Norfolk Southern Corp (NSC) 2013 Q3 法說會逐字稿

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  • Operator

  • Greetings and welcome to the Norfolk Southern, 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.

  • (Operator Instructions)

  • 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, IR

  • 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 call represent our best good faith judgement 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 & 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, and (technical difficulty) over as CFO upon John's retirement on November 1. As per usual, Don, Mark and John will provide commentary in their respective areas and then we'll 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 inter modal 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 in $131 million, or 5%.

  • Merchandise and inter modal 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 (technical difficulty).

  • 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 a 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 will 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 - Chief Marketing Officer

  • Thank you Wick and good morning to everyone.

  • During the third quarter strong merchandise and inter modal 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 $133 million, or 11% and inter modal had a quarterly revenue record of $605 million which was up $38 million or 7% over last year.

  • Our coal markets continue 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 inter modal sectors, which offset negative mix associated with higher inter modal 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 $129, or 6% year-over-year due to pricing pressure in the export market and mixed changes in our utility network.

  • Now turning to total volume for the quarter, shipments increased by 4% due to gains in inter modal and merchandise, which offset a 2% decline in coal volume.

  • Inter modal 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 US seaboard market for both thermal and metallurgical coal.

  • And a weaker Australian dollar, now down 11% against the US 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 stockpile's 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.

  • And both domestic met and industrial coal shipments were off 8% percent and 5% respectively, as soft demand and excess inventories impacted both market segments.

  • In our inter modal 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 inter modal 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 inter modal 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.

  • And as you can see on this slide, our Crescent, Pan Am, Southern, and Meridian Speedway lanes continue 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, the new business and increased reduction at NS-served plants.

  • And the rebound in the housing and consumer products markets helped us increase both lumber and pulp board volumes by 7%, which partially offset a 13% decline in graphic paper.

  • Now concluding with our outlook, we see ongoing growth opportunity in inter modal 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 API 2 index continues to hover in the low $80 per ton range.

  • This is a price point at which US 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 US suppliers.

  • Finally, sluggish electricity demand and excess stock piles in the South, coupled with pressure from natural gas will challenge volumes into our utility plants.

  • On the upside, our outlook for inter modal 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 inter modal network.

  • And we will remain laser focused on delivering superior inter modal 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.

  • And lastly, our paper and lumber markets should continue to rise with the housing market offsetting weaknesses in graphic and printing paper.

  • Now I will summarize.

  • We expect our merchandise and inter modal 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 inter modal shipments will continue to be seen in overall revenue per unit trends.

  • Thanks for your attention, and I will 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 have seen an increase in our safety ratio, we are confident we are 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 operations, 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.

  • And moving on to terminal dwell, the other major component of network velocity, we continue to seek 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 are 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 inter modal 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% and 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.

  • Our network philosophy along with other productivity initiatives continue to drive operating improvements in a number of areas.

  • Against the 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 our re-crew 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 seven 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 graph across the top show the longer term declining trends in crew starts and re-crews 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 will now review our financial results for the third quarter.

  • Starting with our operating results, as Don described revenues for the order totaled $2.8 billion, up $131 million or 5%, as merchandise gains and inter modal 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.

  • Purchase services and rents increased $17 million to 4%, largely reflecting increased volume related activities.

  • These increases were partially offset by lower road rate prepare 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 to $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 nonoperating items, other income was down $3 million or 9% due largely to lower coal growths 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 nine months of 2013, we distributed $476 million in dividends and repurchased $564 million 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.

  • I will now turn the program back to Wick.

  • Wick Moorman - Chairman & 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 at 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 inter modal continued 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 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 are the best in the business, and I am confident in their ability to continue to drive even better results for our customers and our shareholders.

  • And 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 will turn it back over to the operator to field your questions.

  • Operator

  • (Operator Instructions)

  • Matt Troy, Susquehanna.

  • Matt Troy - Analyst

  • I had a question on pricing.

  • Specifically, we watched the rail's narrative on pricing go from market-based to inflation plus, to now you said equal or exceed rail inflation.

  • I'm just curious, in what instances do you decide that equally 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 a acceptable level to go forward or how do you just make that decision as you are parsing new business bids and deciding what is beyond inflation plus, versus what is beyond inflation equals?

  • Don Seale - Chief Marketing Officer

  • First I would emphasize that 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 pricing.

  • 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 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 - Analyst

  • So no change is essentially 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.

  • I just want you, again, to reiterate or frame your views there that you continue to price that business for an acceptable margin level that essentially -- what are the hurdles or the metrics when you are 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 margins in that business ex-operational improvement should hold the line or get better over time?

  • Thanks.

  • Don Seale - Chief Marketing Officer

  • That Intermodal continues to be a competitive market and we are competing with the highway predominantly.

  • 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 - Analyst

  • Congrats, John.

  • Operator

  • Allison Landry, Credit Suisse.

  • Allison Landry - Analyst

  • I wanted to ask about fuel during the quarter and if there was any lag impact benefit or negative.

  • John Rathbone - CFO

  • There was a $41 million negative lag impact for the quarter.

  • That compares with last year's quarter of $21 million lag effect.

  • Allison Landry - Analyst

  • Okay.

  • So as a year-over-year negative of about $20 million?

  • John Rathbone - CFO

  • Correct.

  • Allison Landry - Analyst

  • And 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 line does have some variability associated with our actuarial studies.

  • And it's one that's difficult to get -- 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, plus or minus, that should give you a good handle on that.

  • Allison Landry - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Bill Greene, Morgan Stanley.

  • Bill Greene - Analyst

  • 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 their that made that unusual or was it just all mix?

  • Don Seale - Chief Marketing Officer

  • 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 - Analyst

  • Okay.

  • Thank you.

  • And 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 quarter-over-quarter?

  • Is the fact that coal is now a smaller piece of the business and Intermodal bigger, should that mean 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 - Chief Marketing Officer

  • 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 are 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 are just seeing some substitution and replacement of commodities that we are transporting.

  • Bill Greene - Analyst

  • So the mix on a margin basis isn't really that different, given what you've been able to do on the costs?

  • Don Seale - Chief Marketing Officer

  • 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 - Analyst

  • Okay.

  • Fair enough.

  • Thanks for the time and best of luck, John.

  • Operator

  • Chris Wetherbee, Citigroup.

  • Chris Wetherbee - Analyst

  • Maybe a question, Mark, on the cost initiative side.

  • You said that you are 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 initiatives, does it appear that you have equal opportunities as you move into 2014?

  • Are you going to be able to get 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.

  • Think about things like LEADER, that is less than halfway rolled out, we will be working on that for 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 will be working on the rest of this year and next year.

  • Chris Wetherbee - Analyst

  • Okay.

  • And just a follow-up on the headcount side, and I apologize if I missed it.

  • Can you give us a rough estimate 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 as you see year-over-year just on the operations side, we have reduced about 4% in the last 12 months, 4.1% to be exact.

  • And as we go into 2014, we're going to continue to make reductions.

  • And again, it will be incremental, but we are looking at a reduction of at least several hundred people through attrition throughout the course of next year.

  • Chris Wetherbee - Analyst

  • That's great.

  • Thanks very much for the time.

  • I appreciate it.

  • Operator

  • Tom Wadewitz, JPMorgan.

  • Tom Wadewitz - Analyst

  • I think a follow-up for you, Mark and I've got to say it's impressive performance on the reduction crew starts with the volume growth.

  • How do you think about the constraints on that?

  • I know you touched on this a little bit on headcount next year.

  • But if volumes are up another 4% next year, can you reduce crew starts another couple percent?

  • It's a pretty wide and impressive gap.

  • Or do you start to hit some train lane considerations or other factors?

  • Mark Manion - COO

  • Well if volumes are up, that will be great.

  • We will 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 yards where we are doing a better and better jobs getting trains out on time, not having the delays and the re-crews that would otherwise take place.

  • We've got our Belleview project that is going to be coming into its own.

  • That builds-in efficiency.

  • So, we are continually taking time out of schedules.

  • That has an effect more efficiency.

  • So when you put all that together, we think we will continue to be favorable on the crew start size -- side, but again it has everything to do with volume and we will take as much volume as we can get.

  • Tom Wadewitz - Analyst

  • Okay.

  • Great.

  • I appreciate that.

  • And a question on coal.

  • What -- I don't think that you specified, maybe I missed it.

  • How big was the impact from liquidated damages in third quarter, you know, absolute level of damages and the year-over-year.

  • Is that something that kind of goes away fourth quarter or next year, or does that persist?

  • Don Seale - Chief Marketing Officer

  • Tom, as we stated previously, there was no material liquidated damages accrued in the third quarter.

  • Tom Wadewitz - Analyst

  • Okay.

  • Nothing this year, nothing meaningful from last year?

  • Don Seale - Chief Marketing Officer

  • No.

  • Tom Wadewitz - Analyst

  • Okay.

  • Great.

  • Thanks for the time.

  • Operator

  • Scott Group, Wolfe Research.

  • Scott Group - Analyst

  • Don, you talked in one of the earlier questions about how you think pricing is going to 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.

  • 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 - Chief Marketing Officer

  • We believe we are 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 - Analyst

  • And are you talking from a pricing perspective or a total revenue perspective when you say coal at the trough?

  • Don Seale - Chief Marketing Officer

  • The total revenue perspective and a revenue per unit perspective.

  • Scott Group - Analyst

  • Okay, great.

  • And just second question on the Crescent Corridor, 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 have utilized so far and do you have any views on kind of how much additional you are planning for in terms of growth next year?

  • Don Seale - Chief Marketing Officer

  • We are in the first inning of our growth plan for the Crescent Corridor.

  • And we identified well over 1 million loads in the initial approach for Crescent.

  • And we are on track, but we are in the first inning of that.

  • Scott Group - Analyst

  • Why do you think we are only seeing single-digit growth on that corridor if it's brand-new?

  • Don Seale - Chief Marketing Officer

  • We are being judicious with respect to the business that we are seeking and gaining.

  • We have made investments in that Corridor, and our objective is to generate sufficient returns on those investments.

  • Scott Group - Analyst

  • Thanks a lot for the time, guys.

  • Operator

  • Justin Yagerman, Deutsche Bank.

  • Justin Yagerman - Analyst

  • I wanted to dig in a little bit on the outlook for coal here and get a sense, your competitors 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 I wanted to get your thoughts on how you think about that?

  • When you look ahead to 2014, how much of your utility business is going to be repricing where you have an opportunity to relook at guaranteed minimums and pricing?

  • Don Seale - Chief Marketing Officer

  • With respect to the first part of the question, fixed and variable, we continue to have dialogues 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.

  • Also we're finding our utilities to be interested, but not overwhelmingly interested in the concept.

  • So we are having dialogues, but I would 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 are 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 results on that in the January call.

  • Justin Yagerman - Analyst

  • And looking out to 2014, where was that?

  • Don Seale - Chief Marketing Officer

  • 2014, that includes that 5% that we are 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 for the contractual terms.

  • Justin Yagerman - 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 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?

  • Don Seale - Chief Marketing Officer

  • That's a negative mix.

  • As we have 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 that 50/50, was 54% north and 46% south.

  • So we had a negative mix effect within that utility market.

  • Justin Yagerman - Analyst

  • So the sequential RPU in a favorable mix that would have driven mix in response to an earlier question, was pretty much solely on th export side or was there something else?

  • Don Seale - Chief Marketing Officer

  • That is correct.

  • The favorable Lamberts Point export traffic which was up and Baltimore traffic shorter haul exports down, we had a positive mix effect on export business, which was up 3% in total.

  • Justin Yagerman - Analyst

  • That's very helpful on a clarification basis.

  • Last question, and I will turn it over.

  • On the Intermodal side, just piggy backing on what Scott was asking before, we saw decent volume numbers compared to past quarters out of your competitor.

  • Are things more competitive on the domestic Intermodal side in the East than we have seen in a while?

  • As they have gotten up to a 90% on the double stack and maybe starting to challenge you guys where you've been more dominant in many of these lanes?

  • Don Seale - Chief Marketing Officer

  • We see no real change.

  • We are 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 - Analyst

  • Great.

  • Thank you so much for your time.

  • Operator

  • Walter Spracklin, RBC Capital Markets.

  • Walter Spracklin - Analyst

  • My question is kind of a follow-up on the Intermodal pricing.

  • I believe it was you Wick, or perhaps Don that mentioned you were trending negative 1% in Q2 and then switched to positive 2% in the Q3.

  • 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 in the backdrop of a weaker economic environment or what have you or to drive truck volume over onto your rail network.

  • Is the shift from negative 1% to plus 2% a change in pricing philosophy and 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?

  • Don Seale - Chief Marketing Officer

  • 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 - Analyst

  • Okay.

  • And just to confirm here John, did I hear you say there was an $8 million one-time tax benefit in the quarter, in third quarter 2013?

  • John Rathbone - CFO

  • Yes.

  • And that's related to North Carolina reduced their tax from 6.9% to 6.25% over a two-year period.

  • And that's the reduction related to deferred taxes on that recognition in the balance sheet of those deferred tax benefits that we picked up.

  • Walter Spracklin - Analyst

  • And Don, I don't know if you mentioned the split between met and utility on your export side in the quarter, roughly?

  • Don Seale - Chief Marketing Officer

  • It was 79% met, 21% thermal.

  • Walter Spracklin - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • Ken Hoexter, Bank of America.

  • Ken Hoexter - Analyst

  • 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?

  • Don Seale - Chief Marketing Officer

  • Our Lamberts Point Port of Norfolk coal was strong in terms of the quarter for expert 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 out of Central App continuing to be in demand in China during the quarter.

  • And what was the second part of the question?

  • Ken Hoexter - Analyst

  • Just your thoughts on the export market in 2014?

  • Now that you have seen this -- (multiple speakers).

  • Don Seale - Chief Marketing Officer

  • It's a mixed bag, it's very murky.

  • The thermal coal as I mentioned, is subject to load forces with an API 2 in the Europe that is too low, versus the cost structure for US 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 less than encouraging.

  • Ken Hoexter - Analyst

  • Great.

  • And if I can get my follow-up on Intermodal, 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 when do you unleash that -- is that just JB 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.

  • Don Seale - Chief Marketing Officer

  • We are 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 - Analyst

  • Great.

  • Appreciate the time.

  • Operator

  • Brandon Oglenski, Barclays.

  • Brandon Oglenski - Analyst

  • If can follow-up from Ken's question there on the new lane for Intermodal.

  • Along the lines of efficiency gains -- maybe this one is 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?

  • Mark Manion - COO

  • We've got plenty of room to grow, if that's the question, in those Intermodal segments, all of them.

  • Brandon Oglenski - Analyst

  • 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?

  • Mark Manion - COO

  • This is a something that continues to ramp over time and there is really two pieces to it.

  • One is filling up the train size, and then as it necessitates, we will add actual trains to those corridors.

  • Brandon Oglenski - Analyst

  • And from a capacity perspective right now, where would you put available capacity in your network?

  • Mark Manion - COO

  • A lot.

  • I don't have a percentage for you, but we've got a lot of room to grow.

  • And you've got to think in terms 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 chokepoints or potential chokepoints.

  • So we're staying ahead of that and so between a pretty robust infrastructure to start with, as well as improvements throughout the years, there is a lot of room out there.

  • Brandon Oglenski - 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 going to impact length fall in yields?

  • Don Seale - Chief Marketing Officer

  • 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 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 - Analyst

  • Thanks for that.

  • Operator

  • Justin Long, Stephens.

  • Justin Long - Analyst

  • 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?

  • Wick Moorman - Chairman & CEO

  • 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 will 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 - Analyst

  • Okay.

  • And maybe for my second question there has clearly been a lot of uncertainty about the direction in the US 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 are hearing from your customers do you have a best guess on a normalized range for the US export market?

  • Do you think it's an 80 million, 90 million, 100 million ton market on an annual basis?

  • Wick Moorman - Chairman & CEO

  • 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 is coal over the long-term that we think will always be in demand.

  • I think 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 US export thermal coals.

  • We and a lot of people would hope that's a very bullish proposition, but we just don't know yet.

  • Justin Long - Analyst

  • Okay.

  • Thanks.

  • That's all for me.

  • Appreciate the time.

  • Operator

  • Thomas Kim, Goldman Sachs.

  • Thomas Kim - Analyst

  • 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 also what would be an update on the outlook for the Meridian Speedway?

  • And again the longer-term opportunity in that particular Corridor?

  • Thanks.

  • Don Seale - Chief Marketing Officer

  • Again, the Heartland Corridor continues to be robust.

  • We don't expect quarter-to-quarter-to-quarter increases of 19%.

  • 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.

  • I don't think we will project that type of growth that we are seeing in the third quarter, but it will be substantial.

  • The other quarters will continued to grow as we compete 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 that we gain are attractive and generate appropriate returns.

  • Thomas Kim - Analyst

  • With regard to the Meridian Speedway and more specifically, do you see potential for this somewhat relative under performance to change and what may be strategically being sort of focused on to accelerate the growth?

  • Don Seale - Chief Marketing Officer

  • 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 are seeing a much higher growth rate of 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 in McCalla, Alabama near Birmingham.

  • Thomas Kim - Analyst

  • If I can squeeze in one last question with regard to your general preference between international versus domestic Intermodal.

  • Is their one, or a point A, like a difference in pricing and if you had a choice between international versus domestic, would you prefer one over the other?

  • Thanks.

  • Don Seale - Chief Marketing Officer

  • We prefer both.

  • The revenue per unit on the international because it is a private container, marine container is lower.

  • Revenue per unit, but it's an attractive business.

  • And since we are supplying a lot of domestic boxes from the domestic Intermodal world, it generates a higher revenue per unit.

  • But both are attractive sectors for us.

  • Thomas Kim - Analyst

  • Thanks a lot.

  • Operator

  • Jason Seidl, Cowen.

  • Jason Seidl - Analyst

  • If I could go back to the question in terms of yields expected for 4Q on the ag side, you said that you revert more back to normal.

  • Are you talking back to that $2,100 a carload level that we have seen in the past, or am I going a little bit too low for the conversion to more shuttle trends?

  • Don Seale - Chief Marketing Officer

  • I don't want to guide you on the revenue per unit per say, 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 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 rate.

  • So we'll just have to see how that comes together because if we run more export trains than we have planned, which we could, that would have an impact on any number that I would give you.

  • Jason Seidl - Analyst

  • Okay.

  • What percent is export versus the shuttle of the business?

  • Don Seale - Chief Marketing Officer

  • Well, last year, we had very little export grain at all.

  • This year, we will have a fairly substantial export program.

  • I can't give you the percentage of the total.

  • Jason Seidl - Analyst

  • Because you would be predicting the export market.

  • I understand that.

  • If I can 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 rate?

  • John Rathbone - CFO

  • We do those quarterly.

  • And so 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 about our accruals.

  • Jason Seidl - Analyst

  • Fantastic gentlemen.

  • Thank you for the time as always.

  • Operator

  • John Larkin, Stifel.

  • John Larkin - Analyst

  • I had about the stockpiles in the southeast at the utilities which have been above normal for a number of years now.

  • I 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 - Chief Marketing Officer

  • The southern utility stockpiles are being impacted by two broad factors.

  • First, natural gas competition, even with natural gas prices increasing 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 -- utilities we serve in the South kick up by about one day coming off the second quarter into the third quarter.

  • John Larkin - Analyst

  • Okay.

  • That's very helpful.

  • Thank you for that.

  • And 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 may be 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?

  • Mark Manion - COO

  • We think there is continued improvement yet, and it has to do with -- we've got a number of productivity projects out there.

  • But projects such as things that depart our trains out of terminals on time, keep them from having to be recrewed, 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.

  • You've got to remember, even though right now we've got our dwell down at really what our operating plan is.

  • Our operating plan is something that we change, we tweak as we go forward.

  • And as we reduce our -- 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 is taking place in terminal.

  • So we see still see upside in it.

  • John Larkin - Analyst

  • Thanks.

  • Appreciate the answer.

  • Operator

  • Jeff Kauffman, Buckingham Research.

  • Jeff Kauffman - Analyst

  • I just want to follow-up a little on Allison's question earlier.

  • We were talking about some of the questions to materials and others line.

  • I think you mentioned the casualties $23 million, probably $35 is a more sustainable level.

  • Can you talk about the other elements that drove that down about $26 million year-to-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 was slightly higher for the quarter.

  • But I think a $35 million quarter run rate on those casualties looks fine on a go forward basis.

  • But if you're talking about materials and other, if you look backwards on that.

  • 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 million, $102 million something of that nature is what we have guided to in the past on those kinds of line items.

  • Jeff Kauffman - Analyst

  • Okay, thank you.

  • And 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 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 will remember at the beginning of the year, we did have some tax benefits from the research and development credits that came in.

  • The short line credits that will likely expire.

  • Jeff Kauffman - Analyst

  • So when we say normalized, are we thinking 37% to 38%?

  • Or more 36.5%?

  • John Rathbone - CFO

  • Yes.

  • Jeff Kauffman - Analyst

  • Okay.

  • All right.

  • Well, congratulations.

  • All my other questions have been answered.

  • Thank you.

  • Operator

  • David Vernon, Bernstein Research.

  • David Vernon - Analyst

  • Don, with the export coal rates through Lambert the met, are you seeing continued pressure on that due to the changes in the market or is that rate holding firm as you move through the quarter?

  • Don Seale - Chief Marketing Officer

  • 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 - Analyst

  • But sort of holding in?

  • Don Seale - Chief Marketing Officer

  • Holding in is a good way to put it.

  • David Vernon - Analyst

  • That is great.

  • And then just as a second follow-up question, this is the second year we haven't had many utility contracts coming up.

  • I wanted 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 - Chief Marketing Officer

  • They range from three to five years, but I will tell you, our larger utilities are five years.

  • David Vernon - Analyst

  • The larger utilities are five years.

  • Okay.

  • So does that imply that we will see a pick up in the rate of renewals coming up next year or --?

  • Don Seale - Chief Marketing Officer

  • Not in 2014.

  • David Vernon - Analyst

  • Not in 2014.

  • Don Seale - Chief Marketing Officer

  • No.

  • David Vernon - Analyst

  • Okay, all right, thanks.

  • Operator

  • Keith Schoonmaker, Morningstar.

  • Keith Schoonmaker - Analyst

  • Thanks.

  • Would you please share the proportion of coal volume that is hauled from each geographic region like you did in the last call?

  • Don Seale - Chief Marketing Officer

  • The 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 - Analyst

  • And one other question, a mix question.

  • Can you comment on how changes in mix 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 - Chief Marketing Officer

  • 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 - Analyst

  • So some of those tank car moves are dominating the increase in Intermodal in this ratio.

  • Don Seale - Chief Marketing Officer

  • Well, the empty to loaded miles of the total.

  • Now if you look at the 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 - Analyst

  • Thank you.

  • Operator

  • Tyler Brown, Raymond James.

  • Tyler Brown - Analyst

  • Mark, I may have missed it but can you give us an update of where you are exactly on the Movement Planner roll out specifically?

  • And has that technology been a driver of the productivity improvements recently or is that more of something we see in 2014, 2015?

  • Mark Manion - COO

  • 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.

  • So at this point, I think we are seeing some of the benefits, even though it's pretty early on in the game, we are seeing some of the benefits of Movement Planner.

  • We think we are seeing some of our velocity improvement on account of that technology.

  • But more to come.

  • Tyler Brown - Analyst

  • Okay perfect.

  • And Don just judging 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 - Chief Marketing Officer

  • 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 - Analyst

  • Okay, perfect.

  • And just real quick, is there a big difference in ARPU between a private box and a public pool box?

  • Don Seale - Chief Marketing Officer

  • If it's a private box, obviously that's taken into account where we don't have -- 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 [TEU]s versus 53s in the domestic market.

  • Tyler Brown - Analyst

  • Okay perfect, thank you.

  • Operator

  • Thank you.

  • Ladies and gentlemen, we have 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 & CEO

  • Thanks everyone, for the questions and for being with us this morning.

  • We look forward to talking to you and reviewing our fourth quarter results in January.

  • Thanks.

  • Operator

  • Thank you.

  • This concludes today's teleconference.

  • You may disconnect your lines at this time.

  • Thank you for your participation.