Norfolk Southern Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.23.13 | About: Norfolk Southern (NSC)

Norfolk Southern (NYSE:NSC)

Q1 2013 Earnings Call

April 23, 2013 4:30 pm ET

Executives

Michael Hostutler

Charles W. Moorman - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Donald W. Seale - Chief Marketing Officer and Executive Vice President

Mark D. Manion - Chief Operating Officer and Executive Vice President

John P. Rathbone - Chief Financial Officer and Executive Vice President of Finance

Analysts

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

William J. Greene - Morgan Stanley, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Jason H. Seidl - Cowen Securities LLC, Research Division

Scott H. Group - Wolfe Trahan & Co.

Justin Long - Stephens Inc., Research Division

Keith Schoonmaker - Morningstar Inc., Research Division

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Patrick Tyler Brown - Raymond James & Associates, Inc., Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Operator

Greetings, and welcome to the Norfolk Southern Corporation's First Quarter 2013 Earnings Call. [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

Thank you, and good afternoon. Before we begin today's call, I would like to mention a few items. First, the slides of the presenters are available on our website at nscorp.com in the Investors section. Additionally, transcripts and MP3 downloads of today's call will be posted on our website for your convenience.

Please be advised that any forward-looking statements made during the course of the call represent our best good-faith judgment as to what may occur in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate and project. Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control.

Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important. Additionally, keep in mind that all references to reported results, excluding certain adjustments, that is, non-GAAP numbers, have been reconciled on our website.

Now it's my pleasure to introduce Norfolk Southern Chairman, President and CEO, Wick Moorman.

Charles W. Moorman

Thank you, Michael, and good afternoon, everyone. It's my pleasure to welcome you to our First Quarter 2013 Earnings Conference Call. With me today are several members of our senior team, including Don Seale, our Chief Marketing Officer; Mark Manion, Chief Operating Officer; and John Rathbone, Chief Financial Officer, all of whom you will hear from this afternoon.

Our first quarter net income was an all-time best of $450 million or $1.41 per diluted share. It did include a large nonoperating land sale. But even without the benefit of this gain, we posted our second best-ever first quarter results in revenues, operating income, net income and earnings per share. In addition, the operating ratio of 74.8% was our second best for a first quarter.

Looking at our top line, revenues for the quarter were $2.7 billion, a decrease of 2% from last year. Overall volumes were up 3%, as increases in intermodal units of 9% were offset by a 4% decline in coal traffic and flat merchandise volumes. Don will provide you with all of the revenue and volume details in a few minutes.

On the expense side, our continued focus on productivity and efficiency resulted in operating expenses remaining flat with last year, and John will review all of those details with you.

The big story for the quarter was the quality of our service. The composite service index improved 50 basis points over last year to 83.3%; system average speed was 24.2 miles per hour, a 3% improvement. This increased velocity created additional capacity, and our network is running as fluidly as I have ever seen it. Mark will provide you with all of the operating details in a few minutes. And as all of you who follow us know, all of these metrics are intertwined.

The fluid network leads to better service and the ability to control costs, and the combination of continued investment in our system, along with the efficient utilization of our capacity, will allow us to grow our franchise for years to come.

Now at this point, I'll turn the program over to Don and the rest of the team, and then I'll return with some closing remarks before we take questions.

Donald W. Seale

Thank you, Wick, and good afternoon, everyone. The first quarter revenue of $2.7 billion was down $51 million or 2% compared to first quarter of last year, as a $131 million decline in our coal market more than offset revenue gains achieved in intermodal and merchandise.

With respect to yield, revenue per unit declined by 5% due to a 13% decline in coal RPU. Merchandise revenue per unit was up $70 or 3%, and intermodal revenue per unit was flat compared to first quarter 2012.

Negative mix in price, mostly associated with export coal, accounted for $85 million of the overall revenue decline for the quarter, and fuel surcharge revenue was down $51 million. On the plus side, higher volume contributed a positive $85 million into the revenue variance.

With respect to volume, total shipments for the quarter were up 3% as strong intermodal gains more than offset declines in coal and merchandise. Merchandise results were mixed as 2 of the groups, Metals & Construction and Agriculture, experienced declines, while first quarter volumes for chemicals and automotive increased year-over-year, while paper volumes were flat.

Now turning to the individual market segments. Coal revenue of $635 million was down $131 million or 17% for the quarter. As we saw in the fourth quarter of 2012, weaker demand across most markets contributed to this decline, along with a materially weaker pricing environment for export metallurgical coal. Our largest decline in volume occurred within the utility sector, which experienced a decrease of 21,000 loads or 9%. Continued reduction of stockpiles, which were built as a result of weak demand in the 2011-2012 winter, was the largest single contributor to this decline, coupled with competition from natural gas.

Overall, this had a more pronounced volume impact at our longer-haul Southern utilities, which were down 16%, while shorter-haul Northern utility volumes declined by only 3%. Export volumes were up 21% in car-loadings and 25% in tonnage for the quarter, due to increased handling of thermal coal and increased met coal shipments through both the ports of Baltimore and Lamberts Point.

In the U.S. market, domestic metallurgical volumes were down 14% for the quarter due to weaker steel production and the continued impact of the RG Steel bankruptcy, which we reported last quarter, a comp which we will clear beginning in the third quarter of this year. And finally, industrial coal volumes was down 10% due to weaker demand and improved equipment efficiency at selected coal-fired industrial plants.

Now turning to our intermodal network. Revenue in the quarter reached $573 million, up $46 million, or 9% over the first quarter of 2012, driven by 9% higher volumes. As depicted on Slide 5, the volume gains in intermodal came from both our domestic and international markets. Domestic volume was up 7% due to continued highway conversions and the opening of new Crescent Corridor lanes in the quarter, while organic growth across our international accounts boosted international volume by 13%.

As in previous quarters, we continued our strong focus on increased efficiency across our intermodal network. During the quarter, 95% of containers in both domestic and international market segments moved on stack cars, a metric which highlights loading efficiency and equipment utilization. This was a 5 percentage point improvement compared to the first quarter of 2012, and in turn, total intermodal crew starts were only up 1% on a 9% volume increase for the quarter.

Now turning to our merchandise markets depicted on Slide 7. Merchandise revenue was up 2%, reaching $1.5 billion for the quarter. This increase came as a result of higher revenue per unit for the quarter, which was up 3%.

Reduced domestic raw steel production, which was down 8% in the quarter, combined with the impact of the RG Steel bankruptcy, contributed to an overall decline in steel volumes of 7%. Aggregate shipments were also down for the quarter due to a weaker highway construction market and declines in frac sand as natural gas drilling rig counts continued to decline in the quarter. This combination of factors led to an overall 6% decline in Metals & Construction volume.

In our agricultural markets, reduced corn volumes to processors and the impact of ethanol plant closures contributed to a 3% decline in shipments, though we saw strong gains in fertilizer and soybeans for the quarter. Fertilizer demand is particularly strong this year due to low carryover grain inventories and anticipated increases in acreage to be planted this spring.

On the plus side, chemicals volume was up 10% due primarily to growth in crude by rail business, which accounted for over 13,000 shipments in the quarter. Automotive volumes were up 2% despite a slight decline in projected North American vehicle production during the quarter. And paper and forest products volumes were essentially flat for the quarter as a rebound in the housing market contributed to an 11% improvement at lumber volumes, which was offset by weaker volumes of graphic paper.

Now concluding with our outlook. The market ahead continues to be mostly positive, but we face continuing headwinds across our coal markets. Competition from natural gas, and flat to declining electricity demand will continue to impact our utility coal franchise. But firming natural gas prices reflect some relief in utility dispatched curves, looking ahead.

With respect to export metallurgical coal demand, we see continued sluggish demand in Europe and slowing shipments into Asia. In the met export market, we've seen some marginal improvement in world pricing. In this regard, we're continuing to price our services on a quarterly basis. And in view of improving world prices, some modest increases were applied for met coal exports starting April 1 for the second quarter. So with that said, U.S. coals will continue to be challenged to remain competitive from a total cost perspective, which makes this market choppy and uncertain at best.

Also, thermal coal exports will face lower yields associated with the weak API 2 index into Europe. In view of these challenges in both met and thermal coal exports, we do not expect our export volumes for the rest of the year to be as strong as those in the first quarter. And finally, with respect to domestic met coal here in the U.S., we see a weaker market ahead until we finally clear the RG Steel comp in the third quarter.

Turning to intermodal, we anticipate a continuation of solid opportunities for highway conversion as we launch new service lanes and ramp up volumes at our newly opened terminals. We also expect continued growth within our international segment, though at a more moderate pace than we saw in the first quarter.

In merchandise, we continue to expect growth in 3 of our 5 business groups in the months ahead led by chemicals, automotive and housing-related materials. In the other 2 markets, Metals & Construction and agriculture, we anticipate flat to modest declines in the first half, with an improving outlook for the second half of the year.

Wrapping up, in summary, we expect that our diverse market base will continue to provide volume growth ahead despite the challenges that we face in the coal market. And we remain committed to market-based pricing at levels that equal or exceed the rate of rail inflation over time as we provide excellent service to our customers.

Thank you for your time. And Mark, I'll now turn it to you for the operations report.

Mark D. Manion

Yes. Thanks, Don, and good afternoon, everyone. Based on preliminary safety data, our first quarter performance stands at 0.72, that's equal to the same period last year. Positive improvements in our safety process has continued to increase our employee engagement and provide a solid foundation for future performance.

Moving to the next slide, our composite service metric continues a trend of year-over-year improvement. For the first quarter 2013, composite performance stands at 83.3%. This represents an improvement over the full first quarter last year, and it's important to point out that this was accomplished despite a more normal winter this year compared to the very mild conditions we experienced last year.

Turning to the next slide, and one of the key components of network velocity, train speed, system average train speed improved 3% over the same period last year.

Turning to Terminal Dwell. We did see a modest increase in Terminal Dwell of just under 1%, but that was driven primarily by a deeper reduction in our end-of-year operations in response to reduced customer demand over the Christmas and New Year holidays that have abutted weekends. However, since the beginning of February, our Terminal Dwell performance has been improved over last year.

Moving on to the next slide. Building on the progress we've seen over the last several quarters, improved velocity and other productivity initiatives are the drivers behind the improvements you see here. Overall, we've reduced crew starts, a significant 5% against a volume increase of 3% and a gross ton mile increase of 4%. As Don referenced, we've been able to manage 9% increase in intermodal volume, with only a 1% increase in crew starts. Coal volumes decreased 4%, but we were able to achieve an 11% reduction in crew starts. And similarly, despite general merchandise volumes being flat, we were able to reduce crew starts by 2%. Concurrently, we've reduced T&E overtime by 9% in addition to a re-crew reduction of 5% over the same period last year. Velocity-driven equipment rents have been reduced 4%, while carloads per locomotive have improved 6%, and gross ton miles per gallon have improved 2%.

We continue to manage our manpower and asset base commensurate with our traffic volumes and improvements in our network velocity. Our active T&E workforce stands at 11,540, a nearly 6% reduction over last year. At the end of the quarter, we had approximately 600 employees furloughed or on retention boards within the transportation and mechanical departments. From an asset perspective, we had 239 locomotives in storage, along with approximately 8,500 freight cars. In addition to the velocity and productivity improvements that we reviewed on the previous slide, we will continue to adjust the manpower and asset base commensurate with our traffic volumes. As I mentioned last quarter, we're also pursuing opportunities to rightsize the network.

Turning to the next slide, this is a great example of a rightsizing opportunity, the closure of the Roanoke, Virginia hump operation. Enabled by network velocity, efficiency and changing traffic flows, on February 25, we ceased humping operations at Roanoke. Traffic, once handled at Roanoke, was redistributed to other yards, utilizing existing capacity without impacting network velocity. Along with the projects I outlined last quarter and with additional initiatives like Roanoke, we are solidly on track to meet and exceed our $100 million expense savings target for 2013.

Thank you. And now, John, I'll turn it over to you.

John P. Rathbone

Thank you, Mark. I'll now review our financial results for the first quarter. Let's start with a summary of our revenue. As Don described, our 2013 railway operating revenue of $2.7 billion was the second-highest first quarter revenues on record. Total revenues declined $51 million or 2% compared to last year's $2.8 billion first quarter record. Fuel revenue of $274 million were $51 million less than last year, and we experienced an unfavorable fuel lag of $23 million during the quarter.

Slide 3 displays our total operating expenses, which increased slightly for the quarter. The resulting $691 million of operating income was down 7% compared to 2012, and our operating ratio increased 1.5 points to 74.8%. Both measures ranked as second-best first quarter operating results.

Turning to our expenses. The next slide shows the components of the $3 million increase, and I'll go over each of the components in detail. As displayed on Slide 5, fuel expense increased by $16 million or 4%, driven largely by higher diesel fuel consumption and prices. Diesel fuel usage grew 2% relative to a 4% increase in gross ton miles, a reflection of operating efficiencies and ongoing fuel saving initiatives. Our diesel fuel price for the quarter decreased to $3.19 or 1%.

Depreciation expense increased by $3 million or 1%, reflecting slightly lower depreciation rates, resulting from a recently completed equipment study that partially offset the effect of a larger capital base. The new rates reduced depreciation expense by $8 million this quarter. This favorable effect will continue for the remainder of the year.

Purchased services and rents increased by $2 million, reflecting higher professional fees and increased automotive and joint facility costs that offset lower engineering and hauling services. Equipment rents decreased slightly due to improved network performance, which more than offset the effect of increased intermodal volumes.

Materials and others fell $12 million or 5% due primarily to reduced equipment and railway material usage from lower repair activity which should increase as the year unfolds. Also, for the remainder of the year, we anticipate higher casualty expenses as we lap the favorable personal injury claims development we described in the second and fourth quarter of last year.

Next, compensation and benefits decreased by $6 million or 1%. Reduction in employee activity levels, reflecting the improved productivity and reduced payroll taxes, more than offset $15 million of increased pay rates.

Turning to our nonoperating items. Other income is up $106 million, including a $97 million land sale gain in Michigan. This involved the sale of 135 miles of track to the State of Michigan for high-speed passenger service. Returns on company-owned life insurance were up $7 million, and interest expense on debt was up by $9 million due to increased net borrowing.

Income before income taxes increased $43 million or 7% due primarily to higher nonoperating income, partly offset by lower operating income. Excluding the land sale, pretax income would have been $600 million or 8% lower.

Income taxes totaled $247 million, and the effective tax rate was 35.4% compared to 37.3% in 2012. The decrease was primarily related to a $9 million retroactive benefit from January's tax law changes.

Net income from the quarter was $415 million, an increase of $40 million or 10% compared to 2012. Diluted earnings per share were $1.41, up $0.18 or 15% compared to last year.

As noted earlier, our first quarter record results included the land sale in Michigan that generated net income of $60 million, an increased earnings per share by $0.19.

As shown on the next slide, cash from operations covered our capital spending and produced $344 million in free cash flow. Cash from operations was amplified in the first quarter of 2012 as accounts payable returned to normal levels.

We accelerated credit payments at the end of 2011 as part of our SAP implementation. Our 2013 free cash flow supported $157 million in dividends and $33 million of share repurchases. Last year's results included higher share repurchases, as well as proceeds from borrowings. Our first quarter 2013 share repurchases reflected a cautious approach as we weighed uncertainties in Washington. As the economy continues to grow, for the remainder of the year, we intend to increase share repurchases.

We remain confident in our ability to generate free cash flow and access debt markets. We will continue to prioritize investing in our business, committing to our dividend and applying incremental cash towards share repurchases guided, of course, our economic outlook.

Thank you for your attention. I'll now turn the program back to Wick.

Charles W. Moorman

Thank you, John. As you've heard, Norfolk Southern had a good first quarter this year, with near record operating income and operating ratio even in the face of continued significant weakness in our coal business.

As I've said previously, coal continues to be the wild card in our business outlook, although we do see some signs of stability, with gas prices now at $4 plus per million Btus, slow growth in generation demand and the price of met coal stabilizing and possibly even starting to tick up.

On the intermodal side, we're continuing to see growth in our business, driven in part by the completion of most of our Crescent Corridor infrastructure, along with a great service product. And as Don told you, the outlook for our merchandise business is somewhat mixed, but with some anticipated growth in 3 of the 5 business groups.

In general, we see an economy that will continue to grow, albeit at a slow pace. As I stated at the outset, the other big story at Norfolk Southern continues to be the level of our network operations. As Mark told you, our first quarter 2013 metrics exceeded the first quarter of 2012, even with more adverse weather conditions.

The economies we are recognizing as a result are significant and at the same time, our customers are receiving a constantly improving service product, which will help drive further volume growth and pricing improvement.

As I've stated many times at Norfolk Southern, we believe that superior service, going hand-in-hand with a focus on safety and operating efficiency, are the best ways to grow our volumes and revenues, which in turn will drive increasing returns for our shareholders. We're confident in our strategy and our ability to execute it, and our first quarter results are a strong indication that it's working.

Thanks, and I'll now turn it over to the operator to field your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chris Ceraso with Crédit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

I was hoping you could give us a little bit more color on the decline in the yield in coal, maybe just bracketing how much of that is associated with the change in mix versus how much is the reduction you had to take in price for export coal.

Donald W. Seale

Chris, this is Don. As we discussed in the calls in the past over the last few quarters, our met coal pricing has been adjusted downward to reflect the world market, which, as you know, declined from $330 per ton down to $160. It has improved back up to $170, but we're still in the range of 25% to 30% declines year-over-year in met coal pricing. And we will continue to face those headwinds until we clear part of the second quarter, as we complete the second quarter. Also, with respect to mix, we handled 2 million tons of export thermal coal in the first quarter versus about 600,000 tons of thermal coal handled in the first quarter of 2012. It's good business for us, but it is lower revenue per car -- lower revenue per ton than the met coal, as you know. The other moving parts that I mentioned in my remarks was our longer-haul Southern utility business was down 16% in the quarter. Our Northern utility coal was only down 3%. And as we've discussed in the past, the revenue per car differential of those 2 books of business is 50%. So it's material. One other quick comment, a little color, Chris, hopefully that will answer your question fully, our utility business for the quarter, 31% of that book was shorter-haul utility business in Illinois, Ohio and Indiana and averaged only about 25% to 30% of our normal revenue per unit of utility coal as a whole.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay, that's really helpful. I had just one quick follow-up. Not to give you a hard time, but can you just talk about the rationale behind not buying back stock and waiting to see what's happening in Washington? I mean, you've got a very strong balance sheet. You generated a lot of cash flow in the quarter, and now the stock is 20% higher than it was 3 or 4 months ago. So maybe you've missed out on an opportunity. Can you just take us through your rationale there?

Charles W. Moorman

Yes. As we finished -- as you know, you have to use a planned purchase. And as we look to the fiscal cliff, one of the issues as we slowed down purchases going into the fiscal cliff, because of the way those programs work, we were precluded from entering the market until after earnings release in January. So the whole month of January was basically lost to us as far as purchases, then we've reentered the market. Our intention -- but albeit at a lower rate. And you're correct, you're quite right, we did miss certainly a buying opportunity doing that at very favorable pricing. But going forward, we expect to resume our share repurchases at levels that -- at more historic levels.

Operator

Our next question comes from the line of Chris Wetherbee with Citi.

Christian Wetherbee - Citigroup Inc, Research Division

Maybe just sticking on coal, could you talk a little bit about where inventory has kind of ended the quarter or maybe where you think we are kind of in April with utilities?

Donald W. Seale

Chris, our utility stockpiles, we ended the quarter with 41 days on average through the network. That's about a 7.5% reduction from the fourth quarter.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. And relative to normals, how does that look?

Donald W. Seale

The Northern utilities in our network are normalized now. We are approaching normal throughout the North. The stockpiles have been pulled down. The weather has been colder through the Midwest and Northeast. Our Southern utilities are still marginally above target.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. And then maybe just a quick follow-up on the coal-to-gas switching or maybe gas back to coal. With prices above $4, I know on the average, and it's maybe a little bit higher in some cases on the breakpoint between the 2, but have you seen any kind of marginal demand come back to coal from gas?

Donald W. Seale

Yes, we have, Chris. The NYMEX delivered price of gas is now $4.25, $4.25 per million Btu for May. And the shoulder months of March and April have been fairly cold, so we've seen demand electricity production continue fairly stronger, at least an uptick in it. So with those gas prices and the pull-down in gas storage, we have seen a marginal dispatch of coal in our network pick up.

Operator

Our next question comes from the line of Tom Wadewitz with JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I wanted to ask you one on the export coal side. I guess if I look at the coal stocks in general, they haven't been so healthy recently, so that would kind of concern you about the coal market. And I'm trying to figure out how to interpret your comments. I think, Don, you said that your pricing on export coal and met would be up a little bit, which obviously is favorable. But it seems like you're also saying maybe tonnage is down. So I was just wondering if you could lend a little more -- provide some more comments on how you look at the met export market and kind of tonnage and pricing in, say, second quarter versus first?

Donald W. Seale

Tom, I'd be glad to. We see the second quarter met coal pricing being marginally better than the fourth quarter and first quarter. There's been an uptick, as I've mentioned, back up into the mid-170s on worldwide met coal prices. The spot increases we took for a quarter, April 1, for the second quarter, I will tell you were very modest. So on met coal, in general, continued headwinds with respect to demand. We do see a little bit of slowing of demand in Asia. So we expect met coal pricing to hold, but we certainly don't see it rebounding. Now with respect to thermal coal, the API 2 index into Europe got as low as $82. It's moved back up to the $86 range, $86 per ton. So it's recovered somewhat. We still see opportunities for thermal coal exports in the second quarter moving through the year, probably not at the 2 million ton level that we handled in the first quarter, though.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

So how would you think about the met tonnage in second versus met export in second versus first? Is it kind of similar or what would you think about the tonnage side?

Donald W. Seale

I would say that we see some softening in the second quarter versus the first.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. And can you offer an overall comment on pricing? I guess if I look at some of your other yield lines, setting aside coal, you're probably a little weaker than I might have anticipated. Paper and clay was down, chemicals was down, maybe that's mix, intermodal was down a touch. But what do you -- how do you view the overall pricing environment outside of the coal market?

Donald W. Seale

Pricing market remains solid, Tom. Let me take one business group and give you some color in the merchandise area, which may help with your question. And I'll take the chemical group. In chemicals, as I mentioned, we handled about 13,000 carloads of crude oil in the quarter, substantial increase. That's very good business for us. But it is not moving at the average revenue per unit for chemicals as a whole. Also, we had a polypropylene movement out of Chicago that was high-rated that is no longer moving. That will be a negative comp for chemicals at about $6 million per quarter for the balance of 2013. So when you look at chemicals and look at RPU, just those 2 things, if you take those into account, it starts to explain how the RPU looks versus the overall pricing, which continues -- pricing continues to be solid.

Operator

Our next question comes from the line of Matt Troy with Susquehanna International.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Just looking at the coal business, which seems to have stabilized at a run rate of, I don't know, 25,000 to 27,000 carloads a week. That's a far cry from the 33,000, 34,000 you were at several years ago. It seems as if things have bottomed, which, as we know, is the first and the most important step. Is your sense that, that 26,000 or 27,000 run rate, I know there's a lot of moving parts and pieces in it, is it substantial enough baseline for you to move off of and drive the cost savings? I guess you somewhat answered the question earlier with the $100 million target and your confidence around the cost savings there. But maybe if you could just talk about, is your sense that the absolute coal traffic on the network today is roughly where it's going to be, at least for the foreseeable future? And what gives you confidence in your target on the $100 million in expense takeout?

Donald W. Seale

With respect to the -- where the coal market is, it appears to us that we are approaching or we are at the bottom of the trough, possibly. And as you well said, there are a lot of moving parts in that, a lot of changes in length of haul. So as Southern utility coal is down double-digits, 16%, Northern utility coal down only 3%, and then we have a lot of our utility coal as a total moving shorter haul up in the Midwest. It's good business, and we're getting rapid turns on the equipment. So revenue per asset is very high. And as Mark mentioned, we have 4% decline in volume and 11% reduction in crew starts for the coal business. So we are seeing some operating leverage and cost leverage in the way we're managing that book of business. So we think we are seeing a bottom here. One of the things that we also think we're seeing is natural gas production in terms of rig counts going to a level that might support, might support $4 to $5 gas. And if we stay in that $4 to $5 per million Btu gas range, coal is going to dispatch at a higher rate than we saw it dispatch in 2012.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Got it. And my follow-up would be simply the other big piece of the puzzle here in terms of traffic mix being intermodal. To be able to grow volumes 9% on top of, I think you said crew starts were up 1% or so, demonstrates I think -- yes, some of the leverage there. Could you talk about just intermodal network capacity? I know you said you had 95% double stack. But whether it's train length or whether you can drive it through better yard productivity handling and asset turns, how much more Intermodal business do you think you could handle without adding significant resources to the network?

Mark D. Manion

Yes, let me take a stab at this. This is Mark. The -- keeping in mind that, of course, we've got some intermodal trains out there that are upwards at 10,000 feet long. But on the average, those trains are more in the neighborhood of 5,500 feet. So you can see that there are a lot of trains that have a lot of capacity. And when you look at the good story of these intermodal terminals that have been newly built and expanded and we're in the process of growing the business in those, that's just a great opportunity to fill those trains out.

Operator

Our next question comes from the line of Bill Greene with Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

Don, did you mention -- I might have missed this, but where there any liquidated damages or take-or-pay revenues that occurred this quarter that we need to think about as we model forward?

Donald W. Seale

Bill, no, we did not have liquidated damages revenue in the quarter.

William J. Greene - Morgan Stanley, Research Division

Okay. Do you expect to have any going forward? Would this be something that will be material enough that we should be modeling it?

Donald W. Seale

No.

William J. Greene - Morgan Stanley, Research Division

Okay. And then Wick, I'm hoping we can get your views on the trade-off between kind of volumes and price. We've talked a long time in the rail industry about inflation plus pricing. And clearly, Norfolk's having success, kind of winning share, if you will, or getting the volume whether it's from new customers starting on your lines or whatnot. But if we look at the OR metric, Norfolk, for a long time, was sort of top of industry. That slipped a little bit. There's some mix effect there. But maybe you can talk a little bit about price and volume and how you think about that, and getting back toward the top of the industry on margin, how you think about these things. That will be helpful.

Charles W. Moorman

Well, when my good friend, Don and I, talk about the trade-offs between volume and price, we always end up saying, we want both. And I will tell you that we are very rigorous in our thinking about margin and about price, whenever we are pursuing new business or for that matter, renewing a contract with current business. And I think we'll be able to continue to do that in the future, successfully, if at least in part, in substantial part, because we are really giving our customers a very, very good product. And I will say, parenthetically, that over the past year, the number of our customers that I meet, and I meet a lot of them, who have just, without any prompting at all, started to talk about how well we are doing for them is really unprecedented in my career. So I think that we have that capacity to do both. But I do think that you raised a good point and something we've got to -- we have to think about with our franchise, which is that we have a different mix. Every franchise is different. We clearly have a big Intermodal business, which has a different operating ratio, a set of characteristics than coal. We like our Intermodal business. We think there are great opportunities out there, and they're great opportunities at prices and at margins that will ensure that we earn an adequate return and grow our income. And those are the 2 goals that we always have in mind. We have to earn an adequate return, obviously, first of all. But then we want to grow our operating income and our earnings per share, and we see the Intermodal business as one of the levers that we can pull, continue to pull to do so. So in terms of getting to where we rate with other folks, in terms of overall operating margin, I think you have to take mix into account. But I can assure you, we're focused on getting the right price, continuing to grow volume and grow our earnings at good levels of return.

Operator

Our next question comes from line of Walter Spracklin with RBC Capital Markets.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

I just wanted to follow up a little bit here on the Intermodal question. You've painted -- both CSX and yourselves, have painted a nice picture of the conversion opportunity from truck. Many of the factors that have led to that conversion have been around for a while, but we really are seeing a pick up now. And I think it's on the basis of your improved service offering and the capacity you've built out there. When you look at that opportunity, it's still a really big number that you've identified as a potential conversion. Can you talk to us about your strategy on how to convert that over to rail, and is this something that we continue to see high rates in the early days? Or is it more of a longer term, kind of grind away at it over a number of years?

Charles W. Moorman

Well, we think there's clearly a very large opportunity. And let me just kind of take a microcosm of the way we think about the world. You're very familiar, all of you I know, with our Crescent Corridor initiative. That set of initiatives, which includes new capacity and new services, a number of which we turned on early this year, is aimed at a truckload market that today is running between 5 million and 6 million truckloads per year, out moving between the South and the Southwest, to the North and the Northeast. Our initial efforts are targeted at trying to pick up about 1 million of those loads. But when we're successful doing that, we can continue to add capacity. We can continue to add infrastructure. And we think this is a long-term game, in terms of converting truckload traffic to the rails, for all of the reasons that we've talked about before, our -- the issues with the highways and congestion, the very significant issues that many truckload carriers have of finding drivers. Our economies and our emissions and all of the things that make us a -- in many ways to many of our customers, a more desirable way to ship. So we think this is a long-term growth opportunity for us, and we're going to continue to pursue it aggressively.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

And as you build density, I think density is a really important part of that game, and I think, whereas Intermodal has been an average contributor from a profitability standpoint, that would indicate that it's going to get, obviously, better than average. Can you talk to us without talking about profitability, I know you're careful around there, but just as an improvement? Is it something that improves slightly compared to historical? Or are we seeing a big step-function in profit improvement as you build density?

Charles W. Moorman

Well, I don't think it's a single big step-function. But there is absolutely no doubt that the more units we put over the network, particularly as we do it efficiently in terms of crew starts and the like, the profitability of the traffic improves. The other thing, and which Don talked to you about, which I think is very important over the long term, is all of the other initiatives on this productivity side that we have involved in our Intermodal network today. Certainly, the more efficient use of equipment is good, and we have seen margin improvement as a result. We have more initiatives out there. So I would tell you that while we're always working on our -- not only the profitability of Intermodal, the profitability of all of our traffic, we will continue to see it rise and certainly, growing volume and manage -- while managing costs will be a significant component of margin improvement.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

That's great. Just a quick housekeeping, if I may? Mark, you were guiding us down for employee headcount toward the end of the year. You've had a good -- you declined a little bit here again in the first quarter. Is this -- should we consider this to be the staffing level you're comfortable with through the year? Or do we see further declines from this point?

Mark D. Manion

We'll see a little bit more decline as the year goes on. Our T&E probably is going to stabilize at or around the number we are right now. And as I think I mentioned on the last call, our engineering department, we've got an initiative to reduce, throughout the year, about 300 people. So not a lot, but reduction throughout the year from attrition in engineering.

Operator

Our next question comes from line of Brandon Oglenski with Barclays Capital.

Brandon R. Oglenski - Barclays Capital, Research Division

Wick, I just wanted to follow up with some comments that you had following Bill Greene's question there. Obviously, a lot of railroads are targeting improved profitability across North America. But it sounds like there's some different ORs on the business on the East Coast. Does that mean, structurally, that the East Coast carriers just aren't going to be able to see as much improvement as targeted in the other regions of North America for railroad performance?

Charles W. Moorman

No, I wouldn't say that. I think we -- internally, we have targets for improved profitability just like all of the other carriers. The railroads are a franchise business, and every one of these franchises is different in terms of where we go, who we serve and the breakdown of our relative lines of business. But we have good goals for improved profitability, and we're pursuing them. And I wouldn't say that we would compare unfavorably to other folks. The other difference is you're comparing the East to West, is clearly length of haul, and that has some impacts on the financial side as well.

Brandon R. Oglenski - Barclays Capital, Research Division

Well -- and if maybe I can just follow up on that. Wick, your intermodal pricing -- obviously, there's a lot of mix shifting across your book of business. But we've heard that intermodal rates are just harder to get up in this environment with trucking struggling to get rate increases with their customers. Is this just an investment phase, that we should view Norfolk really building out the density of the network and pricing will come on the back end?

Charles W. Moorman

Well, let me say that, obviously, and I'll let Don comment on it, too, obviously, we're in a slightly different business in most of our intermodal activities, in that we're a wholesale function working with some terrific partners. So that has an impact on pricing as well. And clearly, as you mentioned and Don has shown this to you before, the world of truckload pricing has a big, big effect on what happens in the intermodal world. But Don?

Donald W. Seale

Yes, truckload pricing continues to evolve. We have the hours of service changes that are pending, that more than likely, they look like they will be applied in July. That could take out as much as 5% productivity out of the current truckload driver base, which we think will start to move truckload prices later in this year. Something, though, that hasn't come up in this last couple of questions is, we were talking about highway conversions. But I want to remind everyone on the call that we also have a very healthy portfolio of international business, which was up 13% in the first quarter. Our Domestic business was up 7%. So the international business is very good business for us as well. It is lower revenue per unit because of marine containers, moving in marine containers, than, say, the domestic freight that is generally moving in boxes, supplied by us or one of our intermodal marketing companies. So you have to take that into account, in terms of the overall mix. But I would just remind you that international business continues to expand as well. And we think truckload pricing, with -- especially with respect to Domestic, will continue to evolve, and the hours of service is something you should look at.

Operator

Our next question comes from line of Ken Hoexter with Merrill Lynch.

Ken Hoexter - BofA Merrill Lynch, Research Division

Don, if I can just hit on the coal again. Just on the overall pricing, you were down double digits the last 2 quarters. You noted, you comped against the down 20% declines on the export, particularly as you wrap around April. Your thoughts on the back half here, you've got easier comps, or do you still expect pricing to be down double digits?

Donald W. Seale

Ken, good afternoon. As we move through the second quarter and finish the second quarter, getting into the beginning of the third, those headwinds will start to diminish with respect to the year-over-year price comparisons, with respect to met coal. The thermal coal that we're taking on is new business. As I mentioned in the first quarter last year, we only handle 600,000 tons of thermal coal. We had 2 million tons in the first quarter. We expect thermal coal to continue to move, maybe not at that first quarter level, but it will be up compared to last year. And that has a lower RPU that you'll have to take into account with respect to revenue per unit.

Ken Hoexter - BofA Merrill Lynch, Research Division

Wonderful. And just on the -- following up on the Intermodal side. You noted a lot of new -- I guess with the expansion on the terminals, are these new customers? Are these expansion now that you've got more capacity? Maybe you can kind of walk through a little bit on where the volumes are coming from? And then I -- just a quick one for Mark. I guess, what you do with the locomotives after they're stored for a while, do you eventually just get rid of them? Same with the cars, or do you keep them for volume rebounds?

Donald W. Seale

Ken, on the first question, and then I'll pass it over to Mark on the locomotives. We're seeing new customers enter the lanes that we are opening up, the 34 new lanes with respect to Crescent. And I'll give you an example. We are seeing increased activity from the Southwest into the Mid-Atlantic, as well as Mexico into the Mid-Atlantic, with new customers, new shippers that have not been in those -- that particular point -- set of point pairs with us before. Of course, we've also got business ramping up with existing customers, and those existing customers would be beneficial cargo owners like Wal-Mart, Target, Procter & Gamble, Lowe's, Home Depot, et cetera.

Mark D. Manion

Ken, if I can answer your locomotive question. Our locomotives, that are in storage, essentially fall into 2 categories. One is as a surge fleet, and that's approximately 100 locomotives that are high horsepower, ready-to-go, that we put out there if we need them for business volumes or weather conditions or whatever the situation may be. The balance of the locomotives, for the most part, are your lower horsepower yard and local locomotives. And those are older locomotives that we primarily use for rebuild opportunity. As you may know, we have had an aggressive rebuild program for about 10 years now, primarily up in our Juniata Locomotive Shop. And many of you on the call have seen that facility. It's a really great asset for the corporation. And we take a locomotive that is essentially 30 years old or so, and rebuild it and give it another life for another 20 years. So that's what those locomotives are used for.

Operator

Our next question comes from the line of Justin Yagerman with Deutsche Bank.

Justin B. Yagerman - Deutsche Bank AG, Research Division

I wanted to ask, you mentioned that gas has moved up and certainly, that's been a bit of a change and that could be positive on the coal side in terms of dispatches from a utility coal standpoint. But I would think it could also mean some kind of resumption of drilling in the Marcellus, as gas becomes more profitable again. Where is the threshold where you would expect to see some of that merchandise traffic that's falling off, begin to really pick up? And I mean, we saw that hit you guys in Q3. So obviously, the comp probably gets better then, but even before that in Q2, is there an expectation if gas really moves that we could start to see some more activity there?

Donald W. Seale

Justin, this is Don. And our view, in my view, the producers of gas are seeking a realistic market price. And I think that we'll see production coincide with market prices where returns can be generated for the activity of drilling. Certainly, if we see demand continue to pick up, should we see LNG exports, or should we see more alternative uses of natural gas for chemical production and demand pickup, we could see production increase, which in turn would provide us with an uplift in frac sand shipments and additional input commodities to support the drilling. But my view is that the gas producers are looking to produce gas at acceptable returns. And $2.50, which was the average in 2012, was not an acceptable price.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Sure. And we're not there. So what's the price do you think that is kind of the cutoff in terms of that friction point?

Donald W. Seale

As I indicated earlier, I think that $4 to $5 range. We've got a lot of people telling us that $5 average gas may be a settling-out point, ahead. And if that's the case, I think it's good for the economy. We're competitive in the world market, for sure. The chemical industry continues to prosper. And certainly, coal competes much more effectively at $5 gas across all the basins, including Central App on the dispatch curves.

Justin B. Yagerman - Deutsche Bank AG, Research Division

In terms of train length, on the Intermodal side, I mean, 10,000 feet sounds like a pretty lofty goal. How much of your network do you think you could actually get to that type of a train length? And when you think about the incremental margin ongoing from 5,500 to 10,000 feet on a train, is it right to think that there's very little cost involved with actually lengthening the train out that much?

Donald W. Seale

The -- those longer trains are pretty much reserved for our hot corridor between Chicago and the East. And that, as you probably know, is a double track and in some places, triple track and 4 tracks. For the most part, the rest of our system is pretty well-aligned with a maximum train length of about 8,000 feet, in some places a little bit less than that. And that has to do with the length of our sidings. So we're selective by lane as far as filling out our trains. But keeping in mind that with that average train length of 5,500 feet, there's still a lot of opportunity, including a lot of opportunity in that Crescent Corridor that's gauged along the 8,000-foot range.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Got it. And thinking about the cost involved with lengthening a train from, let's say, averaged to that 8,000-foot mark, I mean, is there an extra locomotive, a lot more handling involved? How do you think about the additional costs as you lengthen out that train?

Donald W. Seale

No, that's the beauty of it. You still have one crew. In most cases, you've got the same complement of locomotive power. So as we add volume onto trains, it's a real win for us.

Justin B. Yagerman - Deutsche Bank AG, Research Division

That's great. And one last one. Just curious, as I think about this crude by rail franchise that you guys have been building out, it's obviously small. Some of the properties fall in Conrail territory. And I'm just curious how you guys think about the competitive dynamic for any jump ball business that you may go against CSX or and how those competitions will be structured?

Donald W. Seale

Justin, we're looking at our crude oil franchise like we look at all of our business. We're looking to provide very good service to the refineries that we are working with. We're customizing the service, and we're pricing it at levels where it generates the proper reflection of that value for the service. So we're fortunate that we serve multiple refineries in the Delaware, Pennsylvania, Ohio, New Jersey area and a couple of down in the Louisiana, Alabama markets as well. So we're looking at it as we look at all business, and we're looking to provide really solid service for the refineries, as well as making sure that we generate the proper value for them.

Charles W. Moorman

Let me build on the point Don is making, too, here, which is this is a business in which competing on service matters because these are very expensive assets that they are employing in terms of the railcars. And if we can provide faster, more efficient service, it means lower capital investment for someone who's providing those cars, and that can be a big factor in this business.

Operator

Our next question comes from the line of Jason Seidl with Cowen Securities.

Jason H. Seidl - Cowen Securities LLC, Research Division

I'm going to go back to intermodal for a moment here. Obviously, you mentioned hours of service. Has some of this growth that you've been seeing in intermodal been because of the hours of service there in the shipping community? And do you expect that maybe to ramp up little bit here in 2Q just before the change?

Donald W. Seale

No, we don't think there's a shift ahead or conversion ahead. We've been experiencing double-digit growth in our Domestic business for the last 3 or 4 years. I think it's more of a function of our Intermodal network and the value of our service across that network and the fact that we're delivering a very good service right now at a very high level.

Jason H. Seidl - Cowen Securities LLC, Research Division

And in terms of the pricing, obviously, thinking of truckload as maybe the ceiling, that's been kind of sluggish right now, in that sort of 2% type range. But post the HOS changes, do you think they're going to be an ability for Norfolk to take some of those Domestic Intermodal rates up?

Donald W. Seale

We certainly hope so as trucking capacity and productivity is impacted by the hours of service. And of course, as Wick mentioned, fuel efficiency, highway congestion, driver challenges, all of that remain as obstacles in trucking. And we certainly see a wide range of customers wanting to increase their participation in the Intermodal space. I was going to mention sustainability from an environmental standpoint. A lot of our receivers, a lot of beneficial cargo owners have targets for sustainability to actually put more of their traffic on rail to improve their carbon footprint.

Jason H. Seidl - Cowen Securities LLC, Research Division

Okay, that's great color. If I can, one quick housekeeping. I think there's a call-out for a tax item in the quarter. Was that a $9 million retroactive tax gain, did I hear?

John P. Rathbone

Yes, it was, based on the legislation in the past January 2.

Operator

Our next question comes from the line of Scott Group with Wolfe Trahan.

Scott H. Group - Wolfe Trahan & Co.

I got one last one on coal. Maybe if we could think about that yield sequentially. So we've got the met rates that you took up a little bit in the second quarter, but maybe the met or the overall export volumes ticking down a little bit, and the domestic volume starting to recover a little bit. Should we be thinking about, just on a sequential basis, relative to that, 18 50 a car in the first quarter, should that be coming down a little bit in the second quarter, or because of taking up the met rates little, that can go up just sequentially?

Donald W. Seale

Sequentially, in terms of revenue per car, it all depends on the ultimate mix of metallurgical coal to thermal coal in the export market. If thermal coal is a little bit better than we think it will at this point, obviously, that will have an impact on revenue per car. I will tell you, though, that the increases that we took on met coal April 1, I used the term modest, and I will reemphasize modest, they're not large enough to start driving revenue per car in a material way.

Scott H. Group - Wolfe Trahan & Co.

Okay. And you just say it's too early to know, based on your -- but your sense of exports coming down a little bit sequentially and thermal coming up a little bit sequentially, directionally, does that feel like yields should be down sequentially?

Donald W. Seale

Yes, from the first quarter to second quarter, we think both thermal and met will be at a lower level in the second quarter than we saw in the first. In fact, we think it will be at lower levels than across second, third and fourth quarter for the balance of the year.

Scott H. Group - Wolfe Trahan & Co.

That was a comment on volume there, right, Don?

Donald W. Seale

That's correct.

Scott H. Group - Wolfe Trahan & Co.

Okay. And then with the met increases that you put in, the spot rates that we're seeing seem to be, right now, a good amount below the second quarter benchmark. Are your increases holding or you're not able to keep those?

Donald W. Seale

At this point, they're holding.

Operator

Our next question comes from the line of Justin Long with Stephens.

Justin Long - Stephens Inc., Research Division

Could you remind me how much capacity the Intermodal terminal expansions will add on the Crescent, in terms of the number of incremental carload that, that will create? And how much of that has already been completed at this point versus what's planned in the next year or so?

Donald W. Seale

We could barely hear that question here. But I think you were asking about incremental lifts across the corridor, specifically the Crescent Corridor?

Justin Long - Stephens Inc., Research Division

That's correct. And in terms of the incremental carload opportunity that, that could create?

Donald W. Seale

We have added, in our terminal network, about 850,000 lifts of incremental capacity. Now a lift, obviously, it generates more than one load over the source -- over the course of the year. Wick had mentioned 1 million loads that we're targeting in the Crescent Corridor. We have adequate -- more than adequate capacity to, obviously, to take that 1 million loads on, plus more.

Justin Long - Stephens Inc., Research Division

Okay. And that's based on the terminal capacity that's come online as it stands today?

Donald W. Seale

Correct.

Justin Long - Stephens Inc., Research Division

Okay. And is there a way of framing up how much these projects are impacting your volumes today? And I guess, I'm trying to get a sense of, if this was a key driver to growth in Intermodal in the first quarter, or if you think the more significant benefit will be felt when this capacity starts to really get filled in the second half of this year and into 2014?

Donald W. Seale

I'll just give you some percentages of growth in the first quarter year-over-year. The Pan Am Southern corridor was up 9%. Our Crescent Corridor volumes were up 7%. The Heartland Corridor was up 20%, and the Meridian Speedway volume was up 15% year-over-year.

Operator

Our next question comes from the line of Keith Schoonmaker with Morningstar.

Keith Schoonmaker - Morningstar Inc., Research Division

A quick question on a couple of expanding sectors. Through week 16, I think motor vehicles, year-to-date, look up over 3.5% and first quarter RPU looked like it's improved more than 5%, both pretty good. Can you comment on your auto franchise expectations for the midterm? As well, do you expect to benefit from the new capacity coming online in Mexico in the next few years?

Donald W. Seale

With the latter part of the question first, we do expect to benefit from the 5 new assembly plants under construction in Mexico. We also expect to benefit from new production that is moving from Japan and from Europe to the U.S. where the U.S. is being used as a manufacturing platform for both the domestic U.S. market, as well as the export market abroad. You probably have noticed or heard that Toyota just announced this week that they're moving the ES300 Lexus production from Japan to Georgetown, Kentucky. We serve that plant at -- for Toyota at Georgetown. So that will be a source of growth ahead. We continue to have dialogue with other manufacturers with respect to potential new auto plant locations. And in addition to that, we've seen major expansions at BMW at Greenville, South Carolina, Mercedes at Vance, Alabama that we serve, as well as Honda at Lincoln, Alabama. So we've got some major expansions with our current automotive production base and more is coming from abroad. And we see good growth opportunities ahead in our automotive network.

Keith Schoonmaker - Morningstar Inc., Research Division

And the other sector I want to ask about is housing, finally, improving in some regions. And I think also, year-to-date, you've increased lumber and wood products volume over 13% from the prior year, something like that. The strong improvement -- sorry...

Donald W. Seale

Now 11% up in lumber. Yes.

Keith Schoonmaker - Morningstar Inc., Research Division

A strong improvement, but based on what you're seeing from your customers, you expect this to even accelerate this year? And I guess, not just center-beam, but also in Intermodal boxcar aggregates, et cetera, all across sectors. Can you comment on your expectations for total exposure to housing?

Donald W. Seale

I can't give you a number at the current run rate of our exposure to housing. You've seen that starts are now approximating 1 million, which is a good recovery from a low of 520,000 that was the trough. Certainly, we have a range of products that we handle in housing as it recovers, and it's everything from lumber, plywood, OSB, different products like polyvinyl chloride, on the chemical side, that goes into pipe manufacturing for housing. So there is the range of products from cement, chemicals, aggregates, lumber, that go into housing that would benefit us as it continues to improve. And we're seeing some of that across, not only our center-beam traffic for lumber, but we have a healthy cement franchise, as well as products moving in boxcars.

Keith Schoonmaker - Morningstar Inc., Research Division

And do you think the current improvement year-over-year, year-to-date, is representative of what you expect the rest of the year?

Donald W. Seale

We do. If we stay at this start current level of housing start volume, over the 1 million unit level, we see that type of activity we saw in the first quarter, we've got the favorable comps year-over-year, and we will see that level of growth for the rest of the year.

Operator

Our next question comes from the line of David Vernon with AllianceBernstein.

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Just a quick follow-up on the comp line. There was a $7 million payroll tax in there. Is that just a one-time thing, or is that a recurring thing that's going to be going on throughout the year?

Charles W. Moorman

Tax recurring, that was the railroad unemployment insurance. It was reduced by 1.5%. That affected all of us and, well, affected us by that $7 million, and should not -- it should carry off.

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Okay, great. And then just, Don, a quick follow-up on the coal length of haul. It seemed like you were saying that the longer haul southern utility business was coming down, and that was having a negative impact on length of haul. What else was going on inside of coal that was actually compensating for that because it looks like the overall length of haul was up by about 5% in the quarter, year-over-year.

Donald W. Seale

The export increase of 21% volume, 25% in tons was generally longer haul to the ports. And that was the counterbalance. And then as I mentioned previously, we had another counterbalance in the other way with about 8 million tons of short-haul utility coal up in the Midwest that averaged somewhere in the range of about 60 miles per car.

Operator

Our next question comes from the line of Tyler Brown with Raymond James.

Patrick Tyler Brown - Raymond James & Associates, Inc., Research Division

Just a quick question for Mark. But Mark, can you provide any update on where we are with the Movement Planner rollout, maybe in terms of like your gross ton-mile coverage and when do you think you'll be fully rolled out there? And has this a component of your efficiency gains, or is that something we'll see in the future?

Mark D. Manion

I think we've seen the kind of the beginning of the efficiencies from Movement Planner still really early because it is fully deployed on 2, when we're working on 3 of our divisions. But we see that being a pretty aggressive rollout as we continue. And we should have that completely rolled out by the end of 2014.

Patrick Tyler Brown - Raymond James & Associates, Inc., Research Division

Okay, perfect. And then just kind of 1 other operations questions. But just in terms of network planning, how difficult is it for the network to take on maybe kind of a coal basin shift, let's say, to Illinois, in conjunction with your crude oil business that continues to grow? I assume most of that traffic is kind of East-West. Does that pose any design issues, or do you feel that the capacity is adequate there?

Donald W. Seale

No, absolutely adequate there. And when you think about that lane, we have a tremendous amount of capacity there.

Patrick Tyler Brown - Raymond James & Associates, Inc., Research Division

Okay, perfect. And then just kind of housekeeping, any update on CapEx?

John P. Rathbone

We're still talking a little over -- about $2 billion for the year.

Operator

Ladies and gentlemen, our next question comes from the line of Jeff Kauffman.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Kind of the tail wagging the dog, but when I look at crude by rail, you gave a nice breakdown of Intermodal and how the economics change as you add cars to trains. How much of the crude by rail is moving manifest versus unit train right now? And as you grow this business at 20%, 25%, 30% rates, can you talk about where the critical mass is to where you start moving more on unit train basis?

Donald W. Seale

Our current split on crude oil is about 65% unit train, and the balance is moving manifest. And if someone has a car set, where they have 100 cars, plus, they generally want to move that in a unit train. We don't dictate whether it moves in a unit train or a manifest. The shipper and the refinery, working in concert with each other, does that.

Operator

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Charles W. Moorman

Well, thank you, everyone, for your patience and for the excellent questions. And we look forward to talking to you again next quarter. Thanks, everyone.

Operator

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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