dialogue, but I will tell you that we do not have any of that price structure in place as of now. The second part of the question, we have about 5% of our current utility book that we're still having some discussions and negotiations with. That will be concluded by the end of the fourth quarter, and we will give you a report out on the results of that in the January call.
Justin Yagerman (Director and Transportation Analyst)
Okay, and then looking out to 2014, what, what, what was that?
Wick Moorman (Chairman and CEO)
2014, that includes that 5% that we're negotiating on now, and we have no material utility contracts that are up for renewal next year. We will have escalators in the contracts apply as we have per the contractual terms.
Justin Yagerman (Director and Transportation Analyst)
Okay, great. Just a point of clarification on the call. I think you said that when you looked at mix, that northern utilities were seeing stronger, you know, improvement versus southern, which jives with what I would have thought, but maybe not in terms of how that played out in RPU. Is that a positive mix for you guys, or is that a negative mix, northern?
Wick Moorman (Chairman and CEO)
That's a negative mix. As we've talked in the past, our northern utility business, the stockpiles are at target. Southern utility stockpiles are in excess of target, and our southern utility coal is about 50% greater RPU than our northern utility coal. And in this most recent quarter, I will tell you that the split of utility north to utility south, which generally runs 50/50, was 54% north and 46% south. So we had a negative mix effect within that utility market.
Justin Yagerman (Director and Transportation Analyst)
Okay, so the sequential RPU, the favorable mix that would have driven that, in response to an earlier question, was pretty much solely then the export side, or was there something else? Because you guys-
Wick Moorman (Chairman and CEO)
That is correct. The favorable Lamberts Point export traffic, which was up, and Baltimore traffic, shorter haul export down, we had a positive mix effect on export business, which was up 3% in total.
Justin Yagerman (Director and Transportation Analyst)
Okay, that's very helpful on a clarification basis. And then the last question, and I'll turn it over. You know, on the intermodal side, just piggybacking on what Scott was asking about before, we saw decent volume numbers, you know, compared to past quarters out of your competitor. Are things more competitive on the domestic intermodal side, in the east than we've seen in a while, as they've gotten up to 90% on the double stack and, you know, maybe starting to challenge you guys where you've been more dominant in many of these lanes?
Don Seale (CMO)
We see no real change. We're focused on the highway. That's where the freight is moving. And the highway, the motor carriers are facing hours of service changes, continuing changes with respect to driver availability. So we still see the overall value proposition for intermodal and the competitive situation essentially the same.
Justin Yagerman (Director and Transportation Analyst)
Great. Hey, thank you so much for your time.
Don Seale (CMO)
You bet. Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your question.
Walter Spracklin (Canadian Research Management and CoHead of Global Industrials Research)
Thank you very much. Good morning, everyone. My question is kind of a follow-up on the intermodal pricing. I believe it was Wick or perhaps Don that mentioned you were trending negative 1% in Q2, and then switched to positive 2% in the Q3. You know, just throwing it back to you, there was the view that perhaps you had been using price as a mechanism to fill some of your lanes on the backdrop of a weaker economic environment, what have you, or to drive truck volume over into onto your rail network. It
Is the shift from -1 to +2 a change in pricing philosophy, or was that an accurate assessment back in Q2, and that's changed now, or was there something else at play that we should be considering?
Wick Moorman (Chairman and CEO)
I wouldn't read too much into sequential quarter-to-quarter revenue per unit changes. We don't price a large portion of our intermodal business on 90-day increments. We price it in longer term increments than that. So, fuel changes, mix changes, lane changes, all of that are predominant quarter to quarter, but yield is not going to change in a major way quarter to quarter.
Walter Spracklin (Canadian Research Management and CoHead of Global Industrials Research)
Okay. And just to confirm here, John, did I hear you say there was an $8 million one-time tax benefit in the quarter, third quarter 2013?
John Rathbone (CFO)
Yes, and that's related to North Carolina reduced their tax from 6.9 to 6.5 over a two-year period, and that's the reduction related to deferred taxes on that recognition and the balance sheet of those deferred tax benefits we picked up.
Walter Spracklin (Canadian Research Management and CoHead of Global Industrials Research)
Okay. And Don, could you just, I don't know if you mentioned the split between met and utility on your export side in the quarter, by the way?
Wick Moorman (Chairman and CEO)
It was 79% met, 21% thermal.
Walter Spracklin (Canadian Research Management and CoHead of Global Industrials Research)
Perfect. Okay. Thank you very much.
Don Seale (CMO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Ken Hoexter with Bank of America. Please proceed with your question.
Ken Hoexter (Managing Director)
Great, good morning. Can you just jump into that mix shift a little bit, and was there anything that caused that shift over to Lamberts? And on the same vein, any thoughts on the export market into 2014?
Wick Moorman (Chairman and CEO)
Our Lamberts Point, Port of Norfolk, coal was strong in terms of the quarter for export, predominantly based on metallurgical coal flowing to China. As you probably recall, we had a couple of press releases in the quarter. We loaded one vessel with 168,000 metric tons of export metallurgical coal destined to China, which was the largest coal cargo ship loaded in the northern hemisphere. So, we saw met coal Central Appalachia continuing to be in demand in China during the quarter.
Mark Manion (COO)
Fourth quarter.
Wick Moorman (Chairman and CEO)
And what was the second part of the question?
Ken Hoexter (Managing Director)
It's just your thoughts on the export market into 2014, I guess, now you've seen this-
Wick Moorman (Chairman and CEO)
Well, it's, it's a mixed bag. It's very murky. The thermal coal, as I mentioned, is subject to, world forces with an API 2 into Europe that's too low versus the cost structure for U.S. producers. On the met coal, we see continuing opportunity, but we don't see a robust market. The Australian currency that I mentioned in my prepared remarks continues to make Australian coal more competitive. And should the new prime minister and, government in Australia remove the carbon tax, Australian exports will become even more competitive. So we have an outlook on coal that's, that's less than, encouraging.
Ken Hoexter (Managing Director)
Great. And if I can get my follow-up on intermodal with Don, I guess it was an impressive answer before on the yield side on intermodal and kind of your restraint you're showing on the new lanes that you're opening in order to get that return that you want on your investment. So what—when do you unleash that? Is that just J.B. Hunt going in, or your large customers going in and selling that, or are you doing something to more actively market those lanes to convert that highway traffic just so we can understand the growth dynamics from those opening up?
Wick Moorman (Chairman and CEO)
We're working with all of our intermodal partners, as well as directly having dialogue with beneficial cargo owners, as we normally do. So, we have a high service value in that corridor, and it has great demand and great promise and potential. And what we're doing is just being prudent in the way we launch it and ramp it up.
Ken Hoexter (Managing Director)
Great. Appreciate the time.
Operator (participant)
Thank you. Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.
Brandon Oglenski (Director and Senior Equity Analyst)
Yeah, good morning, everyone.
Wick Moorman (Chairman and CEO)
Good morning.
Brandon Oglenski (Director and Senior Equity Analyst)
If I could follow up, from Ken's question there on the new lanes for intermodal, and along the lines of efficiency gains, so maybe this one's for Mark. But are you running at ideal densities right now in those new intermodal segments? And is that some of the upside on the efficiency story for 2014?
Don Seale (CMO)
We got plenty of room to grow, if that's the question, in those intermodal segments, all of them.
Brandon Oglenski (Director and Senior Equity Analyst)
Well, when you first start up those lanes, are you getting ideal densities overnight, or is this something that builds up and the profitability builds up as you get market share?
Don Seale (CMO)
This is something that continues to ramp over time, and there's really two pieces to it. One is filling up the train size, and then, as it necessitates, we'll add actual trains to those corridors.
Brandon Oglenski (Director and Senior Equity Analyst)
From a capacity perspective right now, where would you put available capacity in your network on the intermodal?
Don Seale (CMO)
A lot. I don't have a percentage for you, but we've got, we've got a lot of room to grow. And you gotta think in terms of of the fact that over the last, really, I guess, we're going on almost 10 years now, where we have every year, methodically, surgically, been adding infrastructure improvement to what in the past was choke points or potential choke points. So we're staying ahead, ahead of that. And so between a pretty robust infrastructure to start with, as well as improvements throughout the years, there's a lot of room out there.
Brandon Oglenski (Director and Senior Equity Analyst)
All right. Thanks for that. And Don, real quick on grain, how is the shifting of sourcing of corn and grain in your area gonna impact length of haul and yields?
Don Seale (CMO)
That's a good question. I'm glad you asked it. As I pointed out, the drought of this past year forced us to source a lot of grain in Nebraska and Iowa, coming over Chicago, coming to our processors in the Midwest, and even some going into the Southeast. That will revert to more traditional origins, with this new, robust crop, where we will source a lot of that corn and, the corn for processing in Illinois, Indiana, and Ohio, which will result in a shorter haul, lower RPU, going into points like Decatur, Illinois, for example, or Lafayette, Indiana. So, still good business, just going back to the patterns that are normal.
Brandon Oglenski (Director and Senior Equity Analyst)
Thanks for that.
Don Seale (CMO)
You bet.
Operator (participant)
Thank you. Our next question comes from the line of Justin Long with Stephens. Please proceed with your question.
Justin Long (Managing Director of Equity Research)
Thanks, and good morning. On CapEx, I was wondering if you had any early read on what we could expect in 2014, and also if you could provide any breakdown in terms of the need for infrastructure, equipment, PTC, et cetera, that would be helpful as well.
Don Seale (CMO)
Well, we haven't taken a capital budget to our board yet, so we haven't announced any kinds of numbers. The capital budget, I think we have talked before, will be roughly order of magnitude of where we are today. We clearly have a big PTC nut out there in front of us, and then we have our typical ongoing needs. We've talked in the past about we are slowly replacing our coal car fleet, which is becoming life expired over a period of about 10 years. So we'll see projects like that, but
We don't have a good number for you yet, and we'll obviously be talking a lot about that in January when we talk with you again.
Justin Long (Managing Director of Equity Research)
Okay. And maybe, for my second question, there's clearly been a lot of uncertainty about the direction of the U.S. export coal market recently, and I realize it will be volatile with weather, exchange rates, et cetera. But longer term, just based on what you're hearing from your customers, do you have a best guess on a normalized range for the U.S. export market? Do you think it's, you know, an 80 million, 90 million, 100 million ton market on an annual basis?
Don Seale (CMO)
You know, we wish we did. We really just don't have a crystal ball that's good enough right now to predict what's coming down the path. We have a lot of confidence over the long term in the strength of our export metallurgical coal franchise. We serve a lot of high-quality metallurgical coal producers, and that coal—that's coal over the long term that we think will always be in demand. I think, but in terms of some kind of ratable number for years, we just don't know, and we certainly don't have very good insight into the long-term prospects for U.S. export thermal coals. We and a lot of people would hope that that's a very bullish proposition, but we just don't know yet.
Justin Long (Managing Director of Equity Research)
Okay, thanks. That's all for me. Appreciate the time.
Operator (participant)
Thank you. Our next question comes from the line of Thomas Kim with Goldman Sachs. Please proceed with your question.
Tom Kim (Senior Industrials Equity Research Analyst)
Morning. Thank you. With regard to intermodal, can you just give us an idea where you think a more normalized growth rate might be for the Heartland Corridor? And then also, you know, what would be an update on the current outlook for the Meridian Speedway? And again, the longer term opportunity in that particular corridor. Thanks.
Wick Moorman (Chairman and CEO)
Well, the Heartland Corridor continues to be robust. We, we don't expect, quarter to quarter to quarter to quarter increases of 19%. That would be a, that would be a compounding, phenomenon. But it's going to continue to be a robust growth corridor for us. We have, a suite of services to and from, the Port of Virginia that, is in great demand around the world, with double stack service to Columbus, Detroit, back to Chicago. So that corridor will continue to grow. Don't think we'll project that type of growth that we're seeing in the third quarter, but it'll be substantial.
The other corridors will continue to grow, again, as we compete in the highway with highway carriers and partner with our intermodal partners and beneficial cargo receivers, to the extent that the prices that we put in and the volumes we gain are attractive and generate appropriate returns.
Tom Kim (Senior Industrials Equity Research Analyst)
With regard to the Meridian Speedway, and more specifically, I mean, do you see potential for this somewhat relative underperformance to change? And what may be strategically being sort of focused on to accelerate the growth?
Michael Hostutler (Director of Investor Relations)
I would remind you that the Meridian Speedway is focused more on a developing suite of services to and from Mexico. The transcon business associated with Meridian Speedway, too, is a more mature intermodal market. We're seeing a much higher growth rate on local eastern intermodal as opposed to the more mature transcontinental intermodal market. And Mexico has great potential, but it's just beginning to ramp up, tying into our new Birmingham hub that we finished at McCalla, Alabama, near Birmingham.
Tom Kim (Senior Industrials Equity Research Analyst)
Okay. If I could just ask—squeeze in one last question with regards to your general preference between international versus domestic intermodal. Is there one or point A, like a difference in pricing? And then if you had a choice between international versus domestic, would you prefer one over the other? Thanks.
Wick Moorman (Chairman and CEO)
We prefer both. The revenue per unit on the international, because it's a private container, marine container, is lower revenue per unit, but it's attractive business. And since we're supplying a lot of the domestic boxes for the domestic intermodal world, it generates a higher revenue per unit. But both are attractive sectors for us.
Tom Kim (Senior Industrials Equity Research Analyst)
Okay, thanks a lot.
Operator (participant)
Thank you. Our next question comes from the line of Jason Seidl with Cowen. Please proceed with your question.
Jason Seidl (Managing Director)
Good morning, gentlemen. John, good luck in retirement, sir. If I could go back to the question, in terms of yields expected for 4Q on the ag side, you said it should revert more back to normal. You know, are you talking sort of back to that, you know, $2,100 carload level that we've seen in the past, or am I going a little bit too low for the conversion to more shuttle trends?
Don Seale (CMO)
Well, I don't want to guide you on the revenue per unit per se, but there will be some other moving parts that will impact the changes to normal patterns for domestic grain. As I mentioned in the comments, we see export grain ramping up because of the large crop this year. And as you know, the export market last year was nonexistent because of the lack of of grain supplies. So generally, our export trains will generate a higher RPU that will be blended in to mute some of the return to normalized patterns on the domestic grain. So we'll just have to see how that comes together, because if we run more export trains than we had planned, which we could, that would have an impact on any number that I would give you.
Jason Seidl (Managing Director)
Okay. What % is export versus the shuttle of the business?
Don Seale (CMO)
Well, last year, we had very little export grain at all. This year, we will have a fairly substantial export program.
Jason Seidl (Managing Director)
Okay.
Don Seale (CMO)
I can't give you, I can't give you the percentage of, of the total.
Jason Seidl (Managing Director)
Because you'd be predicting the export market. That's. I understand that. If I could jump on my follow-up question, in terms of the personal injury rates, obviously, it crept up a little bit, and there's a negative comparison in 4Q that you mentioned. When is the next actuarial study on the personal injury rates?
John Rathbone (CFO)
We have, we do those quarterly. Each quarter we evaluate those personal injuries. And as Mark said, when we look at the creep of the injury rate going up slightly, but as Mark mentioned in his comments, the severity has not crept up. The serious injuries have not changed, so that gives us comfort that about our accruals.
Jason Seidl (Managing Director)
Okay, fantastic. Gentlemen, thank you for the time, as always.
Don Seale (CMO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of John Larkin with Stifel. Please proceed with your question.
John Larkin (Managing Director of Investment Banking,Transportation and Logistics)
Morning, gentlemen, and thank you for taking my question. Had a question about the stockpiles in the Southeast at the utilities, which have been above normal for a number of years now. Would have thought that by now, they would be getting close to normal. What is it that's preventing them from moving in that direction? Is it fear of liquidated damages? And when do you think that we might expect that they would be brought down to normal levels so that your movements into that area would be more what you would expect to see over the long term?
Don Seale (CMO)
Good morning, John. The southern utility stockpiles are being impacted by two broad factors. First, natural gas competition, even with natural gas prices increasing on a moderate, from a moderate perspective to about $3.60 per million BTU, natural gas is still competing in the South at a higher rate than it is in the North, in our view. Second is electricity demand just hasn't recovered from the recession. It's down 4% in our service territory. So, you put those two things together, and then also the summer weather was just not as warm as it was forecasted to be. It was a cooler summer.
So those three factors combined, we saw the utility stockpiles at utilities we serve in the South tick up by about a day, coming off the second quarter into the third quarter.
John Larkin (Managing Director of Investment Banking,Transportation and Logistics)
Okay, that's very helpful. Thank you for that. And then maybe as the follow-on over in Mark's operating area, great improvements have been made there with respect to more productive train starts. I gather from some of the data that your train speed is reaching sort of steady state and terminal dwell, maybe reaching steady state. Is there much room for improvement there? If not, is all of the productivity really going to come from increased train length going forward?
Don Seale (CMO)
We think there is continued improvement yet, and it has to do with we've got a number of productivity projects out there. Projects such as things that depart our trains out of terminals on time, keep them from having to be re-crewed, taking time out of our schedules, just various things that increase the overall efficiency of the train, the train network, we think that will have an impact on our overall velocity. So we think there is still some upside in the velocity, and still some improvement yet to be had in our dwell in terminal.
'Cause you got, you gotta remember, even though right now we've got our dwell down at really what our operating plan is, as our operating plan is something that we change, we tweak as we go forward. And as we reduce the, as we tighten up our train schedules, we change our train plan, we change our operating plan, and that has an effect of reducing the overall dwell that's taking place in terminals. So we still see upside in it.
John Larkin (Managing Director of Investment Banking,Transportation and Logistics)
Thank you. I appreciate the answer.
Wick Moorman (Chairman and CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Jeff Kaufman with Buckingham Research. Please proceed with your question.
Jeff Kaufman (Analyst)
Thank you very much, and congratulations on a strong quarter. I just want to follow up a little on Allison's question earlier. We were talking about some of the changes to materials and others line. I think you mentioned the casualties, $23 million, probably $35 million, is a more sustainable level. Can you talk about the other elements that drove that down about $26 million year-over-year? How sustainable are those?
John Rathbone (CFO)
Most of that came from the reduction, as we said, reduction in favorable personal injury claim reserves, offset by our environmental expense, which were slightly higher for the quarter. But I think a $35 million quarter run rate on those casualties looks fine on a go-forward basis, if that's. But if you're talking about materials and other, that, if you look at backwards on that, you'll if you take an average over a year or two and about $100 million is about what the quarterly run rate is on that. 100, 102, something of that nature is what we guided to in the past on those kind of line items.
Jeff Kaufman (Analyst)
Okay, thank you. And then a tax rate question. You mentioned the $8 million related to the change in the North Carolina rates, but it seems like the tax rate guidance going forward is about 100 basis points below what we were thinking, 37%, going to 36. Should we think of 36 as kind of the tax rate that we should use going forward, or is there a reason that would be a different number?
John Rathbone (CFO)
No, I think it would be back to a more normalized rate because this year we did have those unique items. And, you'll remember the beginning of the year, we did have some tax benefits from the research and development credits that came in.
Jeff Kaufman (Analyst)
Mm-hmm. All right.
John Rathbone (CFO)
The short line credits that will likely expire.
Jeff Kaufman (Analyst)
So when we say normalized, are we thinking 37-38 or more than 36.5?
John Rathbone (CFO)
Yes.
Jeff Kaufman (Analyst)
Okay. All right. Very good. Well, congratulations. All my other questions have been answered. Thank you.
John Rathbone (CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of David Vernon with Bernstein Research. Please proceed with your question.
David Vernon (Managing Director and Senior Analyst)
Hi, good morning, and thanks for taking the question. Don, with the, with the export coal rates through Lamberts Point, the met, are you seeing continued pressure on that due to the changes in the market, or is that rate sort of holding firm as we kind of move through the quarter?
Don Seale (CMO)
Sequentially, second quarter to third quarter, stable. We still see year-over-year compression that we've talked about in the past. It's not the same market as it was in 2011 or even early 2012.
David Vernon (Managing Director and Senior Analyst)
But sort of holding in?
Don Seale (CMO)
Holding in is a good way to put it.
David Vernon (Managing Director and Senior Analyst)
That is, that is great. And then just as a second follow-up question, this is like, I think the second year now where we haven't had many utility contracts coming up, and I guess I wanted to, to get an understanding, what's the average duration on the utility customers that you guys have, as far as their contract terms?
Don Seale (CMO)
They range from 3-5 years, but I will tell you our larger utilities are 5 years.
David Vernon (Managing Director and Senior Analyst)
Larger utilities are five years?
Don Seale (CMO)
Right.
David Vernon (Managing Director and Senior Analyst)
Okay. So does that imply that we'd see a pickup in the rate of renewals coming up next year, or?
Don Seale (CMO)
Not in, not in 2014.
David Vernon (Managing Director and Senior Analyst)
Not in 2014.
Don Seale (CMO)
No.
David Vernon (Managing Director and Senior Analyst)
Okay. All right, thanks!
Don Seale (CMO)
Thank you. Welcome.
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)
Yeah, thanks. Would you please share the proportion of coal volume that's hauled from each geographic region, like you did in the last call?
Don Seale (CMO)
Illinois Basin is growing at the fastest pace. It, in the quarter, was 16% of our tonnage. PRB is still around 18% of our tonnage. Central App is still about 38, and Northern App is the balance.
Keith Schoonmaker (Director of Industrial Equity Research)
One other question, a mix question. Can you comment on how changes in mix in over the past few years are affecting the ratio of loaded to total miles? It seems like it's been pretty flat in the last three years, but would you expect a mix that is leaner in coal and richer in intermodal to perhaps present opportunities to increase this ratio?
Don Seale (CMO)
Well, as we transport more crude oil and more ethanol and that type of product that moves in a private tank car, as you know, all of those movements are 100% empty return. We price that accordingly, because it's a private asset to return that car set back to the origin. So when you look at loaded to empty miles in our network, you will have to take into account the growth of that type of traffic over time.
Keith Schoonmaker (Director of Industrial Equity Research)
Okay, so some of those tank car moves are dominating the increase in intermodal in this ratio?
Don Seale (CMO)
Well, the empty to loaded miles-
Keith Schoonmaker (Director of Industrial Equity Research)
Yes.
Don Seale (CMO)
- are the total. Now, if you look at intermodal and drill just into that segment, obviously, we monitor that very closely, and generally, our loaded to empty mile ratio is improving.
Keith Schoonmaker (Director of Industrial Equity Research)
Thank you.
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 morning. Hey, Mark, I may have missed it, but can you give us an update of where you are exactly on the Movement Planner rollout specifically? And has that technology been a driver of the productivity improvements recently, or is that more of something we see in 2014-2015?
Don Seale (CMO)
Movement Planner has been implemented now on 4 of our 11 divisions, and we are ramping it pretty quickly now. We will get it fully implemented in 2014, optimistically, midway through the year, but certainly by the end of the year. And so at this point, I think we're seeing some of the benefits, even though it's pretty early on in the game. We're seeing some of the benefits of Movement Planner. We think we're seeing some of our velocity improvement on account of that technology, but more to come.
Tyler Brown (Associate VP of Investments)
Okay, perfect. And then, Don, just changing gears real quick. Do you, by chance, have the size of the EMP fleet? And do you have any expectations on whether that pool is going to expand or shrink next year?
Don Seale (CMO)
As Wick indicated, we haven't announced our capital budget. We will be reviewing that with our board in November. The EMP fleet overall is in the range of 30,000 units. We do expect it to expand.
Tyler Brown (Associate VP of Investments)
Okay, perfect. And just real quick, is there a big difference in ARPU between a private box and a public pool box?
Don Seale (CMO)
If it's a private box, obviously, that's taken into account where we don't have the asset cost associated with it, so there would be a delta, but I wouldn't say that it's a significant differential in the domestic market. It's more pronounced on the marine containers, which are 40-foot TEUs versus 53s in the domestic market.
Tyler Brown (Associate VP of Investments)
Okay, perfect. Thank you.
Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, we've come to the end of our Q&A session. Mr. Moorman, I'd like to turn the floor back over to you for closing comments.
Wick Moorman (Chairman and CEO)
Well, thanks, everyone, for the questions and for being with us this morning. We look forward to talking to you and viewing our fourth quarter results in January. Thanks.
Operator (participant)
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.