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Operator
Greetings and welcome to the Norfolk Southern Corporation third quarter earnings conference call.
At this time, all participants are in a listen-only mode.
A brief question and answer session will follow the formal presentation.
(OPERATOR INSTRUCTIONS).
As a reminder, this conference is being recorded.
It is now my pleasure to introduce Norfolk Southern's Director of Investor Relations, Ms.
Leanne Marilley.
Thank you Ms.
Marilley, you may begin.
Leanne Marilley - Director - IR
Thank you and good morning.
Before we begin today's call, I would like to mention a few items.
First, we would like to welcome you to our third quarter earnings conference call.
We remind our listeners and Internet participants that the slides of the presenters are available for your convenience on our website at NSCorp.com, in the Investor section.
Additionally, MP3 downloads of today's meeting be will available on our website for your convenience.
As usual, transcripts of the meeting also will be posted on our website and will be available upon request from our corporate communications department.
At the end of the prepared portion of today's call, we will conduct a question and answer session.
At that time if you choose to ask a question, an operator will instruct you how to do so from your telephone key pad.
Please be advised that any forward-looking statements made during the course of this presentation 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 the word 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.
Now it is my pleasure to introduce Norfolk Southern's Chairman, President, and CEO, Wick Moorman.
Wick Moorman - President - CEO
Thank you, Leanne and good morning everyone.
It is also my privilege to welcome all of you to our third quarter 2008 analyst conference call.
We have with us several members of our management team, including our Vice Chairman and Chief Operating Officer, Steve Tobias, along with Don Seale, our Executive Vice President and Chief Marketing Officer, and Jim Squires, our Executive Vice President of Finance and Chief Financial Officer.
We are also joined by Rob Kesler, our Vice President of Taxation, Bill Romig, Vice President and Treasurer, and Marta Stewart, our Vice President and Controller.
When we last met I indicated that we were optimistic that the momentum we had generated in the first half of the year would continue into the third quarter.
Today, I'm pleased to report that that momentum did remain strong as Norfolk Southern delivered record-breaking revenues, profitability and earnings, along with a best-ever operating ratio in the face of the most volatile economic period in recent history.
Our railway operating revenues were the highest ever, up 23% over last year.
We also posted best-ever operating profit, up 31%, and record net income of $520 million or $1.37 per diluted share, up 35% over the comparable period last year.
The operating ratio was a record low, 69.1%, a 2 percentage point improvement and the first time in our history that we have reported a quarterly operating ratio in the 60s.
Most importantly, our safety and service metrics remained at industry-leading levels, even in a quarter punctuated by several weather challenges.
Our strong performance and improvement in efficiency demonstrates that we are continuing to provide the service our customers need to compete in this turbulent economy.
Our results are also a confirmation of the strength of our balanced portfolio of businesses, as we were able to largely offset persistent volume pressures in housing-related and automotive traffic in the quarter and maintain the pricing patterns of the first half of the year.
To give you more detail, I'll now turn the program over to Don Seale, who will walk you through our third quarter results from a revenue and volume perspective.
Jim Squires will follow with the financial overview and then I will return with some closing comments about our longer-term goals and economic outlook before we take your questions.
Don.
Don Seale - EVP - CMO
Thank you, Wick and good morning, everyone.
Despite ongoing weakness in automotive, housing, and retail sectors of the economy, third quarter revenue reached a new record of $2.9 billion, up 541 million or 23% over the third quarter of last year.
The primary drivers for these record results were improved pricing, higher fuel revenue, which included a favorable lag effect in crude oil prices, and solid transportation service across our diversified business base.
Within the major business sectors, merchandise revenue increased by $167 million or 13%, with record revenues attained by agriculture, metals and construction, paper and chemicals.
Coal revenue was $298 million higher than last year, an increase of 52%, and a new quarterly record.
Revenues were up $76 million or 16% for Intermodal, also a new quarterly record.
As noted in Slide three, revenue per unit was an all-time high as well, reaching $1,527 for the quarter, as each of our business groups achieved record performance.
We have now produced six consecutive years of revenue per unit growth.
Of the 24% RPU growth in the quarter, approximately 60% was due to higher fuel surcharge revenue.
Strong repricing activity and higher contract escalators accounted for the remaining RPU growth, partially offset by a negative mix affect of $25 million due to higher volumes of coal versus lower volumes of higher RPU merchandise traffic.
And coal's revenue per unit for the quarter was supplemented by a $22 million gain due to a contract volume shortfall payment and increased billing as a result of our new coal inventory management system.
Obviously, length of haul and mix of commodities have an implication for revenue per unit as well.
For the quarter, revenue ton miles grew 2.3% compared with a 1% decline in volume, reflecting higher shipments of longer haul bulk traffic, which as you know contributes to overall pricing yield.
Solid and consistent service across our network is also a driver of our capability to improve price and yield.
In that regard during September, we completed the tabulation of our 2008 customer survey.
This latest survey showed a 22% improvement in our customers' perception of Norfolk Southern's overall value for the dollar based on higher marks for service, ease of doing business and value of our service versus trucks.
These improved customer service indicators tell us clearly that the value proposition for our service performance continues to move higher in today's workplace.
Now, turning to volume, on slide four, the weakened domestic economy continues to impact our shipments, which fell 1% in the third quarter.
The performance of the International economy provided some offsets, as our overall export volume grew by 11%, offsetting a 13% decline in import traffic.
Agricultural shipments set another quarterly record, while metals traffic also posted a solid gain.
Intermodal volumes improved modestly year-over-year as increased domestic traffic offset weaker International volume.
Coal tonnage reached a quarterly record due to robust shipments to the export and domestic metallurgical markets.
Transitioning to the specific business sectors, as shown on slide five, coal revenue reached $876 million, up 52% over the third quarter of 2007 and 13% higher than the previous record set in the second quarter.
Revenue per unit increased by $588 per car, or 43%, due primarily to pricing gains, higher fuel related revenue, and the one-time adjustment of $22 million in the quarter that I reviewed a moment ago.
And volume increased by 6% as we reached our highest tonnage quarter ever at 49.7 million tons and second highest carload quarter as well.
Looking at the individual coal markets, as shown on slide six, export carloadings were up 53% over the third quarter of last year.
Global cooking coal supply continues to be constrained by Australia's port and rail capacity issues.
In addition, China's near-record level coke prices have kept coal demand high in Europe.
As a result, volume through Baltimore increased by 131% and Lambert's Point volume increased to 40%.
Carloadings through the Lambert's Point coal piers exceeded 2007 year-end volume on September 6, and is now almost 12% higher than full 2007 year-end volumes.
As I presented to you last year quarter, despite these high volumes, additional capacity exists at our Pier Six Terminal in Norfolk to double the current throughput if coal supply and demand should reach that level.
Turning to slide seven, third quarter utility volume was flat compared to the same period in 2007.
Utility volume in the northern half of our service territory was up 2% despite supply constraints in the Central App coal fields.
Longer haul Colorado coal was handled to several eastern utilities, supplementing tight supply from Central App origins.
Third quarter utility growth was further limited by coal production problems at several mines in the Monongahela district.
Volumes were also impacted as higher export demand reduced coal availability for domestic customers.
Looking at the current stockpile situation, coal stockpiles at our southern utilities are below target levels going into the winter season, while stockpiles in our northern service territory are approaching normal targeted levels for this time of the year.
Finally, our domestic Met, Coke and Iron Ore volume was up 6% due to the startup of production at the recently expanded Haverhill, Ohio Coke plant and higher coal shipments to Clarendon, Pennsylvania.
And Industrial coal volume declined by 4% due principally to weaker demand and strong competition from exports for available coal supply.
Turning to slide eight, I will take a moment to comment on some key productivity improvements within our coal network.
As pictured here, we continue to replace older, lower-capacity coal cars with new composite high-capacity equipment.
As a result of this ongoing transition, we were able to reach a new payload record of 110.2 tons per car during the quarter and a 6% gain in tonnage, with only 5.5% more carloads.
We also continue to increase the use of distributed power on heavy tonnage coal trains, which reduces over the road transit times and eliminates the need for pusher crews and power.
And we are realizing added productivity improvements with 600 coal cars now equipped with ECP brakes.
This braking system allows heavy coal trains to operate at normal track speeds for longer periods of time, which in turn reduces cycle times.
These types of productivity initiatives, along with the scheduling of our coal network service, have resulted in a 9% improvement in transit times across all major coal lanes from January through September of this year.
And that's on top of a 23% improvement realized in 2007.
Clearly, these faster transit times when coal volumes are at record high levels are indicative of a fluid rail network with capacity for growth and improved customer service ahead.
Now turning to Intermodal business, as shown on slide nine, Intermodal revenue reached $560 million for the quarter, up $76 million or 16%, while volume was flat versus third quarter of 2007.
Strong domestic volume offset losses in our remaining lines of business.
Record revenue per unit of $708 was driven by increased fuel surcharge revenue and improved pricing.
In addition, a more favorable traffic mix contributed to the gains as high-rated IMC LTL volume increased, while volumes in lower revenue per unit Ocean Containers declined.
Lower rated International empty revenue movements were down 17,000 loads for the quarter.
Looking at the market segments as depicted on slide ten, domestic Intermodal volume increased by 18%.
Within this market, local NS direct volumes were up 26% as highway conversions accelerated in the quarter.
Early Crescent Quarter traffic gains and improved services contributed to this local growth, which in total represented three quarters of the overall domestic unit increase.
As I've previously indicated to you, our local conversion strategy is focused on both third-party shippers and beneficial owners in the heavy volume truck load market east of the Mississippi River.
More than ever, beneficial owners in this market are reviewing ways to reduce their carbon footprint, while realizing the efficiency of Intermodal versus truck load service.
LTL volume also saw a substantial gain in the quarter and was up 25%, due primarily to new business within our local network.
This gain partially offset a decline in UPS volume within the premium segment, which was down 2% for the quarter.
Finally, Triple Crown volume declined 5% due to significant cuts in auto production.
Now turning to slide 11, revenue for our Merchandise business sector reached $1.46 billion, up $167 million or 13% over third quarter of last year.
Improved pricing and higher fuel revenue resulted in record revenue per car of $2,232 per unit, which is an increase of $366 or 20% over third quarter 2007.
Volume declined by 6%, driven by a 30% reduction in automotive volume and continued softness in the manufacturing and housing sectors of the economy.
Looking at our individual merchandise markets on slide 12, agricultural products continued to produce revenue and volume records.
Ethanol lead growth in this sector, improving 55% for the quarter, based on higher volumes to southeastern destinations.
Distillers Dried Grains, or DDGs, a derivative of ethanol manufacturing, grew 41% in the quarter.
We now serve 17 ethanol plants and 45 active ethanol terminals in our region, with 3 additional plants and 4 terminals scheduled to open over the next few months.
Our metals and construction sector reached record revenue as a 5% volume gain in our metals business effectively offset a 2% decline in construction materials.
This reduction was partially offset by a 14% gain in limestone shipments to NS-Served Coal Fired utility plants.
We now serve 18 power plants that are equipped with scrubber technology that will require scrubber stone going forward.
The improvement in metals volume was driven by a 23% increase in our scrap metals business.
Strong global demand resulted in increased East Coast export volumes of scrap.
Our paper business continues to feel the impact of the projected 30% decline in US housing starts.
Lumber volume fell 21% below third quarter 2007.
Printing paper volume declined due to a reduction in imports and [KLM] volume continues to be impacted by paper mill shutdowns over the past year, as well as weak demand for coated paper.
These volume declines were offset somewhat by a gain in pulp board due to increased export activity.
Record chemicals revenue was achieved despite a 5% decline in volume, as increased petroleum volume could not offset declines in the other chemicals markets.
Volumes were impacted by a plant closure in [Evancity], Alabama and production problems at another Alabama plant which jointly accounted for a 2000 carload decline.
Finally, we estimate the impact of Hurricane IKE to be over 1000 cars in the third quarter, with more than 800 of those shipments expected to be made up in the fourth quarter.
Now turning to automotive on slide 13, we see the continued impact of production cutbacks in this sector.
This unfavorable trend is expected to continue in the fourth quarter, and our volumes will be further impacted by the closure of General Motors at Doraville, Georgia near Atlanta at the end of September and the indefinite idling of the Chrysler St.
Louis South plant in October.
General Motors also recently announced the closure of its Janesville, Wisconsin assembly plant, along with the Moraine, Ohio assembly plant, both scheduled to close December 23, two years earlier than previously announced.
On a positive note beginning in the fourth quarter, Toyota will begin producing the new small car, Venza, at their Georgetown, Kentucky plant, and Honda will begin Civic production at their new Greensburg, Indiana plant.
We should begin handling rail shipments out of these two facilities by the end of the year or early 2009.
Now, in conclusion, faced with the current economic backdrop, we are somewhat cautious going forward.
As we have stated many times, our strong and balanced portfolio of businesses should continue to help us generate solid results during this prolonged downturn.
With this said, we expect to see further auto plant closures and manufacturing weakness along our merchandise network.
Much of these losses will be offset by project growth in scrubber stone, ethanol and biodiesel.
For Intermodal, we expect to see continued growth in our domestic market as we collaborate with truck load carriers, beneficial owners and third parties to convert traffic from road to rail.
These gains should more than offset weakness in import traffic.
We also expect our coal business to remain strong due to worldwide demand for US coal, and domestic metallurgical volume growth will be led by business from the expanded Haverhill coke plant.
And finally, we expect our service levels and overall value in the marketplace to continue to support pricing improvement through the next quarter and into the coming year.
Thank you for your attention and I will now turn the program over to Jim for our financial report.
Jim Squires - EVP CFO
Thank you, Don, and good morning everyone.
Let's start with our operating results on slide two of my presentation.
As Don described, railway operating revenues were $2.9 billion, up $541 million or 23%.
Also as Don mentioned, the quarter's revenue includes $22 million for one-time adjustments related to our coal business.
With respect to the timing effect of our fuel surcharges, as you know, many of our contracts have a 60-day lag.
Therefore, the quarter includes a $55 million favorable timing effect.
However, for the nine months, this lag affect is unfavorable.
Slide three shows you the corresponding operating expenses, which rose by 20%.
The resulting railway profitability of $894 million is another record-breaking quarter, and the $69.1 operating ratio is 2 points better than last year.
Slide four exhibits the year-over-year change by major expense category.
The largest increase was once again in fuel, which rose $185 million or 64% and has been a consistent theme in 2008.
Slide five breaks down the fuel expense components.
Consumption decreased slightly.
As you would expect, it was higher prices that drove the increase.
Delving deeper into the price analysis, slide six shows the components of diesel fuel price comprised of crude oil in green, other costs in gold.
These other costs include crack spread, transportation costs and availability premium.
What we see here is that while crude oil prices rose 57% compared to 2007, our other costs per gallon increased by 103%.
The result is that the average price per gallon rose 65%.
Some of this inflated spread in diesel fuel prices versus crude reflects supply constraints in the Gulf Coast region due to hurricane activity.
NS sources about 50% of its diesel fuel from the Gulf Coast market.
The next largest expense increase was in compensation and benefits, which rose $89 million or 14%.
Slide eight presents the major components driving this increase.
First, $28 million relates to the two lump sum payments that are in our new labor contract with our locomotive engineers.
This amount includes related payroll taxes.
The new agreement covers approximately 5000 employees and provides each engineer the opportunity for an annual bonus payment based on company financial and service performance metrics, and for the first time, his or her work availability.
Second, the accrual for incentive compensation increased commensurate with the strong performance reflected this quarter.
Third, increased wage rates of $18 million reflect higher contract labor rates.
Next, stock-based compensation rose $9 million in the quarter due primarily to an uptick in price as of September 30.
Finally, payroll taxes increased $6 million.
Slide nine depicts the $28 million or 7% rise in purchased services and rents.
This increase includes a mix of relatively small items, including increased Intermodal Terminal and Transportation operating costs, as well as increased professional and legal services.
These were partly offset by lower equipment rents.
A continued strong focus on asset utilization enabled a 10% decline in equipment rents.
The next largest expense increase was in materials and other.
which rose $19 million or 11%.
The primary components are higher maintenance-related material costs, including higher prices for materials, and the absence of a favorable 2007 adjustment.
And finally, depreciation expense increased by $7 million or 4%, reflecting continuing investment in our network and equipment.
Now let's turn to our non-operating items.
First, gains on property sales and investments were $20 million lower this quarter.
Second, synthetic fuel investments, the tax benefits for which expired at the end of 2007, contributed $18 million to the change.
Third, interest on tax deficiencies added $11 million to the change, as the IRS concluded its review of our 2004 and 2005 tax returns.
A note on interest expense on debt, since 98% of our debt is under fixed rates, we don't anticipate interest rate volatility to impact us.
Slide 13 depicts our pretax results.
Income before income taxes increased 36%.
Income taxes for the third quarter, as shown on slide 14, were $302 million, which compares with $219 million last year.
The effective tax rate of 36.7% compares with a rate of 6.2% in 2007.
The effective tax rate increase was largely due to the absence of synthetic fuel-related credits, offset by both an Illinois tax law change that increased deferred taxes by $19 million in the third quarter of 2007 and the tax benefit from the donation of a conservation easement for 12,000 acres in South Carolina.
The slightly lower effective tax rate this quarter compared to the second quarter relates largely to the conservation easement donation.
Slide 15 depicts our bottom line results.
Net income for the quarter was a record-breaking $520 million, an increase of $134 million or 35%.
Diluted earnings per share for the quarter was $1.37 which was $0.40 per share or 41% more than last year.
The greater percentage increase in EPS is reflective of our share repurchase program, which is updated for you on our next slide.
Third quarter share repurchases totaled 6.2 million shares and $405 million.
Over the past three years, we have repurchased 60.5 million shares for $3.1 billion.
As shown on slide 17, we will pay dividends approximating $1.1 billion to our owners for this three-year period.
When added to our share repurchase program, by the end of this year, we will have returned over $4 billion to our shareholders.
Thank you for your attention and I will now turn the program back to Wick.
Wick Moorman - President - CEO
Thank you, Jim.
Well, as you have heard, this is an exceptional quarter for our company.
As we said, our results continue to showcase our balanced portfolio of businesses, our superior service product and our ability to realize value from strategic investments in our franchise.
In wrapping this up, let me first say a couple of more words about service.
We had another good quarter for service delivery from a metric standpoint and our overall metrics improved year-over-year, although weather-related disruptions hampered some of our operations.
Our goal is always to offer a premium level of service to customers across our network, and we are focused across all facets of the enterprise to support that goal.
The purchase of additional locomotives and our decision to accelerate program track work earlier this year are but two examples of this effort to continually drive further operating efficiencies and deliver better financial results for our shareholders.
As Don mentioned, we track our customers' opinions of our service in an annual customer satisfaction survey, and the fact that we achieved across-the-board improvements in all major categories as well as overall performance is a great indication that our investments, hard work and focus are paying dividends.
Service improvement also lies at the heart of Track 2012, our longer range plan to take Norfolk Southern to the next level of performance and shareholder returns.
We continually strive to improve our service performance by intensively managing all of our assets -- people, infrastructure, equipment and information.
Because of the long lives of many of our assets and the time it takes to deploy capital, it is essential that we think in terms of where our business will be longer-term.
Track 2012 is the process that we have put in place to provide the road map for our company to continuously improve in these important areas over the next four years.
As part of the process, we set aggressive goals in terms of safety and financial performance.
And to achieve these goals we are focusing -- and Track 2012 is all about focus -- on the four keys to improving railroad performance, service delivery, along with our three major cost drivers, fuel consumption, asset utilization and work force productivity.
We have significant improvement projects underway in each of these areas.
Some are relatively short-term in nature and some will require more time, along with the introduction of new technology.
I will tell you that we are all very excited about these initiatives.
We have seen some early signs of success in areas like equipment utilization, as Jim mentioned, and I'm optimistic that you will be seeing even more improvement as 2009 unfolds.
Looking at the fourth quarter and on into 2009, we are obviously concerned, along with everyone else, about the economy.
While our portfolio of businesses will buffer us from much of the impact should the economy deteriorate further, we are making plans to ensure that we can react appropriately in that event.
As all of you know, we work diligently to ensure that our infrastructure assets and workforce are being maintained at the appropriate levels, and we are confident that we have the flexibility to respond to whatever economic conditions arise and still operate safely and efficiently at high service levels.
Looking at the longer-term, we believe that the fundamental drivers of our success over the past few years are still in place and that the rail industry and Norfolk Southern in particular have a bright future.
I'm confident that Norfolk Southern will continue to leverage our operational momentum, improve our service quality and pursue new business and margin improvement as we do, reaffirming our position as a benchmark company.
characterized by excellent performance and execution across the enterprise.
Thanks, everyone, and I will now turn the program over to the operator so we can begin the Q&A session.
Operator
At this time, we will be conducting a question and answer session.
(OPERATOR INSTRUCTIONS).
Our first question today comes from the line of John Barnes with BB&T Capital Markets.
John Barnes - Analyst
Good morning.
You first, Don.
In looking ahead as you discuss the various commodity types, you talked about some of the new production ramping up on the auto side.
But you then talked about just weakness in automotive.
Is there enough of an offset on some of this new business development that is coming on to the Norfolk Southern rail to offset the other weakness, or is the other weakness with the Big Three too much to overcome at this point, and therefore auto is going to be -- is going to be weak for the foreseeable future?
Don Seale - EVP - CMO
Good morning, John.
Certainly across all of our business, as Wick mentioned, the diversity of our business base, we will see the puts and takes.
But we will see volume somewhere around the level that we saw in the third quarter going forward, in our view.
With respect to automotive itself, the new production I mentioned with Toyota and Honda and a third production shift for Honda that will favor us that I didn't go into detail on will help us offset some of the plant closures, but it will not overcome the overall effect of those plant closures.
John Barnes - Analyst
Okay.
More specifically, in terms of the balance between your pricing gains and the volume levels, at what point -- we have obviously seen the rail sector as a whole has experienced some decline in total carloads over the last couple of years.
You have been feeling more of a freight recession, I think, between rail and trucks.
You have been feeling more of a freight recession than the actual economy showed for a couple years now.
At what point does volume begin to dictate what you can do on price -- I mean, legacy contracts notwithstanding and that type of thing?
At what point would you see enough of a decline in carloads where pricing gains would be much tougher to come by?
Don Seale - EVP - CMO
Well, John, at this point we continue to see a pricing environment for our service which continues to improve, and the value of that service in the marketplace continues to move up.
And we don't see any significant change in our price position going forward.
I mentioned our domestic intermodal conversions were up 18% in the quarter, 26% up within our local network.
And those are being done in a collaborative fashion with our motor carriers and IMC and beneficial and owner-partners.
And that tells us the value of what we are offering vis-a-vis the motor carrier, where, as you well know, most of the intercity freight in this country still dwells.
There is a large opportunity for continued upward pricing, as well as conversion of freight from road to rail.
John Barnes - Analyst
Okay, very good.
And then one question on wages and compensation.
I just want to make sure I understand that the $28 million paid during the quarter was one time.
That was a catch-up payment.
There is not any other lump sum payments to be made.
And then secondly, could you walk us through what to expect in terms of labor inflation for 2009?
Jim Squires - EVP CFO
Sure.
As you mention, the special BLE payments are a one-time phenomenon this year and very, very early next year, on January 1, in fact.
In terms of the inflationary impact of negotiated wage rate increases, the rate is at 3.5% per the collectively bargained arrangement for the industry.
So that's what you can expect in terms of contract wage increases.
Other elements of compensation and benefits obviously also have inflationary elements, but those are somewhat less predictable.
John Barnes - Analyst
And the 3.5% is across all of your Union agreements.
Don Seale - EVP - CMO
Yes, we'll look at that.
It's across all of the union agreements.
We think it is 3.5.
It varies by year.
We do have one year of 4 coming up.
But I think that may be the next year.
We will double-check that and let you know.
But it is in that range; it's between 3.5 and 4.
John Barnes - Analyst
Are there any other agreements outside of BLET that require any kind of makeup payment like this?
Don Seale - EVP - CMO
No.
The BLE, and then the recent agreement has been done.
The recent settlement of the machinists, which did not require a catch-up payment, really have concluded this round of collective bargaining.
John Barnes - Analyst
All right.
Very good.
Hey, nice quarter.
Thanks for your time.
Operator
Our next question comes from the line of William Greene with Morgan Stanley.
William Greene - Analyst
Good morning.
You had some positive comments and have had those in the past as well as about export coal and your conviction that the strength there can continue.
The financial markets would seem to disagree.
Can you talk a little bit about maybe how much is already contracted, where you have confidence in both the volume and the price for 2009?
Or what other items give you that kind of confidence?
Wick Moorman - President - CEO
Good morning, Bill.
We have visibility into 2009 with respect to the business we expect to handle into the export market.
And I would point that the EIA this year is projecting total US export coal to be in the range of 84 million tons.
And their forecast -- based on the collective research that they do, their forecast for next year is somewhere in the range of 86 million tons, going up another 2 million tons.
But it is notable that metallurgical coal, which, as you know, is the majority of what we handle into the export market, is projected to grow another 4.5 million tons next year.
And that backdrop, as well as the visibility we have with our contracts and with the arrangements we have with transshippers as well as receivers, give us comfort that our [2000] numbers will look fine.
William Greene - Analyst
What percentage of the business is under contract on the Met coal side for you?
Don Seale - EVP - CMO
We reprice, as you know, our export coal every April.
And then we have some other arrangements that are beyond that.
But it is a year to year, April to April pricing scenario.
William Greene - Analyst
Okay.
And then when you look at the automotive business, what percentage of your total carload, so including that which you don't classify technically as auto, sort of the inbound or the outbound, what percent of the total volume is auto?
Don Seale - EVP - CMO
Obviously, Bill, the automotive market impacts paints, pigments, plastics, chemicals of some sort.
But we don't track it that way.
We look at auto parts and finished vehicles.
And certainly as plants are closed, we are impacted with inbound auto parts as well as outbound vehicles.
But I think the automotive impact in the economy is very visible.
It is playing out and I'm not sure it has a lot more to play out after the kind of production cuts we have seen in the past year and the plant closures.
So while it has impacted us, I don't think we will continue to see a comparable level of impact coming into the next year.
William Greene - Analyst
All right.
One last question, if you look at carloads being down, RTMs being up, how do you think about the capacity utilization of the network?
How full are you?
Wick Moorman - President - CEO
Well, I think we have capacity across our network, and clearly, as RTMs go up, that's a measure of efficiency.
That means we are able to move more tons on a given train and more tons per car, and that is increasing capacity in the network.
So that is a very positive sign of efficiency for us.
If you look at our network right now, we are clearly running at volumes that are below where they were a couple of years ago, and we were providing a high service level then.
So we think we have room to grow, and we are -- we don't know when it will come, but we know growth will come and we will be ready for it.
William Greene - Analyst
Thanks for your help.
Operator
Our next question comes from the line of Jason Seidl with Dahlman Rose.
Jason Seidl - Analyst
Good morning, everyone.
Getting to the Crescent Quarter comments about taking freight off the highway system, at what level of WTI do you think that becomes difficult going forward?
Wick Moorman - President - CEO
We don't think that, barring WTI going to levels where it was six or eight years ago, that that's really a factor.
We are seeing -- even as oil prices have come down, we are seeing the momentum continue in terms of domestic freight wanting to move to rail.
When we talk with our trucking partners, they are telling us they are committed to making that move because over the long-term, they see energy prices as continuing to go up and they see a lot of other advantages to rail in terms of sustainability, which is important to a lot of their customers as well.
So we felt for a while that is continuing; that would be a trend.
I will tell you I think when diesel did spike a little while ago, that provided a little more impetus.
But we think the impetus will continue.
Jason Seidl - Analyst
With that spike, did you lose any business back when it came down, or because the rail service has been more consistent, did you maintain it?
Wick Moorman - President - CEO
No, our service has remained very good and we have seen the volumes continue to grow, even as we have seen diesel fuel prices start to soften a little bit.
I think that that is a long-term very positive trend for us, and I think as long as we can maintain the superior service levels that we are offering, we are going to continue to convert traffic to the rail.
Jason Seidl - Analyst
Great.
Let me hop to export coal in terms of if you are projecting that to grow still next year off of record levels this year, all things being equal, should we expect a fairly good pricing environment for that come April?
Don Seale - EVP - CMO
We expect pricing in April will continue to be favorable.
Jason Seidl - Analyst
Okay.
Thank you for the time, as always, gentlemen.
Wick Moorman - President - CEO
Thank you, Jason.
Operator
Our next question comes from the line of Ken Hoexter with Merrill Lynch.
Ken Hoexter - Analyst
Good morning.
Jim, can you clarify for a quick second on the average revenue per car.
I know Don was going over some numbers before with if you kind of pull out mix and then the $25 million for high coal volumes and then $22 million for coal gain.
If you strip all that out and the 60% that was due to fuel surcharge, what were you looking at on a pure pricing, same-store sales basis?
Don Seale - EVP - CMO
Ken, we don't track on a same-store sales; we don't publicize that type of a number.
But our yield was 9.5% in the quarter.
Ken Hoexter - Analyst
I got the 9.6%.
Is that relative to, you know, in quarters past you've targeted I believe it was 4% entering this year, was kind of the pure pricing rate you were aiming for.
Don Seale - EVP - CMO
Well, we have announced 7%, 9% and now 9.5%.
So I think you need to look at that trend, Ken.
Ken Hoexter - Analyst
Okay.
I just wanted to make sure those were the same numbers that you were referring to.
This morning, there was a decent size article in the Journal about farmers really cutting forecasts for grain production and looking at maybe delaying equipment sales.
What do you, Don, look for as far as the impact on the grain market -- or the ag market in total as you move forward?
Don Seale - EVP - CMO
Well, you know, ethanol is a big driver in agricultural rail shipments.
As I mentioned, our ethanol volume was up 55% and our revenues were up substantially higher than that.
And then the downstream products, the DDGs and inbound corn and other materials that are generated to haul as a result of that activity, the Federal Renewable Fuel Standards this year will generate about 9 billion gallons of ethanol.
That will increase as each of the years go forward, unless that 10% blend in gasoline requirement of the Federal Renewable Fuel Standards are modified.
And we don't see anything on the horizon at this point that would indicate a change in those standards.
So, I think one, corn production will continue to target that market.
And I think as far as food demand, that will continue to be a driver for plantings and production as well.
So we see good things ahead for the agricultural market.
Ken Hoexter - Analyst
I have a quick question for Wick.
Can you throw out some thoughts on the upcoming election, and maybe even drill down to what you think the Democratic view is of kind of coal burning and the prospects for growth of coal generation going forward?
Wick Moorman - President - CEO
That's an interesting question, but not one that I really think that we are prepared to speculate on right now.
Clearly, both political parties have transportation platforms.
We look at both of them.
We think that each probably offers some advantage to the rail business and maybe also poses some problems as well.
But we are just going to wait like everyone else to see how that plays out.
Ken Hoexter - Analyst
Can you at least maybe educate us as to some of the biggest risks on some of the platforms for volumes?
Wick Moorman - President - CEO
I don't know that it is part of either party's platform.
I will tell you, which we state all the time, that purely from a political/legislative perspective, we have the worries about some of the legislation in Congress that would re-regulate the industry.
That is something obviously that we are working hard to make sure doesn't happen.
So we always keep an eye, or maybe an eye and a half on some weeks, on Washington to make sure we are active and out presenting the story of why the railroad industry is so important to the economy.
Ken Hoexter - Analyst
Great.
Thanks, Wick.
Operator
Our next question comes from the line of Ed Wolfe with Wolfe Research.
Ed Wolfe - Analyst
Good morning.
Don, before you talked about some forecasts for export tons.
Clearly, the coal stocks aren't acting like those forecasts are real.
Can you talk a little bit about your visibility that is the backlog for export coal that the companies have actually signed up for under their multiyear contracts, the three-year deals you've talked about they have with the mines relative to your one-year deals?
Don Seale - EVP - CMO
Our export, as I mentioned, was up 53% in terms of carloads in the third quarter.
It was up 55% in tons.
Now, just to give you a little more color, I will tell you that it wasn't evenly distributed through the three months of the quarter.
Our export loadings accelerated in our portfolio in September.
And that continues in October, and based on the commitments that our receivers are telling us that they have with the transshippers, we are comfortable that the ongoing current trend in volumes on export will continue, with some upward trend going into 2009 as we move forward.
Pricing market, as I mentioned earlier, will continue to be favorable as we reprice.
We are already having those discussions with the transshippers and the receivers, and we will have that wrapped up by April 1 and effective April 1.
Now, the stockpiles, I think, Ed, you mentioned ,we are watching those more closely with respect to domestic utility stockpiles.
As I mentioned, in the north, we are approaching stockpile targets.
But in the southern portion of our system, it is still well below target, probably in the range of 6 to 10 million tons below target.
And coal supply has had an impact on that.
So we don't -- at this point, we don't see anything that indicates to us that we will see a material slowdown in current volumes of export coal.
Ed Wolfe - Analyst
Just to that level, obviously you have some visibility that we don't.
When you say we have visibility of it actually accelerating into ' 09, so it is fair to say you have at least three months' visibility.
Do you have six or nine months' visibility, based on some of these contracts in the backlog?
Don Seale - EVP - CMO
Yes, we do.
Ed Wolfe - Analyst
Can you give some sense of we have got --
Don Seale - EVP - CMO
What was the last part of your question, Ed?
Ed Wolfe - Analyst
Can you give some directional sense?
In other words, do you feel like you have 75% or 80% visibility three months into --
Don Seale - EVP - CMO
No, I won't try to dissect that precisely.
Ed Wolfe - Analyst
Fair enough.
Are there any new export deals from coal companies not under contract that you can see?
Don Seale - EVP - CMO
We are aware of some of that, and obviously I can't disclose that.
Ed Wolfe - Analyst
Is that in your expectations when you talk about visibility, or is that potentially extra?
Don Seale - EVP - CMO
That's in our expectations.
Ed Wolfe - Analyst
Just generally, more broad based, the 9.5% real pricing -- and obviously, we've seen that improve throughout -- as you think about next year in '09, is it not fair to assume 9.5 going in, obviously.
But what is a visibility to ' 09 kind of real pricing level?
Is it 4, 5 or closer to 9 again?
Don Seale - EVP - CMO
Well, we are going to reprice a little shy of 60% of our book of business -- in the first half -- about 58% of the total book will be repriced for the year, and about 60% of that will take place in the first half and the balance of the 40% of the 58% will be concluded in the third and fourth quarter.
We are well along into the pricing for the first quarter and the visibility is obviously very good there.
As I said earlier, we don't expect any material change in our pricing outlook.
Our service value and the value proposition in the marketplace in our eyes and based on our survey continues to move upward.
And so we see no change in our outlook with respect to pricing at this point in time.
Ed Wolfe - Analyst
Jim, just in terms of the incentive comp, how do we think about fourth quarter, assuming -- should it be a similar kind of level --?
Jim Squires - EVP CFO
I'm trying to recall the comparison in the fourth quarter of last year.
Generally speaking, you will, depending in part on the stock price performance in the quarter, tend to see some additional incentive compensation in the fourth quarter versus last year.
But of course, with the stock price trend for the quarter to date at least -- we don't know, of course, where it is going to close at the end of the quarter -- there could be some favorability in stock-based compensation, that component of compensation and benefits, versus last year.
Ed Wolfe - Analyst
Nothing gets re-set relative to what the goals were in third quarter?
It should be similar kind of goals you're trying to obtain and (inaudible) and so forth?
Jim Squires - EVP CFO
I would expect so.
We haven't actually -- our board has not actually set the performance criteria for next year's incentive compensation, but I think it would probably be similar benchmarks, similar targets to this year.
Ed Wolfe - Analyst
So you are saying '09 will be similar to '08.
I was just making sure fourth quarter wasn't re-set --
Jim Squires - EVP CFO
No.
Ed Wolfe - Analyst
One last kind of bigger question.
Wick, have you or anybody else had a chance to absorb the Safety Bill impact and look at, between positive training control, training, reduced limbo time, all of these different buckets, kind of where the biggest impact could be and how severe the impacts could be to earnings as you go out?
Wick Moorman - President - CEO
Well, we have clearly been watching this and thinking about it.
Steve and his team have been tracking the impacts very closely.
If you look at the various components of the bill, we don't think limbo time has a big impact at all on us.
The training provisions, I think, are things we are comfortable with.
Clearly, the big item in it is PTC, and we have been working for quite a while -- we, along with the other rails -- we have our own train-controlled pilot down in South Carolina.
We have made some significant breakthroughs, I think, within the past month.
You may have seen the press release we put out with the western carriers about the use of spectrum and interoperability.
I think that is important, because it's really set the stage for PTC to move ahead in a meaningful way across the country.
Interoperability has always been the thing we've had to achieve before it could move ahead.
Having said that, it is clearly an unfunded mandate, and something we are going to have to figure out how to pay for.
There are internal benefits, clearly, in terms of safety and operations.
But it is very unclear, in fact, I think, that has an adequate IRR.
In fact, I think it is fairly clear that it doesn't.
One of the things we will be pursuing with the industry next year with renewed vigor is our infrastructure tax credit, which is designed to mitigate the cost of positive train control, as well as additions to railroad infrastructure.
We think it is an important piece of the campaign for the infrastructure tax credit, the new PTC Legislation.
And I'm optimistic we will get something done there.
PTC's rollout for a major portion of the railroad has to be done by the end of 2015, and we will be digesting the financial impact of that and the capital requirements over the next couple of years.
Ed Wolfe - Analyst
Do you think there is a chance that in the new proposed stimulus package Congress is looking at that the tax credit bill could sneak its way in there?
Have you heard anything about that?
Wick Moorman - President - CEO
I don't know if there is any chance or not.
I think any time we hear something about a bill like that, we certainly have our folks in Washington advance that idea.
Whether there is any meaningful chance of that in this stimulus package they are talking about for the lame duck session, I do not know.
Ed Wolfe - Analyst
Thanks so much for the time, everybody.
Operator
Our next question comes from the line of Chris Ceraso with Credit Suisse.
Chris Ceraso - Analyst
A couple items.
Just a quick one on the coal.
Are there any limits beyond market forces that will affect your pricing for coal in the export market?
Don Seale - EVP - CMO
Limits beyond market forces?
Chris Ceraso - Analyst
i.e.
regulatory.
Don Seale - EVP - CMO
We don't anticipate -- we don't foresee any regulatory hurdles that would impact coal, certainly not visible in 2009.
Chris Ceraso - Analyst
Okay.
Can you comment at all on pricing in the Intermodal business?
Revenue per carload there grew slowest of all the other commodities.
Has there been any change, even at the margin, from quarter to quarter in terms of the competitiveness of trucks.
I know the volume is still strong and you are still converting from truck to rail, but has pricing held up as well?
Don Seale - EVP - CMO
Well, pricing continues to be stable.
I would not say it is not escalating at this point, but it is certainly stable.
Chris Ceraso - Analyst
Stable meaning you are growing it at the same rate or stable meaning that it flat?
Don Seale - EVP - CMO
Stable in terms of growing at the same pace that we did in the first three quarters.
Chris Ceraso - Analyst
Okay.
And then can you give us an update on the Heartland Corridor project?
Don Seale - EVP - CMO
It is moving ahead well.
We have work under way on 9 tunnels.
We are still projecting a completion in the first half of 2010.
We have -- thanks to a lot of hard work from our operating team in terms of planning for this -- really had no service issues at all even though there is a lot of train traffic and we are shutting it downing four-days a week for 10 hours to do the tunnel work.
We are very pleased so far with how that work is progressing.
Chris Ceraso - Analyst
If you can remind us, what sort of incremental volume do you anticipate relative to your Intermodal once this core door is up and running at full rate?
Don Seale - EVP - CMO
We certainly expect volume to grow in that corridor as volume increases, container volume through the Port of Hampton Roads increases..
As you know, we have the big new [Mares] terminal in operation here and it is beginning to ramp up.
Remember too, in addition to volume what Heartland Corridor is about service and operational efficiency.
We will take a full day in transit time out of our service between the Port of Hampton Roads and our new Intermodal facility, Rickenbacker Facility in Columbus, Ohio and we think that service advantage will be very important and the operational efficiencies we will achieve will drive the returns for the project.
Chris Ceraso - Analyst
Thank you very much.
Operator
Our next question comes from the line of Tom Wadewitz with JPMorgan.
Tom Wadewitz - Analyst
Good morning.
Congratulations.
Results obviously very impressive.
Let's see, I wanted to ask Don or Wick about coal yields.
I had a lot of yield questions.
I don't know if you mentioned this specifically on the coal yields.
Can you give us a sense of what on that line the breakdown would be between price and fuel?
Would it be similar to the 60/40 mix in the total yield?
Wick Moorman - President - CEO
It would be comparable and we had the favorable impact in coal of continued repricing of contracts that manifested itself in the third quarter as well and will going forward.
Tom Wadewitz - Analyst
If you take out the 22 million from the contract adjustment, it is like 40% yield growth and you are saying about -- you think about 60 of that is the fuel and 40 is pricing or is a lot more of that contract repricing?
Wick Moorman - President - CEO
No, I think that's a good ratio to use.
Tom Wadewitz - Analyst
What do you think about coal yields in 2009?
It seems like this type of pace is hard to imagine is sustainable but your comments have been pretty consistent you don't see a change in the pricing environment, any thoughts on that and in terms of how much of your coal book you would touch in '09 versus what you touched in '08?
Wick Moorman - President - CEO
In ' 09 we have a quarter of the coal book of business that will be -- 25% of the book that will be repriced in ' 09.
I will remind you as we have repriced coal, we have obviously brought the prices to the current market levels but we have addressed escalators as I mentioned in my remarks.
Those escalators are more robust reflecting today's marketplace.
Tom Wadewitz - Analyst
That's a favorable for coal pricing in ' 09 or you are saying you have pulled it forward and realized it in ' 08?
Wick Moorman - President - CEO
We have seen the positive impact of the escalators in ' 08 and as we reprice the available book we will continue to see the price improvement plus escalators continuing to reflect today's market?
Tom Wadewitz - Analyst
How much of the book, if you can remind me, how much of the coal book you repriced in ' 08?
Wick Moorman - President - CEO
I don't have that number right here handy but we can get that for you.
Tom Wadewitz - Analyst
Do you think it was a lot different than the 25% in ' 09?
Wick Moorman - President - CEO
Not really.
Tom Wadewitz - Analyst
Not really?
Wick Moorman - President - CEO
We will get you the specific number.
Tom Wadewitz - Analyst
Just one more.
Volumes have been weak for a while for the railroads and I guess you look at prior down turns and you don't typically see a period where rail volumes are down 10% or anything.
It is maybe 4, 5% when things are typically bad.
Wick or Don if we do have a recession that lasts a few quarters, bearing in mind you have growth initiatives, visibility on Ethanol and other things.
How bad do you think rail volumes for you could be in '09 if the economy is particularly weak?
Is it down 2 or 3 or 4 or 5?
Don Seale - EVP - CMO
I will tell you, Tom, that you have heard us say before our crystal ball is never particularly good and I would hesitate to put a number on it because no one knows exactly what this economy is going to do.
We went into the beginning of this year as you can remember thinking that because of our project growth that we might actually see volumes up a little bit.
We were surprised by the downturn in automotive traffic which has really driven our volume decline.
So next year we are just going to watch the economy with everyone else and see where it might go.
I think your point is well taken that we do have a lot of buffers in our mixture of businesses.
So we would hope we wouldn't see a radical decline in volumes but as to whether it is 1 or 2 or 3, I think that is purely a function of where this economy goes and we are like everyone else.
We are just kind of watching and -- our major focus here right now is to be ready to react to wherever the economy and our volumes go.
Tom Wadewitz - Analyst
Thank you for the time.
Operator
(OPERATOR INSTRUCTIONS).
Our next question comes from the line of Gary Chase with Barclay' Capital.
Gary Chase - Analyst
Good morning, everybody.
Don, I wonder if you can elaborate a little bit on the answer you were given to the last question.
I think you said you were addressing escalation clauses to make them more consistent with today's marketplace.
Should we be thinking that that is predominantly on the fuel side, i.e.
better fuel surcharge mechanisms instead of relying on I cast or enhancing the escalators to be more than we would normally expect?
Don Seale - EVP - CMO
It is the latter.
As you know we have developed fuel surcharge coverage that is fairly comprehensive across our book of business.
Our fuel has been there.
What I'm referring to are escalators that we are reflect today's transportation market coming off of a three or four-year deal, where the escalator might have been more modest in previous cycles..
Gary Chase - Analyst
Can you give us a sense of the magnitude of change on these?
Is it going from a couple of a percent to 4 or 5 or smaller than that?
Don Seale - EVP - CMO
I can't comment on the magnitude.
I think the sense you should take away from the discussion is that they reflect the current market dynamics as opposed to what might have been there two years ago, three years ago, four years ago.
We continue to see a migration of the value proposition for our service and we are tracking that very closely.
Gary Chase - Analyst
You are repricing to market and you have higher escalation in future years?
Don Seale - EVP - CMO
That's correct.
Gary Chase - Analyst
Also, I wondered if you could give a little more color -- I know you spent time on this as well.
Were there any particularly powerful or significant coal repricing in the quarter?
Pricing was solid across the board but that is the one place we were very surprised how strong things were, exclusive of the 22 million.
Were there any particular contracts there or is that the trend we can expect going forward?
Don Seale - EVP - CMO
As you will recall as we reported last quarter, export coal plays into that in terms of the length of haul.
We average about 444 miles per car on export coal and 280 for utility coal.
That factors into that.
The export pricing that went into affect this past April, April of 2008 , that factors into it and we had renegotiated utility contracts that went into affect in August which had a favorable impact in
Gary Chase - Analyst
Were those August re-negotiations were they a material part of it?
Don Seale - EVP - CMO
They were a part of the overall mix that I just mentioned.
Gary Chase - Analyst
One last quick question, the new auto business as you replaced some of the plants we were going to close down is that mix positive from a revenue per unit perspective, is that more profitable business?
Don Seale - EVP - CMO
That will be -- that will be good business for us and there are new products and products which hopefully will sell better in the current environment.
We think it will be positive with respect to volume and certainly positive with revenue per unit in contribution.
Gary Chase - Analyst
Thanks very much guys.
Operator
Our next question comes from the line of Randy Cousins with BMO Capital Markets.
Randy Cousins - Analyst
Good mornings, Jim, I think you mentioned in your remarks that the lag in the fuel surcharge was $55 million win in the third quarter.
Can you give us a sense of oil prices holding where they are, what the magnitude of the favorable variance would be in the fourth?
Jim Squires - EVP CFO
Depending on where oil settles this month, I think you will see another favorable lag affect in the fourth quarter calculated on the same basis as we calculated the 55.
Randy Cousins - Analyst
Are you saying it is another 55 or are you saying the methodology is the same?
Jim Squires - EVP CFO
Again depending on where oil settles this month, it will be at least that much.
Randy Cousins - Analyst
The other question I have is you guys have -- this is the best operating ratio you have ever had.
Congratulations.
When you look at that OR number, do you see that as sustainable or is that a flash in the pan caused by a confluence of sort favorable events, how do you think about that OR?
Don Seale - EVP - CMO
Well, we are very happy with it.
We have been posting operating ratios approaching that for some period of time and we had a sustained period of doing that back in the ' 90s.
I have said before, our longer-term goal is post operating ratios every quarter that begin with a six.
We are intent about doing that and that's why I talked about all the initiatives we have under way in track 2012.
Operating ratios vary by quarter because business conditions vary by quarter.
Our goal is to continue the operating momentum that we are showing and post lower numbers as time goes by.
Randy Cousins - Analyst
My final question, you guys -- gains on sale of property was a negative $20 million.
Do you have anything in the pipeline in terms of other property sales or given market conditions right now we should kind of model in very little from sale of properties?
Jim Squires - EVP CFO
We traditionally do sell some properties in the fourth quarter but the real estate market is soft so I think that was partly to account for the drag in other income from real estate sales this quarter.
It is inherently not smooth over the course of the year and you will see variability from quarter to quarter in that number.
Randy Cousins - Analyst
So the number in the fourth quarter should be better than the third?
Don Seale - EVP - CMO
It depends completely on what ends up closing.
We are like everyone else, we are constantly in the real estate market and some close in the quarter and some deals get put off another quarter.
It is not something -- we try to get -- we try to give folks a sense of what we think it will be on an annual basis but as Jim said it is not ratable in any way, shape or form.
We know the deals out there but we don't know what will close or what won't close yet.
Randy Cousins - Analyst
Thank you.
Operator
Our next question comes from the line of Arturo [Vernon] with [Maquria].
Arturo Vernon - Analyst
Can you coal miners can sustain the increases that we are seeing in the shipments, both for utilities for the export market?
Don Seale - EVP - CMO
Coal production obviously is a key component continuing to grow the business.
We have some additional supply that is on stream that continues to improve our coal supply.
One, Buchanan, the Consul Mine that was down part of last year is back up and doing quite well and we have two additional mines load outs, Mammoth and Page, both in West Virginia that are doing quite well.
That has supplemented the metallurgical coal as well utility coal that is originating on Norfolk Southern.
But, at this point we see fairly good prospects for continued production that we serve.
Arturo Vernon - Analyst
Thank you.
Question on Intermodal domestic.
It has held remarkable well, do you see any danger of a downturn as the economy softens?
Don Seale - EVP - CMO
Certainly we are watching consumer demand and transportation demand overall.
The true source of that growth in terms of our domestic Intermodal continues to be a very well planned conversion of highway freight to rail by major truckload carriers that we are partnering with.
Their class A truck sales are down, driver recruiting is flat and part of their overall strategy is to continue those conversions and we are working very closely with them.
We don't see that conversion opportunity shrinking materially because truck is such a large portion of intercity freight tonnage to begin with.
Wick Moorman - President - CEO
I think the best way to look at it is even if the number of trucks on the highway comes down it is still a target rich environment for the railroads.
Arturo Vernon - Analyst
That was my perception, just wanted to check in it.
And finally, a quick question on pensions.
How is your pension funding doing?
Jim Squires - EVP CFO
Well, like all pension funds invested in the equities market, ours has suffered in the last quarter, particularly in the last month or so.
It is definitely down.
Arturo Vernon - Analyst
Will that have any bearing on resourcing the outcoming quarters?
Jim Squires - EVP CFO
It should not, no.
Arturo Vernon - Analyst
Thank you very much.
Operator
We have no time for further questions, at this point I would like to turn the floor back to management.
Don Seale - EVP - CMO
Thanks for listening in.
Thanks always for your questions.
We look forward to talking with you again in the future
Operator
You may disconnect your lines at this time.
Thank you for your participation.