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Norfolk Southern Corp. (NYSE:NSC)

Q3 2009 Earnings Call

October 27, 2009 04:30 PM ET

Executives

Leanne Marilley - Investor Relations

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

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

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

James A. Squires - Executive Vice President Finance and Chief Financial Officer

Analysts

Jason Seidl - Dahlman Rose & Co.

Matthew Troy - Citigroup

Thomas Wadewitz - JPMorgan

William Greene - Morgan Stanley

Edward Wolfe - Wolfe Research LLC

Christopher Ceraso - Credit Suisse Group

Jon Langenfeld - Robert W. Baird & Co.

Gary Chase - Barclays Capital

Walter Spracklin - RBC Capital Markets

Ken Hoexter - Bank of America Merrill Lynch

Randy Cousins - BMO Capital Markets

Justin Yagerman - Deutsche Bank

Donald Broughton - Avondale Partners

Operator

Greetings and welcome to the Norfolk Southern Corporation Third Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce Leanne Marilley, Norfolk Southern, Director of Investor Relations. Thank you. You may begin.

Leanne Marilley

Thank you Jim and good afternoon.

Before we begin today's call, I would like to mention a few items. First, we remind our listeners and Internet participants that the slides of today's results are available for your convenience on our website at www.nscorp.com in the investor section. Additionally mp3 downloads of today's call will be available on our website for your convenience. As usual transcript, for the call also will be pasted on our website and will be available on request from our corporate communications department.

At the end of the prepared portion of today's call, we will conduct a question-and-answer session. At that time, if you choose to ask a question, an operator will instruct you how to do so from the telephone keypad.

Please be advised that any forward-looking statement made during the course of this presentation represent our judgment as to what make sure in the future, statements that are forward-looking can be identified by the uses of words such as believe, expect, anticipate and project. Our actual results may differ materially from those projected or we said it to a number of risks and uncertainties, some of which maybe outside of our control.

Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we deal with. Additionally keep in mind that all references to the reported result excluding certain adjustments, which is non-GAAP has been reconciled on our website at nscorp.com in the investors section.

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

Charles W. Moorman

Thank you Leanne and good afternoon everyone. It's my pleasure to welcome all of you to our third quarter 2009 earnings conference call.

I'm joined today by several members of our senior management team including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and Jim Squires, Chief Financial Officer, all of whom you'll hear from today.

We are pleased with our third quarter results, which continue to demonstrate the strength of our franchise, our solid operating performance and aggressive cost control. While third quarter results was clearly impacted by the recession with a 20% reduction in volume, we did reduce operating expenses by 25%. The result was third quarter railway operating profit of $562 million, which was 37% below last year.

Earnings per share were down 41% year-over-year and our third quarter operating ratio was 72.8%, an increase of 3.7 percentage points over the comparable period last year, but an improvement of 7.5 percentage points and 2 percentage points respectively from the first and second quarters of this year.

While revenues and volumes remained under pressure, we continue to take a balanced approach to exercising cost discipline and improving network efficiency while meeting our customer service requirement. Importantly even as we realize significant efficiencies in the quarter, all of the measures within our service composite performance index, planned adherence, train performance and connection performance either improved or were stable year-over-year. We posted a 7% year-over-year improvement in system average train speed in the quarter.

And this improvement was achieved by careful planning and execution that resulted not only in the overall average speed improvement, but also continued improvements in fuel consumption, which declined by both by more than both cruise starts and gross ton miles. But the overall economic outlook remains clear. We are encouraged on a sequential basis. As you may remember from our last call, we indicated that the erosion of traffic volumes was beginning to moderate. And our third quarter traffic volumes continue to suggest stabilization.

Volumes improved 8% sequentially from the second quarter to the third quarter. And while the outlook and shape of the economic recovery remain uncertain, we are increasingly confident that we have seen the bottom. As the economy does revive, we remain focused on ensuring that the efficiencies we have achieved will remain in place as we emerge from this recession and we will continue to leverage and enhance the strength of our network.

I am now going to turn the podium over to Don, who will provide full details about our revenues followed by an operation overview from Mark and then a discussion of our financial results by Jim, I'll then wrap up with some closing comments before we take your questions. Don?

Donald W. Seale

Thank you Wick and good afternoon everyone.

As seen in the last few quarters, we continue to be impacted by economic weakness led by the automotive, housing and retail sectors. But signs suggest that the bottom was likely reached during the second quarter and our third quarter performance, which improved sequentially, which Wick mentioned, is reflective modest improvements we're now beginning to see in the economy.

As shown on slide two, third quarter revenue totaled 251 million, down 831 million or 29% and we will be extremely tough comparisons to our all time high revenue of 2.9 billion one year ago. Over two thirds of the quarterly decline was driven by a 20% reduction in volume, representing $570 million. The next largest driver was fuel related revenue, which declined 436 million in the quarter precipitated by the 50% fall in WTI oil prices. Within that total, we experienced a $10 million negative fuel surcharge lag effect during the quarter, compared to a $55 million positive lag effect one year ago.

To illustrate the impact of the volatility in oil prices, without the effect of the fuel related revenue, total revenue would have declined by 17%, our 395 million versus the 29% decline reported for the quarter. This non-GAAP reconciliation is posted on our website for your review. And we also saw a $22 million unfavorable impact in the quarter from coal-related adjustments in the third quarter of last year.

On the plus side, continued improvements in pricing and a favorable traffic mix, partially offset volume and fuel revenue declines and provided a positive offset of a $197 million.

Turning to yield on slide three, revenue per unit was $1,355 falling $172 or 11%, below record third quarter 2008 revenue per unit. All business segments posted year-over-year declines, primarily driven by lower fuel revenues.

Pricing improvement continued during the quarter with an average pricing gain of 6.2%. As you know, our strong service product is a major diver in improving yield in the marketplace. In this regard, we recently completed the tabulation of our 2009 customer survey, which showed a 6% improvement in our customers overall satisfaction, with transit performance and a 10% improvement in services consistency. Service consistency is the number one priority for most of our customers and the magnitude of improvement here is significant for future price support.

As shown in slide four, during the quarter, we continued to experience economic related declines in volume, across our booker business. Total volume was 1.5 million units, down 373,000 loads or 20% along third quarter 2008.

It's also worth noting that we experienced some very tough comparisons to third quarter of last year, which produced agricultures highest volume ever, the second highest coal car loadings and highest coal tonnage ever along with strong metals and domestic intermodal volumes.

Despite these very strong costs, we saw improvement in the majority of our business, where volumes through each month in the quarter. In this regards, which is shown on slide five, which compares third quarter's performance to this year's second quarter, volume was up 110,000 loads or 8% driven by gains in all groups led by export coal, steel, chemicals and automotive.

Finally, revenue improved by 206 million or 11% and revenue per unit grew by $40 or 3%. We are cautiously optimistic that this sequential quarterly progress is intangible sign of the start of economic recovery.

Turning to slide six. As we move through the final quarter of the year and beyond continued economic uncertainty highlights the advantages of our balanced portfolio of business. As shown here, we expect growth and agricultural shipments led by higher volumes of soybeans, corn and fertilizer.

The U.S. 2009 soybean and corn crops could be the best on record following the poor South American crop, and ethanol volume will continue to grow as 13 new ethanol terminals will open in the next 12 months over our network.

Chemicals year-over-year comparisons are expected to improve driven by project gross, such as newly contracted unit train fly ash business, moving from Tennessee to Alabama for disposal. During the third quarter, we handled 68 unit trains and expect to handle over 300 unit train loads in total under this contract over the next 15 months.

Basic chemical volumes are also improving sequentially. Export net coal volumes in the fourth quarter in 2010 should be substantially better than 2009 and shipments to Western Europe and Asia expand in a recovery global steel market. Australian coal production challenges and poor congestion will continue to play a role here as well.

While export coal volume declined 24% in the third quarter, turning to slide seven, reflecting the 34% decline in European Union Steel production; we are seeing very positive signs in this market.

As depicted year, third quarter volume was twice better than second quarter, and September volume was only down 28,000 tons of 1% compared to last year's strong performance in September. During the month of September, we also handled our first direct cargos to China and more are expected as the Chinese stimulus program drives demand for higher steel production.

Now, turning to slide eight and turning the markets that are showing some signs of recovery that may remain flat year-over-year, we are seeing some signs of improvement and increasing demand in the domestic steel markets, which will drive improved volumes of domestic med coal and steel products ahead. During the quarter, seven additional NS-served blast furnaces resumed production.

We also expect domestic intermodal to continue to be flat to positive for the fourth quarter. But to resume growth in 2010 as highway conversions continue and economic activity improves. International volumes, however, will continue to be down until consumer demand picks up. But we remain unwavering in our commitment to expand our intermodal network for future growth.

During the third quarter, new terminals were formally announced at Memphis and Green Castle, Pennsylvania, which is South of Petersburg and we are on target for a mid 2010 completion of the Harland Court. Last of all utility coal volumes will continue to be impacted by current high stock piles, lower generation rates at utilities and competition with natural gas. As always, utility volumes will be dependent up on this winter's weather conditions, which will to a large degree determine stock pile levels going into the second quarter of next year.

In closing, despite continuing strong economic headwinds and very tough comps from 2008, we have a solid third quarter with notable sequential improvement from the previous two quarters. Going forward, we anticipate ongoing improvement in sequential volume and revenue as economic and project related activity picks up steam.

And our customers across all business segments continue to recognize our strong focus on service related investment and service execution as noted in significant improvements in customer satisfaction with our transit times and shipment consistency performance.

Obviously, this strong service performance represents higher value in the marketplace, which in turn supports continued pricing and profitability enhancement. Both of which are require to make the necessary investments and technology and infrastructure ahead. This in a nutshell is our on going value proposition for customers and shareholders alike.

Thank you, and I will now turn the presentation over to Mark for our operations report. Mark?

Mark D. Manion

Thank you Don. As Don noted, while business volumes continue at recessionary levels, we have seen a steady uptick from the low point in May.

We continue to closely monitor changes in volume to assure that the operation is right sized to meet changes in demand and to meet that demand as efficiently as possible. We continue to take a balanced approach to assure continued improvements in the safety of our operations and consistency of our service while we adjust to changes in business volume.

Let's start with a review of our safety performance; turning to slide two based on preliminary estimates, Norfolk Southern continues to lead the industry and safety of operations. As always, we continue to pursue initiatives to drive further improvement. Our estimated entry ratio for nine months of 2009 is 1.15. Because they're paid on an activity basis, road and yard cruise starts are one good measure of the results of our efforts to keep the network operation inline with our service and operating efficiency goals.

On slide three, the total increase in road and yard cruise stars increased only 4% from second quarter to third quarter against a sequential volume increase of 8% as mentioned earlier. And yard assignments remain flat.

Turning to slide four and comparing road and yard cruise starts with the prior year, we continue to share reductions. Road cruise stars were reduced 16% year-over-year and yard assignments starts were 19% below the same period last year.

Similarly on slide five, you can see a very slight increase in the number of T&E employees in active service from the second quarter. This again reflects a change in volume, but also reflects the impact of the regulatory changes in average service requirements for T&E employees, which went into affect during the third quarter. But the number of T&E employees remains 14% below prior year reflecting the reduced need for T&E employees in our current operation.

The T&E employees are of course only part of the total employment picture; and on slide six, you will note we continue to hold the line. We further reduced total rail road employees in the third quarter with employment levels of 9% below the same period last year.

Turning to slide 7 and looking at service delivery, we continue to closely monitor service delivery, as we adjust the network to meet the challenges of the current business environment. A key measurement of overall service delivery is our composite service measure. Composite service performance combines the key service drivers of train performance, connection performance and planned adherence.

In the third quarter, we were again challenged about service of cost savings and increasing volumes. Train and connection performances declined slightly from the period of last year. New hours of service roles for T&E employee as well as flooding in the South East had some impact on performance. But these issues are now behind us.

The combined service components, as you can see essentially net out the same performance as the same period in the prior year. And as you will see on the next slide our car days, per car load measure, which has a direct translation into cost savings continues to show a network operating at levels comparable to or better than last year.

Car hire days per car load shown on slide eight is a modern measure of network philosophy. I mentioned earlier that this measurement has a direct translation into cost savings, because it looks at the direct impact of velocity on car hire cost.

Car hire days paid but car loading improved slightly in the third quarter down 1.5% from the same period last year. This improvement confirms that our focused approach to balancing cost and service has kept network velocity at steady or improving levels. This is critical in keeping car hire, payments and other velocity related costs inline with changes in volume.

Slide nine, illustrates the significant portion of our fleet that remains in storage due to continued weak volume levels. However, we have reduced the number of cars stores significantly from the peak of over 35,000 cars in July to over 22,000 cars at the end of September. This represents about an 11% increase in the number of Norfolk Southern cars in active services since the first week in July.

The reduction in stored cars primarily reflects increased demand for Norfolk Southern cars primarily in coal, ash, steel and automotive equipment. And we have also reduced the number of locomotives store, from a high of 700 at the end of May to about 380 at the end of September as shown on slide 10.

We've pulled these locomotives out of storage to meet increases in demands since volumes bottomed out in May, including continuing increases in coal trains. Some of the reductions also represent retirement of our older fleet. The net increases in our available locomotive fleet at the end of September was about 7.5% higher than at the lowest point in the first week of June.

On slide 11, you see the impact of reduced operating plan from prior year levels reflected in the locomotive fuel consumption, a 19% reduction. Sequentially, fuel consumption increased 5% from the second quarter against an 18% increase in volume.

The reduction versus the same period in 2008 reflects our conservation efforts in the areas of train phasing, IO reduction efforts and ensuring the locomotive conscious as correctly sized for the trend.

Our focus remains unchanged and we will continue to build on our strengths: safety, commitment to service and operating efficiency. Our primary importance, we want every employee to end their work assignment in the same condition they started it.

In this tricky economic period, we continue to monitor changing volume and traffic patterns. We are making ongoing adjustments to the operating plan in response to those changes, but the same time, we keep a close watch on service and network velocity to assure that we meet customer expectations and make the most efficient use of our asset base.

I thank you. And now I'd like to turn it over to Jim.

James A. Squires

Thank you Mark.

I'll now provide a review of our overall financial results for the third quarter.

Let's turn to our operating results. As Don described, railway operating revenues for the quarter were 2.1 billion, down to 331 million or 29% compared to last year.

Slide three displays our corresponding operating expenses, which decreased by 499 million or 25% for the quarter. Income from railway operations was 562 million, down 37%. The substantial decrease in revenues, primarily driven by decreased volumes and fuel surcharges was partly offset by significantly lower operating expenses. The result of operating ratio was 72.8%.

Turning to our expenses, slide four presents the major components driving the 499 million decrease. Similar to last quarter, all of our expense categories are down with the exception of depreciation. Further note in passenger we are currently engaged in the deprecation rate study for our equipment assets, which we anticipate will conclude in early 2010. We intend to begin the deprecation rate study on our road way asset next year that will conclude in 2011.

Now, turning back to our other expense categories, consistent with the first half of the year, the biggest driver of our overall operating expense decline was sharply lower fuel costs, which decreased by a 282 million or 59%.

As mark noted earlier, third quarter locomotive fuel consumption is down 19%, which reflects the efficiency gains relative to 17% declines in both gross ton miles and cruise stars. These operating efficiency improvements coupled with lower volumes accounted for the vast majority of our 92 million consumption-related decrease in fuel expense this quarter.

As reflected on slide six, lower proceeds provided a 190 million benefit. This graph shows our average price per gallon of locomotive fuel for each of the last seven quarters. $1.85 average price in the third quarter of 2009 was a 48% decline compared with the 359 price per down in the third quarter of 2008.

Delving deeper into the price analysis, slide eight shows the components of diesel fuel price comprised of crude oil and green and other costs in gold. Other costs including crash spread transportation and in 2008 an availability premium. As you may recall these other costs were considerably higher last year driven in part by a supply constrains experienced in the Gulf Coast region due to hurricane activity.

The next largest expense decline was compensation and benefits, which decreased by 110 million or 16%. Slide 10 presents the major components driving this change. First, volume related labor was reduced by 64 million in the quarter, and I review this item in more detail momentarily.

Second incentive and stock-based compensation saw 33 million due largely to less favorable performance in third quarter 2009 relative to 2008. Third, 28 million relates to the absence of lump-sum payments provided in last year's labor contract with our locomotive engineers. Since pay roll taxes decreased reflecting lower compensation levels.

Somewhat offsetting these reductions were higher wage rates up by 14 million reflected of the agreement pay increases that weren't into effect in July 2009. Pension costs increased by 11 million primarily due to reduced asset values. Also medical cost for active and retired employees were up 6 million.

Now turning to slide 11, as I mentioned volume related labor savings were 64 million for the quarter. Taking a closer look at T&E labor, load train and yard crude assignments were down 17% in third quarter. This reduction was the primary driver of the 43 million decrease in T&E volume related compensation expenses in the quarter. The remaining 31 million of volume related pay roll savings primarily reflects reductions in engineering and mechanical requirements also related to lower activity levels.

Purchase services in rents decreased 57 million or 16%, which correlates with decreased volumes. Consistent with the second quarter, we have been successful in reducing expenses while maintaining solid network performances.

So I think you can provide some specific examples, transportation services in operations about 22 million, which includes automotive related costs and lower crew transportation expenses. Intermodal expenses declined 17 million and equipment lines decreased 12 million.

In addition, engineering services were down 9 million primarily due to reduced railway repairs and mechanical expenses were down 5 million largely due to a fewer freight car repairs. Materials and other expenses decreased 49 million or 25%. Slide 15 provides additional details to define this decrease.

Sales reductions in material usage contributed 24 million as we have aligned locomotive freight car and engineering material use to conform with lower traffic volumes. This is largely related to the stored locomotives and freight cars that Mark highlighted before you earlier.

Second, causalities and other claims benefited primarily from lower loss and damage claims. Finally, other expenses reflect decreased travel and miscellaneous expenses.

Now, let's turn to our non-operating items on slide 16. Interest on tax deficiencies reflects less favorable experience compared to last year, related to the IRS review of prior years tax returns. Dealings on property sales were up 7 million from last year and corporate and life insurance benefited from higher returns. The remaining invariance reflects a variety of smaller items completing lower interesting income in whole royalties.

As illustrated on slide 17, income before income taxes decreased 341 million or 41% principally due to lower operating income. Income taxes for the third quarter were 178 million for ineffective tax rate of 37%, which compares with 302 million or an affected rate of 36.7% last year.

Slide 19 depicts our bottom line results. Third quarter net income was 303 million, a decrease of 217 million or 42%. Diluted earnings per share were $0.81, which was $0.56 a share or 41% below last year.

Thank for your attention and now I will turn the program back over to Wick.

Charles W. Moorman

Thank you Jim.

Well as you've heard by continuing to maintain a high level of service to our customers while remaining focused on aggressive cost control, we were able to pose very solid third quarter results while continuing to invest in the problems, which are critical for our future success.

I said before that I believe our company will emerge even stronger and more efficient, when the economy recovers and we felt some indicators of our increasing operating leverage in the third quarter. For example, as you've already heard, our third quarter volumes were up 8% sequentially while road train cruise starts were up only 4% and yard cruise starts were flat.

Similarly our T&E headcount increased by about 1% quarter-over-quarter, and I will remind you again the T&E pay is activity based. And we continue to reduce total headcount. We were also able to continue our tight control on overtime, which remains at levels down 40% plus year-over-year.

And finally, on the asset side as you've heard from Mark, even with our conscious decision to rotate locomotives in and out of storage on a regular basis to ensure they're ongoing good condition, total locomotives available through service increased only 7.5% for May, our high watermark for stored power to September, while traffic volumes increased over 10%.

As you heard me say before, I firmly believe that rail, the safe, efficient and environmentally friendly way to ship freight is a critical part of the solution to our nation's transportation crisis. As such, we're managing Norfolk Southern for the long term. We continue to focus on service improvement through increased network efficiency and new product offerings.

We continue to control cost and we continue to enhance the value of our franchise by making the investments necessary to position us for the future of transportation. Looking ahead as I stated earlier, it does seem like we have at least seen a bottom in our traffic levels.

And while market evolve at its usual amount of sediments slowing around in size, we're hopeful that an economic recovery may have commenced although which shape and duration are uncertain. Regardless the form of the recovery, we're strategically positioning Norfolk Southern to fully capitalize on all of the opportunities that it will present, and I'm confident that in doing so, we'll continue to deliver superior results for our customers and our shareholders.

Thank you, and I'll now turn the forum over to the operator, who will instruct our telephone participants how to ask a question.

Question-and-Answer Session

Operator

Thank you. We are now conducting a question-and-answer session.

(Operator Instructions) Our first question is from Jason Seidl, with Dahlman Rose. Please go ahead.

Jason Seidl - Dahlman Rose & Co.

Good evening everybody.

Charles Moorman

Good evening, Jason.

Jason Seidl - Dahlman Rose & Co.

Couple of quick questions, a lot's been made of pricing or lack of clarity from some of the other conference calls that we had. You guys pose very strong 6.2%. Can you talk about pricing into 2010 in terms of how much you have locked up and sort of what your expect in if it's a ballpark number?

Charles Moorman

Take it, Don.

Donald Seale

Yeah, good afternoon, Jason.

Jason Seidl - Dahlman Rose & Co.

Hi Don.

Donald Seale

Approximately 60% of our 2010 booked price as you will recall, I indicated that we had 40%, re-priced in the second quarter call; that's now up to approaching 60% and the pricing levels reflect satisfactory levels of price that certainly will exceed what we think the rate of rail inflation will be for next year plus an additive for above that.

Jason Seidl - Dahlman Rose & Co.

An additive above that, okay, that's good for a ballpark. I guess on the question, you guys started having some export coal shipped to China. Could you talk about the levels of that and this is going to be something that's going be more consistent or spotty depending on what Australia is doing?

Donald Seale

Jason, I mentioned in the third quarter our export volume was up 24%, our trans were up 23% for the third quarter. But we saw very rapid improvement month-to-month in the third quarter as orders picked up to Western Europe and also the Asia including direct shipments to China for the first time for us.

As I mentioned, within September itself, we were within 1% of a very strong September last year. So as the quarter ramped up month-to-month, we saw an almost get back to even at the end of September. We are expecting continuation of that demand in the export market at least through the current cold year, which as you know runs through about April 1st of 2010.

Jason Seidl - Dahlman Rose & Co.

Okay, that's great. I'll let somebody else have and get in the back of the queue. Thanks guys for your time as always. Thank you Wick.

Operator

Your next question is from Matt Troy with Citigroup. Please go ahead.

Matthew Troy - Citigroup

Yeah, thanks. I was wondering if you could provide some details. It seems to be a consent as their view as it relates to Norfolk Southern that you guys will have a -- let's call it a more difficult fuel surcharge recovery headwind in the fourth quarter. And I think if you look at the numbers, there is support for that view.

I was just wondering if you could maybe put some numbers around what the headwind might be somebody aware of it might be kind enough to do that? I'm just trying to get a sense we model appropriately what the headwind will be over the next three months if we assume current stock prices hold?

Donald Seale

This is Don Seale. As I mentioned, the third quarter was 55 million in terms of the negative fuel lag. The fourth quarter looks like it will be around 130 million.

Matthew Troy - Citigroup

Right. So there is nothing new or change with that outlook?

James Squires

Not really. This is Jim, let me comment of your question as well. With the decline in fuel surcharge revenue likely to be greater than the decline in fuel expense in the fourth quarter, we will face a margin headwind in the fourth quarter as we did in the third quarter and the second quarter as well. And it's likely that that margin have been -- will be somewhat greater in the fourth quarter than it was in the third quarter.

Matthew Troy - Citigroup

And the second question is relates an issue some of the push back we get also from the same crowd is that late last year, Norfolk Southern had changed some of its pricing strategy to incorporate a higher WTI spot assumption and its core rate increases. Now, that was someone what -- I think we challenged back when WTI was at the 30 or 40, but now backup at 70 or 80, it looks much more palatable.

Just wondering, can you talk about what percentage of your book of business was actually rolls forward on a co-rating based on the highest stock price. And is there any reason to believe that you are seeing any kind of incremental pushback from those customers or these people just making noise about nothing?

Charles Moorman

No, we view too that we have indicated this in the past as a component of our price and we are looking at pricing into the marketplace to be competitive than reflecting the value of the service product that we are offering. So, we do not feel that we have any unusual noise associated with that in the marketplace.

Matthew Troy - Citigroup

Any directional bogey how much of the booker business was remarked at higher WTI spot assumptions, so we can quantify?

Charles Moorman

No.

Matthew Troy - Citigroup

Okay. Last question I had, Don, we were there in the summary, you talked about cash was having a positive impact. I know Ford is in negotiations now, but are you seeing any follow through? What's your assumption in terms of either star rates or just -- what are you hearing from your auto customers about demand pass this kind of a similar bump from cash conquers. We've got these in conflict. Are people looking for growth next year sequentially from what we saw in 3Q, just some color there. Thanks.

Donald Seale

We saw a pretty good drill down of inventories from the cash and conquers to 700,000 vehicles. So, and we saw our automotive volumes improved with that. Unfortunately in September, we saw auto sales go back down by about 38%. So, we are not seeing any ongoing strength in auto sales. I will tell you this that auto production is projected to come in about 8.6 million this year. They are going to -- the projection next year is about 10.8 and global insight tells us that the replacement run rate in this country is 12 million.

Matthew Troy - Citigroup

Right.

Donald Seale

If that is correct and production next year is 10.8, that means that we are continuing to see pin up demand developers. The pre drops are faster than it's being replaced. So, at some point we are going to see an inflection in the outer market, we just don't know when.

Matthew Troy - Citigroup

Got it. Thanks for your time. Good quarter guys.

Donald Seale

Thank you.

Operator

The next question is from Tom Wadewitz with JPMorgan. Please go ahead.

Thomas Wadewitz - JPMorgan

Yeah, good afternoon.

Charles Moorman

Good afternoon, Tom.

Thomas Wadewitz - JPMorgan

I wanted to see if you could give a sense on coal; it sounds like you are pretty optimistic on the export coal outlook. Do you think that I guess you are looking at a run rate that approaches strong run rate of 2008 and the sense of that maybe continues beyond exploration of the current coal year. And then on the utility side, do you think there is a risk given high stock piles that you get passed and contract minimums in 2010 or the contract minimums maybe are lower and you could actually see a further step-down in utility coal volumes in 2010.

Donald Seale

Tom, this is Don again. With respect to the exporters, I mentioned earlier, we do expect export demand to be stronger at least through April 1st through the current coal year in terms of European and Asian demand. So we feel pretty good about the export going forward.

With respect to the utility market as you know the stockpiles are very high, our electrical demand is down about 6.5% of our service territory. And we project our estimate, the over hang in utility stockpiles for the plants we served to be about 8 million tons out of the total universe. That is the highest stockpile.

But yet we get, as I mentioned in the prepared remarks, winter weather that brings natural gas prices up and inventories down. And we get greater demand for electricity because of the weather, we could see that cold stockpile beginning to diminish. And we certainly would see good coal availability we think in the shorter months should that take place.

So a lot of moving parts on the utility market, unless we get a cold winter that helps drive natural gas prices up, higher electrical generation up and which will take stock piles of coal down. If we see all of that, we see some opportunity for improvement, not further declines of utility.

Charles Moorman

Tom, the good news is that in addition to global insight, we subscribed to a number of whether almanacs and a majority of them seen to be predicting a cold winter. And if they're right, as Don said, this is a situation that can change very quickly.

Thomas Wadewitz - JPMorgan

Okay. So it sounds like your best sense of it, I mean if I would have 2010, but your estimate is probably the coal volumes are very flat next year maybe they can even be up a little bit.

Charles Moorman

If we knew the future, we'll tell you, but...

Thomas Wadewitz - JPMorgan

Okay, that's fair enough. One another question for you, you've done really well on the cost side and I guess if in looking at like the locomotive chart, you've clearly brought some locomotive back into service and the volumes to pick up sequentially, but on the headcount basis, if we look at your headcount versus let's say May, and we are in a precise May number, but say versus second quarter, it does look like your headcount is actually down a little bit. So is there a point, where as the volumes come back that headcount number needs to come back quite a bit. Or is the way you're running you can handle significantly more volume, run more locomotives and actually not see headcount increase sequentially. How do we think about that?

Mark Manion

Let me answer that; Mark Manion. The headcount we have right now is really capable of handling more volume than we're currently operating in and that's largely is because we will be able to fill out trains that are currently out there. We brought back several hundred people and we've increased the size of our operating plant accordingly. So we're really pretty well positioned to be able to fill out those train operations we currently have. And unless volumes got significantly higher than they currently are, we probably have got the work force, we're going to keep right now.

Charles Moorman

There are couple of moving parts in this. One is, Mark was saying is the operating plant and as we said earlier road train starts were only a 4% on an 8% increase in volume. Yard cruise starts were flat. If you look at average T&E, it was up slightly on the lines of 1%. We have called more people back than that.

But the other thing we always have is going on is just pure attrition. And so our total numbers are going to decline even as we keep headcount flat. But I'll reiterate what Mark said. I think as we see more volume growth, you are not going to see necessarily a proportionate number of increase in employees. We think we still have a lot about operating leverage in the system. And as we said over long and Mark and his team have done a great job of it. We figured out some smarter ways to handle some of this business.

Thomas Wadewitz - JPMorgan

The third quarter number that 27,500 pretty representative for plus or minus a little bit for maybe the next few quarters on headcount.

Charles Moorman

I think there are couple of moving parts in there. I think fairly representative is okay, I think if anything that might continue to move down a little bit.

Thomas Wadewitz - JPMorgan

Okay, great. Thank you for the time.

Operator

The next question is from Bill Greene with Morgan Stanley. Please go ahead with your question.

William Greene - Morgan Stanley

Yeah. Hi there, good afternoon. I wanted just to quick follow-up on some comments that Don made about pricing for next year, reflecting a rate above rail inflation. What's the rail inflation rate that you'll use, because it's negative now I believe if we do the all in. So, how should we think about what the right long term number should be?

Donald Seale

Bill, this is Don. We are thinking a positive number and we are thinking a positive number of 3% and an additive above that.

William Greene - Morgan Stanley

Okay, that's helpful. And then the second question that I have is the comments that you are making as it relates to pulling locomotives out of service if the sequential volume change, all reflect some confidence about the future at least on the sequential basis, which seems at least a little more bit more optimistic than some of the comments we heard last week.

So, I am wondering if there is something specific to Norfolk Southern that is causing you to be bit more bullish or is it sort of just as you're looking at the numbers kind of mathematically where we are and the run-rates that you are seeing to give the confidence that in fact you see some growth from here.

Charles Moorman

Bill, I think and I'll ask Don to comment as well, it's in general driven by what we've seen in the third quarter, what we hear from our customers. What we see in the queue in terms of project growth, and that gives us some confidence that we're going to see volumes that looked slightly did in the third quarter and in fact we may see some continued sequential improvements.

Don is that...?

Donald Seale

I think that's a good sign. Yeah.

William Greene - Morgan Stanley

So, the fact that you've pulled some of these locomotives out of service; did that suggest that you have less capacity in your network or have you a lot of these decline in the locomotives that were started with that really just retirement?

Charles Moorman

It was a combination about three things. One was your retirements, the second as I mentioned was when we reached the high watermark for stored locomotives, we made a decision that keeping these very valuable assets stored and not moving for long periods of time wasn't necessarily a good idea in terms of their mechanical condition, it's not always good to leave mechanical equipments stored for long periods for time. So we consciously decided to start rotating stored power out on a regular basis.

That's in itself decrease the number of locomotive stored at any given time. And then the third was we brought some locomotives back into service as volumes increased. I think the important number is the one that Mark mention, which is what we really look at net locomotives available for service, which was up 7.5% over the lower point.

William Greene - Morgan Stanley

All right, thanks for the time.

Operator

Your next question is from Edward Wolfe with Wolfe Research. Please state your question.

Edward Wolfe - Wolfe Research LLC

Thanks, good afternoon everybody. Don can you talk a little about pricing renewals about what's in the recent contracts, you back out 6.3% of pricing in the number currently, but I am guessing you are not looking at 3% inflation plus three in pricing next year. What are you seeing in the most recent contracts and what are expectations of those come up for pricing renewals?

Donald Seale

Yeah, we are continuing to look at the marketplace, and obviously there is excess capacity in trucking out there that is impacting intermodal in particular, but as we continue to reprice for next year, I'll just repeat that we are getting the prices that we are satisfied with respect the heading covering that rate of inflation plus an additive above that, and I will add that it's inline with what we've been reporting.

Edward Wolfe - Wolfe Research LLC

Other then intermodal that you just obviously referred to, are there other areas that are weaker than the norm or that are stronger than the norm?

Donald Seale

The market obviously the supply chain today has changed a lot, since last year with demand being off substantially, and supply of transportation being an excess. So, I will tell you that price depreciation is more difficult and challenging in today's environment than it was this time last year. But as we've indicated, our service product continues to improve.

Frankly, I'm very pleased to see customers tell us that our consistency was up 10% that is significant and that means that we are more effective with respect to competing with truck and the other rail competitors and that translates to value in the marketplace and our prices will reflect that.

Edward Wolfe - Wolfe Research LLC

And can you talk a little specifically about coal? In your slide, coal yields are down 16%. What's going on in terms of price and mix with coal?

Donald Seale

I mentioned the archive on the first slide, which was a negative 26 million most of that resides in certain coal contract. That impacted coal RPU ahead by a total $73 and $17 across the entire book of business. So that 26 million is what is really relating to coal itself in term of RPU, most of them I mentioned, the export result 23% of tons 24% of volume in the third quarter. And that's higher RPU as well. So the two are the moving parts for the spectacle.

Edward Wolfe - Wolfe Research LLC

Okay. And on slide eight, Don, of your presentation, you mention that your expectation is for international domestic demand to be on the weak side, the domestic intermodal was flattish. Can you talk about your different expectations going forward for those demands?

Donald Seale

Yeah, our international intermodal traffic in the third quarter, our volume was down 32%. And until we see consumption and the consumer become more active in today's economy, we don't expect that traffic to improve materially ahead. With respect to the domestic market, we were all 6% in the third quarter in terms of volume, but I would quickly point out that was against the cost from third quarter of 08, where we were up 18%.

Edward Wolfe - Wolfe Research LLC

Okay. And then last question: you mentioned that utility stockpiles were 8 million, I think you said above norm for a year old customers. What's that on a basis?

Donald Seale

That's across the 100 utility plans that we serve.

Edward Wolfe - Wolfe Research LLC

But is there -- is 8 million on a base of how many million of tons?

Donald Seale

We will -- we are looking at about 130 million tons utility market.

Edward Wolfe - Wolfe Research LLC

Thank you so much for all the time, I appreciate.

Operator

The next question is from Chris Ceraso with Credit Suisse Group. Please go ahead.

Christopher Ceraso - Credit Suisse Group

Thanks, good afternoon.

Charles Moorman

Good afternoon Chris.

Christopher Ceraso - Credit Suisse Group

Just a clarification on the comment about pricing of 6.2%; does that include or exclude fuel adjustment on our CapEx; I think last quarter you had given us a number including and excluding?

James Squires

That includes the cap impact of negative $26 million; and if you back that out, it adds nine tens of a percent, which would make the 6.2 of 7.1.

Christopher Ceraso - Credit Suisse Group

Okay, good. A lot of what you talked about today speaks to the leverage in the business, where volumes are going up and people and equipment are going up less. And if you look at the numbers, it was about a 45% contribution on incremental revenue as you walk from Q2 to Q3 if my math is right. Is that the kind of contribution that we can expect as volumes and revenues go up going forward or were there items that helped that being so strong, Q3 did a seasonal or any kind of one time cost items that helps you?

James Squires

There was really any one time items in particular, I don't think that we've done quite the same computation that you have. But I would tell you that we would expect if we see -- continue to see sequential improvement in volumes that we'll continue to see very good operating leverage.

Christopher Ceraso - Credit Suisse Group

Okay. And then just the last one: you noted automotive is in your down category, but you're talking about a 20 to 30% increase in output in 2010 versus 2009. Is there something that's making you more cautious in that vis-à-vis specific plans or products that you serve?

Charles Moorman

In terms of the increased production for next year, we are cautiously optimistic that that will translate into increased sales, not going to inventory. We would rather see the consumer get a little more active and unemployment drop a little bit in that regard. So while we're not showing it declining, we're not overly eager to characterize it as a rising market next year either.

Donald Seale

That's been somewhat lengthy experience, yeah.

Charles Moorman

Yes, very correct.

Christopher Ceraso - Credit Suisse Group

Yeah. So you're moving the cars from the factory to the dealer, right? Not from the dealer to the customer. So if they're building it, whether it's going in the inventory or being sold through, you're going to feel it, right?

Charles Moorman

Well, unless it goes to our storage area, close to the production facility bridge, this year a lot of that's taken place force us to go to the dealer.

Donald Seale

But the answer really is: if volume -- if production increases year-over-year, we certainly should see that the reflected in our business.

Christopher Ceraso - Credit Suisse Group

Okay, that's helpful. Thanks guys.

Operator

Next question is from Jon Langenfeld with Robert W. Baird. Please ahead with your question.

Jon Langenfeld - Robert W. Baird & Co.

Good afternoon. Can you talk a bit about your fuel usage, one of the lines you reported the revenue ton miles per gallon, and I know that's been relatively flat year-over-year, probably for a couple of years down, I think your competitors or the other rails have seen significant gains on that one. How should we expect that to trend and any idea on why there is such a difference there between you and your peers?

Charles Moorman

No, I guess the metric that we're focused on is the decline in locomotive fuel assumption relative to efficiency gains as measured in term of gross ton miles and cruise starts and the numbers there are 19% decline in locomotive fuel consumption year-over-year versus 17% declines in GTMs and cruise starts. So we do see some consumption and efficiency improvement in those numbers. And we saw some in second quarter as well, so we do feel that there is a sustainable fuel consumption opportunity going forward.

Donald Seale

And we are very focused on a lot of technology improvements that will drive a reduced fuel consumption, one of the things we discussed at length at our investor days, we are willing out the leader technology across our Northern region, which is our heaviest gross ton model region that should be fully operational hopefully by the end of the first quarter of next year that we help will drive sequential fuel efficiency advantages and we remain very focused on driving that fuel efficiency forward.

Jon Langenfeld - Robert W. Baird & Co.

In conception, is there any reason why so once you get that information, any reason why we wouldn't see that then on that revenue ton miles per gallon of fuel consumed?

Charles Moorman

We think we'll see continuing incremental improvements in fuel consumption driven by these technology and other initiatives that we have under way. Naturally there will be quantum leaps in fuel efficiency or consumption improvements, but certainly incrementally, we think along the lines of what we've seen this year.

Donald Seale

The other little variable taken into account is, mixed changes, which effect revenue ton miles versus gross ton miles, we generate a lot more gross ton miles -- revenue ton miles with coal than we do for example with intermodal. So, there maybe changes reflected in that. We think the two things that we are watching, which are train starts and gross ton miles are the best indicators of the work being performed and therefore the best metrics to judge our fuel consumption against.

Jon Langenfeld - Robert W. Baird & Co.

Very good. And then a question was such Harland Court or -- which we know is coming up here. Can you just talk through conceptually, we've had some value being generated as you've been implementing the changes along that line, but obviously the big benefit comes with all in process. So can you talk about that process of rolling that out and how long until you really can see the benefits of having the full through line complete.

Charles Moorman

Well, actually let me just amend one thing that you've said, which is that we will not see any benefits from the projects till the project is completed, because we can't start double stacking trains across that quarter until every clearance has been enhanced.

Jon Langenfeld - Robert W. Baird & Co.

Okay.

Charles Moorman

We are on schedule to get that finished in the first half 2010. Once it's completed, we'll immediately change our operating plan to reflect that and start moving a lot more intermodal traffic up from the Court Roads (ph) to Columbus in the Midwest as well as some traffic coming back the other way. The benefits -- primary benefits initially are operational. They're clearly going to be impacted right now by the downturn in international traffic coming through Norfolk, but we should start to recognize benefits as soon as the last time it was cleared and we turn the trains on that way.

Jon Langenfeld - Robert W. Baird & Co.

And that would be both an efficiency benefit, but also the ability to grab share of the traffic that's coming out of that port I would assume?

Charles Moorman

Well, if you look at the port today, of course the volumes are depressed, we do think that it gives us a marketing advantage to the steam ship carriers that come through this port. It will take some -- little bit of time probably to recognize more of that advantage, but an important part of the consider of the project and really the primary justification for the project was the operating savings.

Jon Langenfeld - Robert W. Baird & Co.

Got you. Okay, thanks for the color.

Operator

The next question is from Gary Chase with Barclays Capital. Please go ahead with your question.

Gary Chase - Barclays Capital

Thanks everyone, good afternoon. Wanted to see Don if I could get you to just clarify some of the comments you've made on the export coal side; I think you said you expect to start to continue through April. So, are we thinking of that as 3Q levels or September levels, because you've obviously seen quite a big pickup as we move through the third quarter.

Donald Seale

Yeah, we expect to see a more robust demand for export through the current export co-year, which will run through April 1st, 2010. I am reluctant to try to fit it into terms, the run rate versus rate. September obviously was very close to our rate within 28,000 tons. October, I will tell you is running a little ahead of 2008 and but beyond that, I hesitate to say anymore about that other than we expect it to be better than it was in the first half through April 1st of next year.

Gary Chase - Barclays Capital

Okay, and that's obviously something that would have helped coal yields in the quarter, which we thought was good. Were there any re-pricing in there that would have given that line of boost as well?

Charles Moorman

No significant coal re-pricings in the quarter.

Gary Chase - Barclays Capital

Okay. And then if I could just one for, Mark: if I look at slide seven of your presentation and look at what you are showing in terms of composite service performance, no doubt the cost performance in the quarter relative to volume was good. But you do show at least in the third quarter not the same kind of improvement year-on-year and at least that metric, I know Don referenced several times, service consistency being strong; and I think the number was up 10. So just wondered if you could shed a little bit light on what's in there and maybe how we should think about that looking forward in an environment, where volumes are potentially going to improve yet further.

Mark Manion

Yeah, we didn't see quite the same rate of improvement in the third quarter that we have in the first half and there will be several things involved in that. Keeping in mind that we had a more difficult plan down in the South East with some weather related issues and that probably played a role and there we had two of our primarily routes out of Atlanta that were actually shut off for a period of 48 hours and then some recovery time after that. So that takes a total, but that together would have some of the adjustments we made to the hours service changes that took place in the middle of the summer. Those things are behind us and we've moved beyond that. So we're looking forward to good performance as we go on into the balance of the year.

Gary Chase - Barclays Capital

Is consistently -- it's the concept on subscriber and is that what it takes to keep the cost lower is the predictability and dependability?

Mark Manion

It sure is. When we started back in 2001 with our third grade operating plan, we -- keeping in mind that having not gone down that road before, we were first concerned that there would be a high cost associated with that.

We figured it would be good for from a customer service standpoint, but the pleasant surprise was that it not only bodes well for customer service, but it really helps from a cost standpoint to operate a scheduled rail road and operate with consistency and follow our operating plans. So, our employees are well familiar with that, and they are positioned to continue and follow that operating plan and follow consistent service.

Charles Moorman

And one of the groups that we have also found that really buy into this concept and the providing this regularity of service and high performance level on our train operation are the -- our employees. It makes there large more predictable and allow them to schedule and they're fully on board.

Gary Chase - Barclays Capital

Okay, guys. Thanks very much.

Operator

The next question is from Walter Spracklin with RBC Capital Markets. Please state your question.

Walter Spracklin - RBC Capital Markets

Thanks very much, good afternoon, guys. Quick question on balance sheet and you got $1 billion for the cash and now and I haven't seen an increase in dividend in few quarters. Just wondering even considering you probably want to keep some cash in the tail here; $1 billion is a lot of money just where your thoughts are in terms of potential buy back and dividend increases going forward.

Charles Moorman

Walter as you said, we should let at the end of the quarter and that is more cash than we need in the long run, I think at any given time. But for now, and for the foreseeable future, I think we will be maintaining higher than normal cash balances. It doesn't feel like us like it's yet time to reduce that cash balance significantly. So, that's where stand with respect to the cash balance, you'll probably continue to see it at rather high levels for sometime to come.

Walter Spracklin - RBC Capital Markets

So, if we do see an improvement, what's your comfort level of cash buffer on your balance sheet that you like to see?

Charles Moorman

Well, it depends on the outlook and current conditions and other factors as well, but I think certainly somewhat below what we're carrying today. But as I said for now that continues to feel like about the right level of cash on it.

Walter Spracklin - RBC Capital Markets

Okay. And just my other question here is on your depreciation rate study; you mentioned in the past we've seen those studies lead to a step up in depreciation. Now there is some reasons that could point to that not being the case here and in particular given the slowdown in CapEx spend. What -- is it something that's regular or did something prompt this and just gut feeling; is this something that's going to drive your depreciation rate higher or lower?

Charles Moorman

It is a regularly scheduled and conducted depreciation rate study and I don't want to predict what the study will conclude, but I will say with lower business levels, assets are likely to have a longer useful life.

Walter Spracklin - RBC Capital Markets

Okay, thanks very much guys.

Operator

The next question is from Ken Hoexter of Bank of America and Merrill Lynch. Please state your question.

Ken Hoexter - Bank of America Merrill Lynch

Hi great, good afternoon. Wick, can you talk a little bit about on the regulatory front? Where you stand with Senator Rockefeller's Committee? Have you seen -- what level of draft have you seen, where our discussion and what your thoughts on expectations for timing?

Charles Moorman

Well, I'd probably give you the same answer you've gotten from some other folks as well. The operative word that we hear in terms of seeing a draft is soon and that seems to have a fairly fluid definition. I don't think we really know when we'll see another draft. It could be very quickly or it could be still some good long time up.

I think the very positive thing that is coming out of this though is that we have as an industry had a very good dialogue with the commerce committee staff and therefore Senator Rockefeller staff; in terms of the issues that are important to our industry, why the economics and the regulatory structure of our industry today makes sense? And how important it is that we be able to continue to earn an adequate return and invest the significant amounts of capital that we need to invest.

I think that as we've had that discussion, it's been a learning experience for some folks and who now I think have a much clear picture of why we say what we say and how important it is to maintain a healthy rail road industry. So I have no idea right now, when we'll get another draft or what the draft will look at, but I think that dialogue has been a very, very positive thing. And hopefully that will be reflected in whatever emerges from the commerce committee.

Ken Hoexter - Bank of America Merrill Lynch

And has the dialogue picked up lately, have they gotten more detail on open access or can you address any of those issues?

Charles Moorman

I really can't. It's about -- other than to say, I think it's just been a fairly continuous dialogue for sometime now.

Ken Hoexter - Bank of America Merrill Lynch

So, it's nothing that pick up recently that we do believe something is more imminent than not.

Charles Moorman

I don't believe so, Ken.

Ken Hoexter - Bank of America Merrill Lynch

Okay. Just I want to hit quick one a place that are raising kind of hammering on. I mean just what we heard from some carriers a couple days ago, why is there such a disconnect in the market? I guess with the east versus west do you think right here, are you starting to see some rail road competition pick up that way, is it more exposure intermodal? I'm just wondering from your point of view why you see such a dichotomy of 2 to 3% pricing versus 6% on the East Coast?

Charles Moorman

Yeah, we can only comment on our book of business and our position in our market that I can't comment what others are doing.

James Squires

Ken, it's Jim. Just to add to that a little bit, I think one thing that investor should keep in mind is that these core increases are not apples-to-apples comparisons in our case. The figure is I'm sure you have not used different methods for quite a lot in core price, some use central sales, some not, some use RTMs in the calculations, some use units and so. I think it's important to introduce that probably out of making a comparisons.

Ken Hoexter - Bank of America Merrill Lynch

Don, can you comment at all on J.B. Hunt on or I guess on domestic intermodal? If you're switching or thoughts on switching from contract business to more variable rates within the marketplace, what are your thoughts are on that?

Donald Seale

Okay. And as I mentioned, our domestic intermodal business was off 6% in the quarter against a real strong comp from last year above 18%. And that double-digit increase continued into the fourth quarter. So, we remain very optimistic about the business model for modal conversion. In our service territory, we continue to make good progress on our activity with the crush and corridor as I mentioned with the couple of new ramps announced in the quarter. And I can't comment all specific negotiations with any of our customers, but I will say just conclude by saying we remain committed to that market, we think it's going to be a good growth market for us ahead.

Ken Hoexter - Bank of America Merrill Lynch

Great, thanks. Good job on the cost cuttings during the quarter.

Donald Seale

Thank you, Ken.

Operator

The next question is from Randy Cousins of BMO Capital Markets. Please go ahead with your question.

Randy Cousins - BMO Capital Markets

Good afternoon. Jim for you, just as reference to the sequential change in compensation from Q2 to Q3. I noticed that the headcount was down Q2 to Q3, but total compensation was up Q2 to Q3. Can you give us some sense as to what exactly went on quarter-to-quarter distinct from year-over-year?

James Squires

Well, a large component of that would have been the volume metrics affects on activity and associated labor expense. And I think that will have been the driver as well as an inflationary component in labor wage rates as a result of the 4.5% increase from most craps in July. That was in a factor as well.

Randy Cousins - BMO Capital Markets

Okay. So as one of you guys have been talking about the ability to leverage your fixed asset base and with that having at a whole lot of headcounts, this seems to be in contrast. So I wonder if you could explain this to me a little bit more or is this a case of kind of reloading the system and in Q3 as a function of volume and preparation. Can you give me sort of additional, is there any additional color you can give me?

James Squires

Well, I'll tell you this. I think the issue to focus on a sequential basis in the fourth quarter really is the comparison. So, it's not so much a sequential perspective as the comparison coming up here in the fourth quarter. As you'll recall in the fourth quarter of last year, we had a substantial decline in our stock price, which drilled down compensation and benefits expense in the fourth quarter of last year versus the third quarter and now we are laughing that. So, you will see some change there.

Randy Cousins - BMO Capital Markets

From market train speed, your train speed kind of peaked out and sort of April, May, June, they've come down more recently. How important is train speed? Should we worry about train speed, is higher train speed a good thing, how do you think about train speed for Norfolk Southern?

Donald Seale

Well, improves a lot of the -- certainly a good thing and as commented on earlier by Wick. We had improved velocity, so that's good, and like I said, we may have taken a little bit of a hit on speed due to usual weather situation in Southeast.

But besides from that, what we concentrate on is balancing our service with out costs and so to the extent that we can continue to operate the plan and I will say that there been -- it's been challenging throughout the year to adjust the plan as much as we have as the volume have decreased that plan was sized significantly and it's something that's done with a lot science and a lot of care. So as we adjusted to plan downward, we just -- we watched the cost closely, and we maintain the service and we'll keep the velocity up, but at the same time we want to operate as consistently as possible that's our focus.

Randy Cousins - BMO Capital Markets

And Wick last question, there is all that kinds of debate that what type of recovery we are going to have certainly, capital markets right now seems to think the end of the world is about to come once more. In terms of your planning, how are you guys thinking about 2010 and if we have a stall on this recovery, can you still you take costs out of the system for doing any volume recovery to get leverage?

Charles Moorman

Well, volume recovery should clearly gives us leverage. In terms of cost reduction I think we've done a really good job of that in particular by sizing the plan and cutting all our necessary costs. That's what we will continue to do. Part of this business for Norfolk Southern for all the carriers is that we're in network business.

We have some considerable component of fixed or very long-term variable costs. They are harder to address although we are addressing them as well. In terms of how we are thinking about next year we are looking like everyone at all the econometric data we can. We are listening to the pandits and try not to get too confused and making our plans accordingly.

Randy Cousins - BMO Capital Markets

Okay, thank you.

Operator

Next question is from Justin Yagerman with Deutsche Bank. Please go ahead with your question.

Justin Yagerman - Deutsche Bank

Hey guys, appreciate you taking the questions. Looking at I think intermodal and just trying to follow up on Ken's question there. I mean outside of the difficult comp on a year-over-year basis, is there anything else going on in that business? Have you seen with your negotiations with onto diverse in a way to your other recourse competitors? And would you expect that if you do actually win the partnership with them or agree on a partnership with them, I should say that, that outlook on domestic intermodal can change from a net neutral to more positive one?

Charles Moorman

Well, as I indicated earlier, we have a positive outlook on domestic intermodal, we see growth ahead, and I think 8% comp from the third quarter last year of 11% increase in the fourth quarter of last year, those are strong comps. Where we are seeing the most headwind in that market right now, is a lot of excess capacity in trucking and also less freight moving because of the economy.

Justin Yagerman - Deutsche Bank

Okay. Are you seeing some of that come back sequentially as truck load pricing sounds like it's a least stabilizing or firming on the margin?

Charles Moorman

We are seeing some truck load pricing forming on transcontinental. On a sequential basis, which is encouraging. We are seeing a little bit more trans loading activity on the West Coast. International boxes to 53 foot boxes coming East, but I will tell you that overall, we are still seeing a trucking market, where there is too much capacity. Looking ahead, we don't expect that to continue overtime, even if the market doesn't recover as quickly, because a lot of those assets are positioned, but they are not being replaced and the financial institutions that hold the financial instruments on that equipment. They are reluctant to repossess it, but if the again in the life of the asset, it's going to drop out.

Justin Yagerman - Deutsche Bank

Yeah, it's a fair point. Bunch of questions earlier on the export; you gave one to little contrary to what we have been hearing on calling general. So it's pretty interesting. What I think about the coal pickup that you guys have been seeing there, how of that would you attribute to weak dollar. And then I guess when you think about the run rate and the outlook that you guys gave its pretty long within April is what gives you that length of visibility in this type of market? Is it that there are specific infrastructure programs that are requiring minimums in term of coal exports that you have visibility to? Or is it that you know you guys just have a general sense that you know these projects are going to continue.

Charles Moorman

The biggest driver in the export metallurgical coal market is that one, the U.S. in particular for Virginia, West Virginia have some of the world's finest quality low ball metallurgical coal for steel making; that's one data point. The second data point is that Chinese stimulus program is probably the most effective economic stimulus program that we have seen in terms of the results that it is driving. The Chinese steel industry this year is projected to produce over 400 million tons of steel to feed infrastructure projects driven by their stimulus plan. To contrast that to U.S. steel production, we are expected to produce about 73 million tons.

Justin Yagerman - Deutsche Bank

But prices in China are being slashed and the inventories are high there, so I mean some expectations are calling for that to be a slowdown in terms of their demand. Is that something like you guys aren't afraid of when you think about the exports that you guys are seeing from a demand standpoint.

Charles Moorman

Well, since the Chinese cargos are a small very small percentage of our total export, what's happening here is China and the demand that it has for coal -- for steel making is taking a lot of the Australian coal, the Australians in turn are having very difficult times keeping up with that demand. The ship queue at ports over there is high as 60 vessels queued up waiting to load. That's freeing up capacity for us into Western Europe, which is where we will see the majority of our stronger position.

Justin Yagerman - Deutsche Bank

That actually length of hauls there make some sense. I guess one last question, I'm curious to get any commentary around box car business in Q3 and how that felt and then generally what trends have looked like so far into October?

Charles Moorman

Our predominant commodity is moving in box cars like paper, pulp still continues to be very weak forest products in general related to housing continue to be weak. But we are seeing some increased demand on food products and some of the other consumer staples that we moving in box cars.

Justin Yagerman - Deutsche Bank

What about things like white goods and the rest?

Charles Moorman

Are still very soft.

Justin Yagerman - Deutsche Bank

Good. And then lastly can you guys talk a bit about CapEx this year and what your thoughts on next year and maybe a little bit about PTC and how that enters into those plants?

Charles Moorman

Very quickly, our CapEx this year again, Jim, will be something around 1.4 billion or slightly under that. We have not completed our capital planning for next year. Although I would say you -- I don't expect the radical change in either direction right now. PTC depends on how the legislation goes and depends on where some of the technology goes. But our estimate right now is somewhere between maybe 700 million and 1 billion.

Justin Yagerman - Deutsche Bank

Over what period of time?

Charles Moorman

Well, the law right now requires to develop be implemented by 2015.

Justin Yagerman - Deutsche Bank

A 2015, thanks a lot for your time gentlemen.

Operator

Next question is from Jeff Carson with CAG (ph). Please go ahead.

Unidentified Analyst

Oh, hi. This is Vicali (ph) for Jeff Carson. I have a follow up question on the discussion earlier about pricing. And as said earlier that one the domestic intermodal that's being probably disproportionally impacted on the pricing side. And I'm just trying to sense for looking at the overall book of business. Intermodal is about close to 20% of third quarter revenue, yeah, coal about 28%. So together they comprise close the half of revenue. So are we seeing more of the pricing strength and some of the other segment like some of the other economical sensitive segment like say chemicals, automotive, metals and construction is that the bright way of looking at it or is there something else going on there?

Charles Moorman

We look at when we report price we are really talking about price of course the book business, and I will tell that on the intermodal book in the third quarter we had a modest positive on price -- not a negative. So, we're seeing a positive price effect across all of the book of business not just coal and chemicals, et cetera.

Unidentified Analyst

Okay. Then I was just trying to a little sense for whether there were any particular segments, any particular commodities that had maybe something towards the upper single digits in terms of pricing maybe, that's more a little more color than what you want to give?

Charles Moorman

Well, that's going more granular than we would like to go.

Unidentified Analyst

Okay. And then just one other question on the export coal business. I was just trying to get a sense given what the percentage of your overall coal revenue that it comprises. Can you give us a sense for the differential in the revenue per car export coal versus demo coal...?

Charles Moorman

Well the revenue per car with respect to export its shorter haul then our utility coal. So it can -- it will have a lower RPU and some cases based on length of haul from Southwest Virginia to the port.

Unidentified Analyst

Okay. And then just one final question: there is a comment made earlier about overtime pay. It was down about 40% year-over-year. I'm just trying to get a sense for when we start to see the free upturn just trying to get a sense for how important that will be to an increase in labor cost. So in terms of dollars, can you tell us what the decline in overtime pay is year-over-year?

Charles Moorman

We don't break that out.

Unidentified Analyst

Just in terms of that part of how significant to this?

Charles Moorman

It's a reasonably significant number, we don't break it out.

Unidentified Analyst

Okay.

Donald Seale

I'll say we have really cut back on overtime this year. That's been one of our key initiatives on the T&E and non-T&E labor side in terms of the activity. And I think our plan going forward will be to keep overtime in check as much as possible.

Unidentified Analyst

Okay. So just a follow-up on that say, I'm talking about the better things here. You say you've got a 10% increase in car load levels from current levels, what is that -- I mean are we trying to stand that we should not see too significant increase in overtime based on that scenario?

Charles Moorman

That would be our expectations. Now let me also say that fourth quarter is always a little more interesting for us in terms of overtime, because we never know what challenges the weather might...

Unidentified Analyst

Sure, weather is always the wild card. Okay, thank you for your time.

Charles Moorman

Certainly.

Operator

The next question is from Donald Broughton with Avondale Partners. Please go ahead with your questions.

Donald Broughton - Avondale Partners

Thanks. But all of my questions have been answered. Thank you very much.

Charles Moorman

Thanks, Don.

Operator

There are no further question in queue. I'd like to turn the call back to management for closing remarks.

Charles Moorman

Thanks very much everyone for your patience and we look forward to talking to you next quarter.

Operator

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.

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Source: Norfolk Southern Corp. Q3 2009 Earnings Call Transcript

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