Fredrik Eliasson - Vice President, Chemicals and Fertilizer
David Mack - J. Goldman
CSX Corporation (CSX) Presentation at Citi Global Industrials Conference September 17, 2013 8:45 AM ET
Thank you, and good morning everybody. It’s a pleasure to be here. Thank you for that introduction, Chris. Before we get started, as always, let me just quickly remind you about our forward looking statements. Any forecast or any outlook or so that I will share with you today should be taken within the full context of our forward looking statements.
The way we have structured this presentation is really around four key points. First of all, I’ll briefly recap our performance history, and our track record of success. Second, talk a little bit about the foundation for that success, which is of course our network reach and our core assets, which now connects over almost two-thirds of the U.S. population.
Third, also talk about our portfolio of business that I would say because of this transition to the new energy environment that we find ourselves in. It’s probably the most diverse portfolio of business that we’ve ever had, and where our merchandise and intermodal business now accounts for over 80% of our overall volume.
And then we’ll dive in a little bit to our intermodal platform and give an update on some of the things that we’re doing there to sustain long term growth as we see that market as being a huge opportunity for us to grow at an excess of the overall economic output.
Let me start quickly with a recap about our performance. I think you’ve heard me say this before, eight out of the last nine years we’ve been able to grow our earnings. Nine out of the last nine years, we’ve been able to improve our margins. We’ve been able to do that despite freight recession, a financial crisis, and now this transition to new energy environment.
We’ve done so by focusing on the things that we control the most: safety, service, productivity, and inflation plus pricing. Last year we were the safest class one railroad. Our service, both in terms of what our internal measurements are telling us, but also what our customer feedback is telling us, is at the highest level it’s been.
Productivity last year, we were close to $200 million. This year we’re on track to do greater than $150 million of productivity, and we continue to push inflation plus pricing as we need to continue to reinvest in our business.
Since 2006, as you can see on this slide, our earnings on operating income has gone up about 60%, a CAGR of 8%. And our earnings per share almost doubled, with a CAGR of 12%, and we’ve been able to improve our operating ratio by 710 basis points.
And we’ve been able to do that despite significant volume decline and mix shift. As you can see on the left-hand side, on slide five, our overall volume in 2006 has declined about 13%, or 950,000 carloads. 900,000 of those loads is related to our domestic coal portfolio. You can see the stacked bars there, you can see the blue area at the bottom.
Our overall merchandise business, as a percentage of overall business, is about the same as it was in 2006, 44% versus 42%. But the decline is about 600,000 units during this period of time as we still haven’t seen the industrial economy and the housing sector fully recover, which we see as a positive sign going forward, because that gives us confidence about growth there over the next few years.
On the intermodal side, which is the green area, you can see that our intermodal business has gone from 30% to 38% of our overall business. And that’s an increase of about 300,000 units, as we have added new customers and continued our highway to rail, H2R, initiative.
Our domestic coal business has gone, as I said earlier, from 24% to 14%, as those 900,000 domestic coal units are no longer there. And then our export coal business has gone from 2% to about 6% of our overall business, which is an increase of about 300,000 units. And that’s driven by that secular, long term global trend, where we think the U.S. producers will have a larger role to play in the world market.
The bottom line is significant mix change in our business, but despite that, we’ve been able to sustain our financial performance. And that mix change has continued here in the first half of this year. Our overall volume in the first half, on the coal side, was down 8% in the first half of this year.
Despite that, we were able to produce for our shareholders and set several financial records, both in terms of revenue, operating income, operating ratio, and our earnings. Now, clearly those results were aided by both liquidated damages and real estate gains, and the second half is going to become more challenging for us.
The coal headwinds that we saw in the first half are going to continue, and I want to talk more about that in a couple of slides. And while we do expect liquidated damages in the second half, the real estate gains will go away. We had about a $46 million of year over year favorability in the first half, and we expect a headwind of about $65 million in the second half year over year.
So while we’re going to continue to deliver very strong service and industry-leading safety performance in the second half, and continue to pull on the same levers we always pull, the second half will be a bit more challenging. And that’s why we’ve guided, for the full year, we expect EPS for 2013 to be similar, or roughly flat, with what we saw last year.
In terms of our longer term guidance, on slide seven, you can see that our earnings per share growth is the 10% to 15% CAGR that we’ve talked previously about. That’s a two-year CAGR coming off the 2013 base.
Operating ratio, we expect a high 60s operating ratio by 2015 on a sustained basis, and longer term, would like to see our operating ratio in that mid-60s range.
In terms of our balanced approach towards cash, nothing has changed there. Our investments remain unchanged at about $2.3 billion for this year. And 16% to 17% of revenue as a core capital spend going forward, plus an overlay of [PTC] to finish that initiative.
Our dividends increased 7% earlier this year, and they reflect a payout now of the higher end of our targeted 30-35% of the trailing 12 months earnings per share.
And then we announced in the second quarter a new share buyback program that is about a billion dollars over the next two years, and it’s primarily supported by excess cash and free cash flow as we continue to target an improving credit profile as we want to balance flexibility and cost of capital through a full business cycle.
Now, the foundation for this sort of guidance really rests, once again, within our network, the fact that our network, 21,000 miles east of the Mississippi River, 23 states, we connect all of the five mega regions east of the United States. We serve nearly two-thirds of the nation’s population in the [unintelligible] of the overall consumption in this country.
Our network also connects over 70 ports and helps the U.S. resources and manufacturers to connect them with global demand. Our network also has superior reach into the Northeast, all the way up here to Boston, and all of Florida.
And that network reach is really the foundation for this diversity of business that we have. And as I said earlier, we probably now have the most diverse portfolio of business that we’ve ever had, especially in light of this transition that we’ve gone through around our coal business.
If you look on slide nine, you can see our intermodal business accounts now for about 40% of about our overall volume. It’s evenly split between domestic business and our international business.
Our industrial sector is about 18% of our overall business. Chemicals, automotive, and metals. Our agricultural business is about 13%. So in addition to agricultural, it’s the phosphate and food and consumer business. And then our construction related markets, which are forests, minerals, and waste and equipment.
And then the last part is our domestic coal and export, which is about 20%. These are the numbers for last year. And the first half of this year, our non-coal business has actually grown from 80% to 82% of our overall business. So the transition towards an even more diversified portfolio is continuing.
So let’s take a look at what our business has done so far here in the third quarter. Overall, our volumes are up about 2% at this point, 10 weeks into the quarter, which I would say is about what we would have expected it to be going into the quarter, maybe slightly below.
If you look on the left hand side, you can see our construction sector. You can see the construction sector for the first half was up about 1%. Here so far in the third quarter, it is up about 9%, and while our construction related materials such as lumber, roofing [unintelligible] and so are continuing to grow. Really the sequential pickup here is more in transportation equipment and in our waste business.
The intermodal business is now up 5% here in the third quarter versus the first half, where it was up 2%. We’ve seen improvements both in our international and our domestic business. Our domestic business here in the third quarter so far is up 9%, while international business is up 3%.
In our industrials sector. You can see continued strong growth. It’s sequentially improved as well, up to 6%, clearly led by crude by rail in our frack [unintelligible] business. But it’s also seen sequential pickup in our metals business.
The agricultural sector is down 2%, similar to what we saw in the first half. That picture will change as we now get into the fourth quarter, because of the strong harvest that we’re expecting.
And then the last two markets are our coal markets, down 6%, so we’ll be more than what we saw in the first half on the domestic coal side. And then our export coal at this point is down about 12%. So continuing headwinds in our coal business.
So let me talk a little bit more about the coal business on the next two slides. And starting with the domestic business, you can see the two-year story really here on slide 11, on the left hand side, and you can see in the dark blue area, you can see what the natural gas prices have done over the last two years, and they’ve now stabilized somewhere around 350 or so for the last few months or so.
You can see overlaid on that graph are the different basins that our customers are pulling coal from, and you can see the green line is the Powder River Basin coal and the yellow line is the Illinois Basin coal. This represents the kind of [indifference] point between natural gas and coal.
The good news story here is that between the Illinois Basin and the Powder River Basin coal, we now pull about 50% of our utility coal from those two basins. That’s up from about a quarter in 2010, and we most certainly expect that trend to continue going forward as well.
Both the northern App and the central App at this point is out of the money, but it doesn’t mean that it isn’t being used. It’s obviously being used to keep the lights on at many utilities, but it’s not in the money, and you would have to see natural gas prices come up closer to 450 before we start seeing switching back.
On the right hand side, you can see our performance so far by week for the first 10 weeks in the quarter. And the green line represents last year’s average performance, and you can see, as on the previous slide, we’re down about 6% versus the third quarter of last year in our domestic business. However, sequentially, we’re up about 5%.
Inventories are still elevated, especially in the South, and clearly the fact that the cooling degree days were down about 18% in our service territory for the second quarter and third quarter to date has not been helpful. We clearly think that the inventory overhang that we talked about throughout this year is going to be with us through the end of this year, and also well into the first half of next year as well.
Overall, though, I would say that we’re comfortable with the guidance that we’ve provided you previously, that we think our domestic coal business will be down somewhere between 5% to 10% for this year.
Turning to our export coal business, you can see on the left-hand side, the Queensland Index, the Met index, and below there you can see the API2, the steam index. Both of those two have declined quite significantly, as most of you are aware, since the second quarter, which has made it much more challenging for the U.S. producers to participate in the world market.
However, our volumes are holding on okay so far. You can see our weekly volumes once again on the right hand side, and you can see the green line is the third quarter of last year. We were down about 12%. And versus the first half, which is the yellow line, you can see that we’re down about 21% versus the [unintelligible] in the first half.
We have had to take pricing actions. We’ve been very public about that, with the pricing actions, to help the U.S. producers as much as possible. So we did that several times last year. We did so also in the first half of this year, and then additional pricing actions here in the third quarter to try to do what we can within reason to keep the U.S. producers competitive.
I would say that to the 40 million ton guidance that we provided you earlier, we have probably more upside than downside to the volume estimates, but from a bottom line perspective at this point, because of the pricing actions that we’ve taken, there’s very little impact, if any, to the bottom line from that potential upside.
So let me turn to the 80% [unintelligible] in the first half of this year, the 82% of our business that has nothing to do with coal. And as you can see, very quietly, since 2009 and last year, we were able to grow that business about $2.2 billion. The foundation for that success beyond of course our network reach has been the service improvements and our focus on profitable growth.
Core pricing was about half of that gain as we continue to push value pricing and making sure that we get paid appropriately for the service that we’re providing. Volume was the other half, where we were able to grow during this period of time our business at a 6% CAGR over those three years. So significantly ahead of the overall economic output, which is something that we think we should be able to do going forward as well.
And profitable growth is key to our long term focus. It is driven by both our focus on inflation plus pricing but also continues to improve our service offerings. And clearly the opportunity that we see as the greatest going forward is in our intermodal business. So if we turn to slide 14, you can see on the right hand side, at the top, you can see what our intermodal business has done over the last few years. We’ve been able to grow our intermodal business about 32% since 2009.
And if you look on the left-hand side there, you can see in that beautiful maroon color, you can see our network and our terminals in our intermodal side, and you can see that they are overlaid very nicely to those mega regions that we talked about before. We have about 45 intermodal terminals, including eight port terminals.
And anchoring now our northern part of our network is our northwest Ohio terminal, a $170 million or so investment that we made in 2011. And that’s really changed the northern part of our network and it’s created a lot more opportunities. We run about 35 trains through that terminal on a daily basis, and because of the fact that we can consolidate volume into that area, we are able to open up many new lanes, about 50 of them since we opened that facility, that previously, economically, wouldn’t make any sense.
Because of the growth that we’ve seen, we are expanding terminals this year. We are expanding the once you see there in pink, about 500,000 units of this capacity. You see what we’re doing in Atlanta, Columbus, Boston, Detroit, Louisville, and Charlotte. In addition to that, we’re also building several new terminals. You can see that in the green.
You can see we’re currently building most in Montreal to take advantage of the growing NAFTA trade, and we’re building a new terminal down in Florida, in Winter Haven. Both of those we expect to be up and running next year. In addition to that, we’re also in the planning stages for a new terminal in Baltimore and also in Pittsburgh.
In addition to investments in our terminals, we’ve also made a lot of investments in double stack clearance. We are, today, about 90% double stack cleared in our intermodal networks. So 90% of the volume that we move today is moving in double stack cleared lanes. We think by 2015, as we do the last phase of our national gateway, we’ll be in the mid-90s at that point, which we think is a very attractive place to be.
So between the market reach that we have, between the terminal capacity that we invested in, and now this double stack economics, we think we have a very, very strong network and platform for continued strong growth going forward.
And as you can see, we have grown 32%, as I said earlier, over the last couple of years. And another way to look at that is on slide 15. This really goes back to the viability of this concept of the highway to rail conversion. On slide 15, on the yellow line, you can see the American Trucking Association’s truck tonnage, and it’s indexed to 2006. And you can see that yellow line has grown about 20% since 2006.
The blue line is our average weekly domestic intermodal volume. And as you can see, during this period of time, our domestic business has grown about 70%. And that’s a good testament to the vibrancy that we’re seeing in this truckload conversion opportunity.
And we’ve been doing that by focusing on four things. First of all, of course a service product that is compelling to our customers. Second, making sure that we have the capacity, both in terms of expanding existing [facilities], but also [unintelligible] [white spaces]. Making sure, thirdly, that we have the right channel partners. And then fourth, working on our H2R highway to rail initiatives. So we go out and educate [beneficial] cargo owners about the virtue of intermodal.
And we’ve done this by making sure that we are doing this from the right way, in terms of making sure that the profitability is there as well. We’re not trying to fill out a network. We’re not trying to create density before profitability. We’re making sure that whatever we add onto our network makes economic sense.
So, significant success over the last couple of years to drive more things onto rail-based solutions. And as we look forward now, on the next slide, on slide 16, we have talked about the 9 million units that are out there that we think, in the eastern half of the United States, that can be converted to rail-based solutions. We think a significant portion of that fits very nicely on top of our network.
And the way we define this opportunity set is basically moves that are greater than 550 miles, which we think is pretty conservative, because we know that we have a lot of volume that is actually shorter than that. And as you can see on the left hand side, the thickness of those blue lines really represents the amount of volume that we [traverse] of that, that fits our network.
And then the pie chart is the terminations or originations, in those different areas. And as you can see, generally, in the south you generally have more originations, while the north is more of a consumption area.
Clearly, as we continue to grow this business, capital will be needed, but we think that capital is very much scalable. We’ve learned, with some of the technology we’ve put in over the last couple of years, and with the wide span cranes that we’ve been putting in, that we can fit a lot of this growth into existing footprint by just utilizing the existing capacity more efficiently.
So we clearly think that we have the right strategy to grow this business. We think we have a track record of success, and we’re very excited about this opportunity going forward. And we think we have an opportunity to grow this business for many more years to come, at a multiple of the overall economic output.
So let me wrap up on the next slide before we go to Q&A. Clearly at this point we a track record of success when it comes to delivering for our shareholders. And now we have guidance through 2015 that extends that performance.
And while the focus continues to be around the 18% of our business that has to do with coal, 82% of our business now in the first half has nothing to do with coal, and we’ve been able to grow that bus very nicely between our focus on inflation plus pricing and continuing to put a compelling service product out there for our customers.
We think we have a network that’s well-positioned for growth going forward, and clearly this intermodal opportunity, we have the beginning stages of a pretty broad-based change in the way the pricing works within the United States. And we’re very excited to be able to provide solutions for our [truckload] partners to help them in the long haul while giving them the opportunity to do the first mile and last mile.
So with that, thank you for your attention, and we’ll open up for some questions.
Thank you, Fredrik. That was a very good presentation. I appreciate it. You hit the 15 minute mark left for questions just like you said you would. So, true professional.
I’m going to ask the first question on the outlook for beyond 2013. So ’14 and ’15, you’ve highlighted an earnings growth CAGR of 10-15%. So a reacceleration, if you will, of the business. I think on previous conference calls you’ve talked about the coal component of that being roughly flat in your guidance.
Just wanted to get a sense, is that still the right way to think about the domestic and export coal franchises as we go into the future? And kind of what gets you to the point where we would be seeing flat coal in aggregate?
Sure. And clearly since we issued that guidance in the second quarter I would say both that the export coal market has gotten more difficult and I would also say because of the cooling degree days that we’ve seen here during the summer, 18% unfavorable year over year, the inventory stockpiles are more challenged than we would have ever expected when we issued that guidance.
However, this is why we give a two-year guidance and not a quarter or one-year. We know that along the way that there will be challenges, and you can very easily make that up with doing half a percent more pricing or more productivity, or a little bit stronger economic growth than we would have originally expected.
And six months from now, the coal picture might look very different. One thing that I always say when you make a plan, the one thing you know is that you can’t expect to achieve that plan exactly the way you laid it down. And I think the same thing is true here. But you can’t hide away from the fact that the coal environment has gotten more challenging since we issued that guidance.
That makes sense. And I promise I’ll ask about the 82% of your business which isn’t coal, after I get maybe one or two more cleared up on the coal side. Just wanted to kind of catch up on the comment you made about the third quarter from a pricing perspective. You’ve been accommodating to the customers over the course of the last year plus. It sounds like there’s maybe a little bit more accommodation in the third quarter.
How do we think about the coal yields? I think Clarence has been pretty clear that he kind of expected things to remain roughly flat through the back half of the year. Is that something that we should be rethinking now? Or is that roughly still good?
I think it’s roughly still good. If it’s going to be down, it’s going to be down 1-3%, maybe overall, because of the additional pricing actions we’ve taken on the export side. But it hasn’t changed materially from that guidance.
And I’m going to ask another one here, and then I’ll open it up, and certainly the audience should feel free to jump in here. I want to touch on the intermodal opportunities. You guys have highlighted the 9 million loads that you see out there. You’ve made a big investment in northwest Ohio that I think has been very successful at linking originations and destinations. Is there the opportunity, or does it make sense, to potentially do a similar type of investment to underpin the southern region of your network at some point in the future? Where do you see the balance of that growth coming from what are the bigger opportunities for you?
Yes, and just going back to northwest Ohio first of all, obviously that has revolutionized the intermodal product to a very large degree, because this is really the first hub and spoke terminal in the country, and in fact the world, essentially. And it has been so successful at this point that we’re actually in the process of now starting to expand it. We’re looking at a $42 million expansion here, maybe next year or the year after.
So incredible success, by being able to create that density that you need to economically serve some of the smaller markets. So we are looking to see whether or not that makes sense elsewhere.
And clearly as the CFO I make sure that whatever investments we make make sense. So we have A) made sure that the post-audit for the northwest Ohio facility has come out the way we expected it, and it has, [unintelligible] there. And now we’ve got to do the business case for an additional terminal, if that’s what we think we should do. And we’re in the process of exploring what the market will actually allow us to do.
So absolutely, because of the success that we’ve had, we think this is the future for our network, and it’s just a matter of making sure we’ve put it in the right place, and making sure that the timing is right, and making sure that the market is there.
David Mack - J. Goldman
I just wanted to clarify some of the comments on the CAGR and growth rate going forward. If I think about 2014, let’s assume coal was flat, were we supposed to think 10-15% off of the $1.80? Or was that excluding the positives in the first half that aren’t recurring in the second half?
It’s the reported number that we will end up with for 2014. It’s the 10-15% CAGR during that two-year period.
David Mack - J. Goldman
So if I was thinking about 2014, on a clean basis, and you were to do 10-15% over the reported number, it’s actually even stronger than that, because you had the nonrecurring items in the first half. So if the Street, let’s say, is modeling $1.95 for next year, the true growth rate is actually higher than the reported growth rate. Is that the right way to think about it?
Well, as you think about it, it’s a two-year period, first of all. So you’re right, the more liquidated damages that we’re getting this year, clearly the hurdle is going to get more difficult for next year. And so we’ll push the number to be at the lower end, obviously.
And clearly, as I said earlier, the coal challenge is going to make it more difficult. But it’s important once again that this is a two-year number, that it is not pinpointed in one individual year. So it could be that if we do better this year than we originally expected, and we get more one-time stuff, that the first year is not as strong as the second year.
So, as I said, one thing you know when you lay out a plan is it’s not going to exactly happen the way that you originally forecast it to happen.
David Mack - J. Goldman
And assuming flat coal, which I know it’s not right now, and you never know, but assuming flat coal, the growth rate for 2014 could be lower and then you could catch up in ’15 as the whole system recurred. But 2014, you would not be uncomfortable with the two-year guidance even if 2014, on the growth side, came in on the low end.
As I said, right now, based on what we’re seeing, that’s the guidance that we have. And in the two quarters already, actually quarter and a half, things have changed significantly. And if we think at some point it’s appropriate to update the guidance, we will do that. But because it’s a two year guidance, and because we know at some point this headwind will stop, and we know that the rest of the business, as long as we focus on the things that we control, it’s producing kind of the core earnings power of the company that we need to get to those numbers, we feel comfortable that that’s the right guidance.
Unidentified Audience Member
Can we talk a little bit about capital expenditures, [ex-PTC]? You commented that it’s going to be 16-17% of revenues, and continue to be that. You built out the intermodal network to a degree which I think you said it is really leverageable at this point in time. Coal probably doesn’t need a whole lot of investment at this juncture. Merchandise is probably okay. And with underlying pricing generally still up a couple of percent, shouldn’t we start to see that number come down as a percentage of revenue, and maybe get to 12% or 13% or maybe even less than that? And/or is as a percentage of revenues really the right way to be thinking about it at this juncture versus just a hard [unintelligible] number?
Personally, I think that gross ton miles is a better way of looking at it. However, I think as an industry, in communicating to our investors, we’ve kind of transitioned through to potential of revenue. Now, why that makes sense also is that while we’ve talked a lot about the rail renaissance, there’s also been a supplier renaissance. The input prices to a lot of the things that we buy today have essentially followed the sort of inflationary pricing that we’ve been able to do.
In terms of your question, that hey, as you have built out a lot of your intermodal network and shouldn’t it not go up, I would say that there’s a self-governing mechanism here, as a percentage of revenue, because clearly as coal - you know, we were down 500 million last year, 160 million so far this year - as a percentage of revenue, our capital is coming down from that perspective.
And I think that we have a good view over the next five or so years that because so much of the capital we spend is engineering based - you know when the ties need to be replaced, you know when the bridges need to be replaced, you know when the tracks need to be replaced, you know when the locomotives need to be replaced - you have pretty good visibility.
And where we are in that cycle right now, I would say that 60-70% is the right place. Now, on the margin, any given year, could there be opportunities to pull it down? Maybe. But I still think that 60-70% seems to be the right place to be.
Unidentified Audience Member
The focus is more reflective of [unintelligible] where the infrastructure [unintelligible], where it just happens to work out that way, but it’s not revenues generated…
You have $400 million to $500 million of strategic capital, and as we look between intermodal and continue to kind of capture some of that growth, we look at productivity, we think that there’s a pipeline of good, well above the hurdle rate returns that we can achieve by putting that capital towards those products. So we feel pretty good that that’s the right place to be.
Maybe I could transition back to the pricing environment a little bit, particularly on the intermodal side. There’s a lot of discussion about competitive pricing within intermodal, particularly in the eastern half of the United States. How do you feel about where we stand right now? Has the dynamic really shifted at all? Or are we seeing mix changes that are maybe showing up in the revenue per carloads that are suggesting that pricing is a little softer?
Well, I can only comment about our strategy, and we’ve been so abundantly clear about what we’re trying to accomplish. We are making sure that whatever we put onto our intermodal network makes sense economically, bottom line. We’re spending a lot of capital, a lot of our shareholders capital, into new terminals, and we have to make sure that the stuff that we bring on pays for that investment.
So to lower the price point, or to build density before profitability, does not make sense. As I said, there’s one thing that we post-audit, and I have my group post-audit significantly, is every little investment that we make, of any substance, to make sure that this makes sense. Because on the margin, that’s the capital that we could put elsewhere, either through dividends, share repurchases, or other capital expenditures. So we’ve got to make sure that we do it right.
So we have a strategy. Is it as vibrant pricing environment in intermodal as we would like it to be? No. It’s not. But over time, hopefully it will get there.
Do you see any instances where competitively you’re losing bids that you might think you should otherwise win?
I think that’s true for any market that there are periods where you have a bid in chemicals, and are in emerging markets, for two years. And there’s always bids that you think you should have won. And I think that is true today, and it was true then. So, you try to price the price the way you think it make sense for your business, and sometimes you win, sometimes you lose.
So one other topic I wanted to hit on before we run out of time, and maybe we’ll have one more question from the audience, would be the productivity side. So, baked into your underlying assumptions for this year we look for flattish type of growth. I’m curious to see where you stand, and where Oscar is as far as his progress on productivity. And then when you think out to the 10-15% two-year CAGR, how much of productivity is embedded in those numbers?
This year we’re on track to exceed 150 after having done $200 million last year. And I think if you look back nine years, we’ve been averaging right around 145 to 150 a year. And as underlying assumptions for our guidance is $130 million, we’ve created [habit] strength, I think, within our organization that that’s the operating department’s responsibility and to partially offset the inflationary pressures that we have. So it’s clearly 130 for each and every year. And as we look to next year, we see the hopper of projects being filled to what we normally expect at this point. So we feel good about the 130 over the scheduled period.
Maybe just returning to coal for a second and thinking about the mix of the types of coal that you’re moving at this point. So you mentioned the Illinois Basin and PRB within the domestic side, and that’s grown from 25% to 50%. Can you talk a little bit about the mix implications of that on the domestic business, so length of haul and pricing, that you’re getting there. And then on the export side, just kind of a quick update on where you stand met versus thermal, because obviously there’s different economics on those two.
So, in terms of the shift to Illinois Basin coal, clearly the length of haul in some instances is longer. But I try to caution all our investors around that and say it’s not worse for us, but ultimately this is about burning more coal. This is about making more of our utilities competitive. So while it’s not a bad thing, I don’t think it’s going to be a big driver that anybody’s going to see in terms of the P&L impact. It really is about burning more coal and making the utilities more competitive, and lower natural gas prices.
On the export side, while, as you can, our volumes are doing okay on the export side, the part of our business that is more challenged right now is the steam side. And we have previously said that it’s going to be about 50-50, tilted a little bit more towards met. It’s clearly going to be tilted more towards met now, because of what we’re seeing here in the marketplace the last couple of months.
And because of the pricing actions that we’ve taken, there’s probably not as much of an upside from that mix change. Because historically, met has been priced with underlying commodity, which has been at a higher price. But at this point, as we’re trying to keep the U.S. producers competitive, there’s not much difference anymore between the steam and the met. There’s some, but it’s not significant.
And the last one, I think in the past you’ve said that the domestic side of your business, I think post the export pricing cuts, has been more profitable. Is that still the right way to think about the business?
I think that’s probably the right way to think about it.
Okay. Thanks very much for your time.
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