Jul 18, 2007
TRANSCRIPT SPONSOR
Executives
David Baggs - IR Michael Ward - Chairman, President and CEO Clarence Gooden - Chief Sales and Marketing Officer Tony Ingram - Chief Operating Officer Oscar Munoz - Chief Financial Officer
Analysts
Ken Hoexter - Merrill Lynch Ed Wolfe - Bear Stearns Tom Wadewitz – JP Morgan John Barnes - BBT Capital Markets Scott Flower - Banc of America Securities Jason Seidl - Credit Suisse William Green - Morgan Stanley John Larkin - Stifel Nicolaus John Kartsonas - Citigroup Amy Young - Caylon Securities Donald Broughton - A.G. Edwards
Operator
Good morning, ladies and gentlemen, and welcome to the CSX Corporation second quarter 2007 earnings conference call. (Operator Instructions) For opening remarks and introductions, I would like to turn the call over to Mr.
David Baggs, assistant Vice President, Investor Relations for CSX Corporation. Sir, you may begin.
David Baggs
Thank you. Good morning, everyone and welcome to CSX Corporation second quarter 2007 earnings presentation.
The presentation material this morning that we'll be reviewing, along with our CSX quarterly financial report and our quarterly safety and service measurements are available on our web site at CSX.com under the investor section. In addition, following the presentation a webcast and podcast replay will be available.
Here representing CSX this morning are Michael Ward, the company's Chairman, President and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; Tony Ingram, Chief Operating Officer; and Oscar Munoz, Chief Financial Officer. Now before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements.
Actual performance could differ materially from the results anticipated by these forward-looking statements. With that, let me turn the presentation over to Michael Ward, CSX Corporation's Chairman, President and Chief Executive Officer.
TRANSCRIPT SPONSOR
Michael Ward
Thank you, David and good morning, everyone. The second quarter results announced yesterday demonstrate once again CSX's earning power and momentum.
Earnings per share were up 22% on a comparable basis to last year when you back out insurance recoveries and tax settlements from the prior period. Our transportation businesses generated record second quarter revenues of $2.5 billion, a nearly 5% increase over 2006, and operating income of $603 million.
Our operations are clearly in a rhythm and delivering great results in both safety and service. We expect continued improvement in both these areas and our people are not letting up.
Our safety focus and success are first and foremost about protecting our employees and the communities we serve. At the same time, financial benefits are also very real.
As a direct result of our safety improvements over the past three years, we were able to take a second quarter $30 million reduction in reserves related to lower personal injury claims. On the service side, not only are we seeing continued gains in our operating performance, but those gains are translating into higher and higher levels of customer satisfaction.
Our improvements in customer satisfaction and service support strong pricing, with approximately 7% improvement in revenue per unit in the quarter. When you combine the underlying strength of our safety, service, and price performance with the ongoing productivity efforts in our operations, we continue to drive our operating ratio lower.
Our employees understand that we are establishing new milestones even as we achieve others. The second quarter demonstrates that our focus is clear and we are on the right path to achieve our goal of an operating ratio in the mid to low 70s by 2010.
Now let's look at our results, beginning with Tony who will discuss our focus on operational excellence.
Tony Ingram
Thank you, Michael and good morning, everyone. I'm pleased to report the team delivered strong results for the second quarter.
First, safety results are outstanding and the positive trend continues. We're running to plan and key service measures continue to improve across the board.
Our customer sees these improvements and they gave us our highest ever rating in customer satisfaction. Productivity is also improving and working against inflation.
Let's look at safety in more detail. Slide 7 shows the excellent trend in safety continued in the second quarter.
In the yellow box you see personal injuries at 1.04 for the quarter. This is the best performance ever achieved at CSX and it helped drive the improvements for the rolling 12 months.
Train accidents were 2.85 for the quarter. On a rolling 12 months, they were down 22% from 3.09.
The improvements in safety are outstanding, but we will not stop here. Our employees are committed to safety and reaching a higher level of performance.
Let's turn to the area our customer sees, on-time performance. On-time in originations increased to 80% in the quarter, another all-time high for CSX, and for the rolling 12 months, performance improved to 77%.
On-time arrivals were 69% for the quarter and also improved for the rolling 12 months. The train network is running well and our focus on planned execution is producing results.
This trend will continue as we build on our success. Looking at slide 9, our asset turns also continues to improve.
On average, the well was 24 hours in the quarter and 25 hours for the rolling 12 months. Our terminals remain fluid and they're running the plan everyday.
Cars online remained at a good level, 223,000 cars for the quarter. Now let's look at another measure of network performance, velocity.
Velocity improved to 20.4 miles per hour in the second quarter and a 20.1 for the rolling 12 months period. The improvements in average velocity is a positive sign, but stable velocity performance is also important.
Stable velocity shows the network is fluid and reliable and can recover quickly from service disruptions. In the end, stable velocity leads to more consistent service for our customers.
This brings me to slide 11, which shows customer satisfaction. Each year we ask more than 2,000 customers to grade our performance on 15 aspects of service.
For the most recent six months, our scores are higher than they've ever been. It is very rewarding to have our customers recognizing the operating improvements we work hard to deliver.
Improved service to our customers is critical to long-term profitable growth for CSX. Just like safety, the work here is not complete.
We target continuous improvements. Turning to slide 12, we're making real progress in productivity.
The network is more efficient when we execute the plan. This is most evident in car hire, the time-based cost of using real equipment not owned by CSX.
In addition, through the ONE Plan, we continuously size our train plan and assets to meet current business conditions. Our process improvement teams are also managing a pipeline of projects to deliver productivity gains to help offset the cost of inflation.
Finally, we recently launched a new initiative called Total Service Integration, or TSI, to further improve customer service and productivity. We'll discuss TSI in more detail at the September investor conference.
Wrapping up on slide 13, our plan is working. We'll continue to build on the solid foundation with leadership, discipline and execution.
The great momentum in safety and network performance will continue. We can achieve even better results.
We continue to raise the bar on productivity and the use of key assets. Finally, our customer will enjoy continuous improvement and service reliability.
Now let me turn the presentation over to Clarence to review the sales and marketing results.
Clarence Gooden
Thank you, Tony and good morning, everyone. This morning I would like to highlight our second quarter results, the primary drivers, and offer insights on what we see ahead for the remainder of 2007.
CSX achieved another successful quarter of revenue growth in spite of the continued weakness in the housing and automotive sectors of the economy. Revenues increased nearly 5% to a quarterly record of $2.5 billion, exceeding the prior year by $109 million, primarily on the strength of our pricing actions.
Yield improvements of $164 million more than offset the impact of lower volumes. This continues our success in delivering uninterrupted quarterly revenue growth for more than five years.
As you can see on the next slide, the pricing environment continues to be strong. The line on this chart reflects the year-over-year change in total revenue per unit, which includes the impact of price, fuel and mix.
During the second quarter, overall revenue per unit increased 6.9%. This increase is less than the rate we saw in the first quarter due to the impacts of fuel and mix.
The bars on the chart reflect the increase in price on a same-store sales basis, which excludes the impact from fuel and mix. Same-store sales are defined as shipments with the same customers, same commodities and car types shipped between the same origin and destinations.
These shipments represent approximately 75% of our total base. On this basis we achieved average overall price increases of 6.5%, in line with the price increases we have achieved over the last seven quarters.
Also let me remind you that in any given period, not all traffic is up for renewal. These results reflect our continued focus on pursuing the highest yields on existing and future traffic, despite some temporal weaknesses in volume.
Moving forward in 2007, we absolutely expect to continue our momentum in improving yield. Now let's look at the factors driving volume change.
Quarterly merchandise revenue of over $1.2 billion increased 5%. This too represents a new quarterly record.
This growth was driven by stronger yields in all markets as revenue per unit increased 9%, more than offsetting volume softness in several markets. Growth in agricultural shipments was favorable due to continued rapid growth in the Northeast ethanol market.
We saw the most significant volume declines in our forest products, food and consumer, and emerging markets where the softness in housing reduced shipments of lumber, building products, roofing granules and aggregates. Let's turn to the next slide and review the results from coal.
Strong pricing actions also drove quarterly coal revenues to a record $638 million, an increase of nearly 8%. Continued strong demand for export coal during the quarter was offset by declines in shipments to utilities as eastern coal utility stockpiles have reached target levels.
Although carloads were down nearly 1%, total tons shipped were favorable as we continue to ship more coal per carload. Revenue per unit increased 9%, significantly offsetting the moderating volume.
This reflects our continued focus on yields and we believe the favorable pricing environment in coal will continue. Now turning to the automotive market's results, quarterly automotive revenue of $223 million remains flat as revenue per unit gains offset volume declines.
North American light vehicle production for the Big Three continue to decline in the second quarter by 7%, as auto industry restructuring resulted in additional plant closures during the second quarter. This trend continues to more than offset the growth from current new domestics located on CSX.
Pricing actions resulted in a revenue per unit increase of 4% and the pricing outlook remains favorable going forward. Long term, we feel well-positioned with the Big Three and for continued growth in the new domestics.
Turning to our intermodal results, quarterly intermodal revenue of $343 million declined 4% driven by mix and lower volume as declines in international traffic more than offset the increases in domestic traffic. International traffic is down 8% due to losses across a few accounts and the closing of our Kingsport, Tennessee intermodal facility.
In addition, there were losses due to select steamship carriers withdrawing from certain markets. However, new shorter haul train service into and out of Atlanta, as well as other new dedicated train services, drove growth in domestic traffic by more than 8%.
These new services will continue to be a catalyst for growth as the year progresses. Price on a same-store sales basis increased over 4% across the intermodal portfolio, yet overall revenue per unit decreased due to the mix impacts from the shorter haul yet profitable traffic.
Taking a look at intermodal profitability, intermodal operating income was up 16% for the second quarter despite less volume and revenue, as a result of pricing gains, the new profitable shorter haul service and greater operating efficiencies. This resulted in a second quarter operating ratio of 79.3%, a 3.6 point improvement versus 2006 on a comparable basis.
Now let's take a look at the revenue for the third quarter. Overall, our third quarter revenue outlook is positive.
Pricing strength will continue to be the key driver across all markets. As you can see in the near term revenue is expected to be favorable in six of our ten markets, neutral in two, and unfavorable in two.
Coal, coke, and iron ore revenue growth will remain strong due to continued pricing strength despite volume challenges from tough year-over-year comparisons and high utility stockpiles in the East. In contrast to the second quarter, the outlook for revenue and volume in automotive is favorable as vehicle production forecasts have improved and as we have moved beyond some of the initial unfavorable year-over-year comparisons from 2006.
The revenue outlook for merchandise is generally favorable, although continued softness in the housing sector will impact volume and revenue in metals, food and consumer, and forest products. The outlook for intermodal is neutral.
Although we see continuing benefits from improved operations, our new services and strengthening in international traffic as we move beyond the third quarter of 2007. Let me close by looking at the overall business environment.
The economy is forecasted to improve in the second half, resulting in growth for 2007 and 2008 in the range of 2% to 3%. More importantly, we expect strong revenue growth to continue, driven primarily by our ongoing pricing success.
While near term volumes will be soft, our overall volume outlook is improving. We are committed to providing excellent service and value for our customers and let me again reiterate, we will not sacrifice price for short-term volume gains.
This focus reflects our long-term vision of pricing to the market to support higher yields on existing and future traffic. Thank you very much and let me turn the presentation over to Oscar to review our financial results.
Oscar Munoz
Thank you, Clarence and good morning, everyone. On slide 25, which represents our reported numbers, we reported earnings per share of $0.71 for the second quarter, a decrease of $0.12 from the prior year.
Going back to the top, in the quarter we saw surface transportation operating income of $603 million, reflected improving operating performance and strong cost control. As a reminder, last year's results benefited from insurance recovery.
Moving below the line, other income and interest expense are both relatively flat with last year while taxes are $21 million higher, primarily due to a benefit seen in the prior year related to the resolution of certain tax matters. Turning to the next slide, let's look at our results on a more comparable basis.
After removing the prior year gain on insurance recoveries and income tax benefits, earnings per share on a comparable basis increased $0.13 or 22%. Looking at operating income after removing the gain on insurance recoveries, our surface transportation business increased earnings $84 million or 16%.
Now looking at this result from a broader perspective on slide 27, you can see that there are two key items affecting the year-over-year comparison of our operating income. The first is the cycling of our now-expired fuel hedge position, which increased last year's second quarter results by $19 million; the second is a favorable adjustment to our personal injury reserves which reduced expense by $30 million in this year's quarter.
Now as a reminder, we evaluate our personal injury reserves twice a year based on independent, actuarial assessments analyzing the historical and recent trends in claims and settlements. This reduction reflects a significant improvement in our safety record over the past several years.
Absent these two items, our core earnings power increased $73 million or 14%, setting an all-time high in comparable operating income despite the softer economic environment. Now let's walk through the details of our surface transportation results on the next slide.
As Clarence discussed, we have seen more than five years of uninterrupted top line growth. In total, continued strength in yields more than offset our decline in volume, resulting in nearly 5% growth for the quarter.
On the cost side, reflecting the impact of lower volumes, stronger operations, and the favorable adjustment to our personal injury reserves, total expenses increased 1% or $25 million for the quarter, the details of which I'll review over the next few slides. The net result was a second quarter operating income of $603 million and an operating ratio of 76.2%.
Let me start our expense review with labor costs. On slide 29, labor and fringe, which is our largest expense category, increased $26 million or 4% over last year.
The increase was primarily driven by wage and benefit inflation of $26 million, as well as cost associated with the ratification of a labor agreement in the quarter. Now while there is a short-term increase in expense associated with this agreement, we expect long-term benefits as compensation for our locomotive engineers is now more directly linked to our corporate objectives.
These cost increases in labor were partially offset by a reduction in train crew headcount due to lower volume and our continued focus on productivity and cost control. Looking forward and on a full-year basis, we continue to expect our labor and fringe expenses to increase less than inflation as we achieve our productivity objectives.
Moving to the next slide, on MS&O, these expenses increased by $18 million or 4% over last year. This was driven by continued higher inflation, an increase in the allowance for non-freight related receivables and various other items.
As I previously discussed, these increases were partially offset by the $30 million reduction in our personal injury reserves, reflecting the significant progress our operations team has achieved in making safety a way of life. As we stated in the past, only about 20% or 30% of our MS&O expenses are directly tied to volume, the remaining costs are more indirect in nature, such as contracted services, cost of risk and infrastructure and equipment maintenance.
So in the near term, you can expect the quarterly run rate on this line to continue growing at 6% to 8% on a year-over-year basis. Let's move to fuel on the next slide.
Overall, fuel increased only $1 million versus last year. The cycling of a $19 million hedge benefit from '06 was mostly offset by a reduction in average fuel price of $12 million, a decline in volume of ton miles, and a continued improvement in fuel efficiency.
This improvement in efficiency directly reduced fuel consumption by over 2 million gallons for the quarter. Further reflecting our commitment to the environment and to improving fuel efficiency, the locomotive process improvement team, a pit team was recently awarded a bronze metal from the American Society for Quality for significant improvements resulting from a company-wide fuel conservation initiative.
Now let's go to the next slide and talk about rent. Equipment rent declined 17% or $23 million driven by a reduction in car hire expense.
Primarily driving this reduction were lower volumes in our merchandising and intermodal markets and the continued improvement in operational fluidity and asset utilization. Additionally, we experienced a favorable impact of $7 million related to the settlement of car hire expenses with other railroads.
If you exclude the favorable impact on these settlements on a go-forward basis you should expect our rent expense to move with our business volumes and to continue to benefit from improvements in asset utilization. Let me review the remaining expenses on the next slide.
All other expenses increased $3 million versus prior year. The driver of this increase is depreciation, which was higher due to a net increase in our capital asset base.
Partially offsetting this increase are lower depreciation rates as a result of an equipment life study completed in the quarter. As a reminder, railroads are required by the Surface Transportation Board to complete a periodic review of their assets.
Equipment is reviewed every three years while track and other assets are reviewed every six years. Our depreciation rates are being driven lower, reflecting longer lives and higher salvage values of our rail cars and locomotives.
With that, let me update you on how we're managing costs for the long term. On slide 34, as our operations have significantly improved our time horizon for identifying and achieving productivity initiatives is lengthening.
We have established both near-term and long-term productivity and effectiveness targets, utilizing cross functional process improvement teams. These teams evaluate processes from end to end and are responsible for developing a pipeline of projects looking out several years into the future.
Core to our approach in managing costs we are constantly benchmarking ourselves against the best in class. Our focus on cost management will be a key enabler in achieving an operating ratio in the low to mid-70s by 2010.
On the next slide, let me update you on how we continue to return value to share owners. Our repurchase program is consistent with our balanced approach of investing in the business and returning value to share owners through share repurchases and dividends.
In addition to representing approximately 15% of current market cap, this is the most aggressive share repurchase program in the industry. We are on track for completing the program by year end 2008.
To date we have already completed over 20% of the program, including the repurchase of approximately 12.3 million shares for nearly $550 million in the second quarter. As we've said before, we will continue to have a bias for early repurchases.
In addition to the share buyback program and consistent with our balanced approach, we recently announced a 25% increase in our quarterly dividend to $0.15 per share, effective with the third quarter payments. Let me wrap up on the next slide.
The actions we have recently taken to increase capital investments, share repurchases and dividends reinforce our view of the company's long-term growth prospects. As a reminder, we have updated our long-term financial targets, expecting to deliver double-digit growth in operating income and earnings per share through 2010, growing off a record 2007 base.
Over this timeframe, we also expect to improve margins to record levels and continue delivering returns on capital that exceed our cost of capital. So with that, let me turn it back to Michael for his remarks.
Michael Ward
Thank you, Oscar. It's my privilege every quarter to talk to you about the renaissance in our industry and the excellent value CSX employees are delivering to our shareholders, to our customers, to our communities and to our country.
In the three years ending June 30, CSX investors have seen the value of their stock nearly triple and have made more money than investors in 95% of the S&P 500 companies. We're proud of that.
Companies create value when they have something compelling to sell. For some companies, that means changing the flavor of the soft drink, for others, it means delivering a cell phone that plays music and surfs the Internet.
For railroads, as you know, the value proposition is quite different. We meet the needs of the entire nation every day, not just desires or preferences, but real needs.
CSX owns an immense 21,000 mile system and every day we maintain it, we expand it to meet new demands and we make it safer. Along our 21,000 miles, we transport coal to light American homes, grain to feed livestock and poultry, military equipment to protect our homeland, and even soft drinks.
We're also there for the safe movement of passengers and commuters who ride on our tracks across the country and through cities like Boston and Washington, D.C. What many people don't know yet is that railroads, which are funded by a private industry, are becoming a greater and greater force in bringing solutions to even more public needs.
As environmental protection becomes more important and the highways more crowded, America is turning to railroads. We are three to four times more fuel efficient than trucks, which dramatically reduces emissions.
Railroads also take traffic off the nation's highways and deliver the safest form of ground transportation available. We meet needs.
We create value for many constituencies and that translates into values for our shareholders. Large freight railroads spend more than four times as much on capital for every dollar of revenue than all U.S.
manufacturing companies on average. Let me repeat that: four times the average.
To invest at this significantly higher level, it's critical that we have ready access to capital supported by an investment-grade credit profile. In order for that to be possible, CSX must also sustain a disciplined and balance approach to managing our capital structure.
So what does that mean? First it means continuing our excellent financial performance.
To that end we anticipate double-digit gains in our key financial measures between now and 2010. Second, it means repurchasing shares when it makes sense.
We currently have the most aggressive repurchase program in our industry. Third, it means paying excellent dividends to our shareholders.
Our announced increase effective in September will triple our dividend in just two years. Finally, a balanced approach means investing consistently and responsibly in the CSX transportation network to meet growing demand.
Our balanced approach provides generous rewards tour investors in both the short and the long run. So before I turn it over to questions, I'd like to thank our shareholders who are attracted to a company with a balanced, long-term strategy and a focused, accountable and highly-motivated team.
So with that we'll take your questions, if you would please identify yourself and your affiliation for the benefit of our audience.
Operator
(Operator Instructions) Our first question comes from Ken Hoexter - Merrill Lynch.
Ken Hoexter - Merrill Lynch
Good morning. Great, great results and good to see that things are really on track with the turnaround.
Mike, before I get to some of the earnings questions, I have a question on the big picture. There's an article up in Canada today talking about a potential bid for CP and the potential for them dividing the network up into a network operating company and a physical asset or rail operating entity.
Can you talk about, as you talk about looking at the company and ability to get certain leverage, can you talk about whether something like that makes sense in ability to get more leverage on top of the company to get the returns that you desire, versus operating as a full entity? I know we are getting a lot of questions on it this morning.
Michael Ward
Ken, I think as you know, as a matter of long-standing policy we usually don't discuss long-term strategic assessments. Having said that, I think that our current business model is the right business model for CSX.
This company and its committed employees have brought excellent results and value by just about any measure you can think of; I mean, tripling in the last three years is pretty darn good and as I said, we're proud of it. I think you can really look forward for us, that we're going to continue that and continue that at a strong pace.
Ken Hoexter - Merrill Lynch
On the quarter, Clarence, you noted that yields were up 7% or 6.5% in line with the same-store level. What level do you target as the annual increase level in some of the long-term contracts?
Is it in that 6.5% range, is it a little bit lower? On an annualized inflationary level?
Clarence Gooden
Ken, what we've said in the past is that we expect in 2007 that our same-store sales price increase is going to be in the range of 6% to 7% and next year in the range of 5% to 6%.
Ken Hoexter - Merrill Lynch
On the coal, you mentioned that with some of the newer cars you're getting more and that's why you saw some of the levels of volumes decrease a bit. Do you bill by the tonnage or by the car?
I'm trying to understand who benefits from the increased capacity of the cars?
Clarence Gooden
We bill by the ton.
Ken Hoexter - Merrill Lynch
Lastly on the intermodal side you said you decreased international traffic, you closed the Kingsport, Tennessee terminal. When do you annualize that?
Was there a large customer that moved off your network? Can you talk about the international side?
I understand some of the Eastern ports are actually seeing some benefit from the tightness of the capacity going on in the West coast, they are moving more to the East. I just wanted to understand if you could see some of the improved volume flow on the East coast?
Michael Ward
We closed the Kingsport, Tennessee terminal April 1. It was a mutually agreed closure by us and our customer.
It was relatively short haul international freight moving to the port of Charleston. It's right in the middle of our coal field, so we had a higher and better use, if you will, for those train slots that were moving down that urban Tennessee gateway.
Operator
Our next question comes from Ed Wolfe - Bear Stearns.
Ed Wolfe - Bear Stearns
Can you give a little bit more detail around the labor? You talked about some costs related to the ratification of some contracts.
Can you talk about what those costs were and how we think about those same costs in third quarter and fourth quarter versus second quarter?
Oscar Munoz
Ed, this is Oscar. The engineer ratification cost in the quarter was approximately $12 million.
That is by and large a one-time ratification cost and don't necessarily see increases in the further quarters. But we do see, obviously, a great win for both teams as we have more and more of our workforce tied, along with management, to the company's objectives.
Ed Wolfe - Bear Stearns
What other contracts are ratified and do you expect a similar kind of drag from those as they get signed, or have you accrued for some and we could even see benefits?
Oscar Munoz
I think it's a combination of all of that. There are always several things that are out there working; the timing, which we can't forecast.
We do tend to accrue on a general basis what we expect and then ratification costs and such are all included as part of that. As they happen we'll let you know.
Ed Wolfe - Bear Stearns
So average comp being up 4.5 in the quarter, we should look at that as there's about $12 million in there that's unusual?
Oscar Munoz
Yes.
Ed Wolfe - Bear Stearns
You also talked about the asset life study on the depreciation side. Can you give us some more details of what's changed in terms of how you're looking at depreciating the assets going forward?
Oscar Munoz
I think the way to look at it financially, it will slightly decrease the rate of increase that you're seeing because of the increased CapEx. It's about $4 million or $5 million a quarter going forward, offsetting again the higher cost of CapEx.
Ed Wolfe - Bear Stearns
Right. So that goes forward and then that will grandfather in second quarter of next year?
Oscar Munoz
Exactly. If you mean we will cycle it.
Ed Wolfe - Bear Stearns
Yes. You'll cycle it.
That's what I meant by that. Also, the $30 million insurance reserves you talked about in MS&O.
How do we think about that next quarter? Is that something that we will see third quarter or not again?
Oscar Munoz
Because it's a long-term actuarial adjustment, it does have some ongoing benefit. It's about $1 million or so per month, so $3 million to $4 million a quarter.
Oscar Munoz
Okay. That's on top of the $30 million this quarter or the $30 million was one-time this quarter and then $3 million a quarter going forward?
Oscar Munoz
Exactly. It's $30 million one-time and then a small improvement on a go-forward basis.
Ed Wolfe - Bear Stearns
Can you talk a little bit, Clarence, about the contracts and what's been repriced? If you look year-to-date, what percent of your contracts have repriced that had not repriced before early '04 at this time?
Clarence Gooden
Ed, we've got about 15% of our outstanding contracts right now, in terms of revenue, that have not been repriced since 2004. Everything else has been touched at a minimum one-time, and in some cases three and four times.
Ed Wolfe - Bear Stearns
So that's left as of now, but can you talk about from January until now, what was repriced, give or take?
Clarence Gooden
I don't have that number with me.
Ed Wolfe - Bear Stearns
Directionally, where truck pricing is down, how should we think about you going forward when you compete with truck? If truck pricing stays down for a while, are you willing to live with negative volume for a while to keep the pricing up, or should we think at some point you've got to manage the volume yield on that domestic piece a little bit?
Clarence Gooden
No. We're planning on keeping our focus on our pricing and in the short term we'll just have to ride the volume out.
Operator
Our next question comes from Tom Wadewitz – JP Morgan.
Tom Wadewitz – JP Morgan
I wanted to touch on the pricing and then also a little bit on intermodal. Ed asked you about the truck pricing.
What about competition in the spot market with Norfolk Southern? Have you seen any change in that dynamic as a result of some slow volumes for a few quarters?
Michael Ward
We have not. We see good, strong pricing all through the rail system.
Tom Wadewitz – JP Morgan
On the intermodal side, can you talk a little bit about the medium-term outlook for growth on that, and perhaps touch on the new southeast service with Burlington Northern? How many trains a day you are running now and the outlook for further growth from that service?
Michael Ward
Tom, we're running two a day. They're full in both directions.
We may well have to add a second train here in the fall peak, if the fall peak does what we hope it does and expect that it will do. As you saw in our numbers, our domestic volume in general is up about 7% or 8% in the quarter so we feel good about the domestic growth in the third quarter.
Tom Wadewitz – JP Morgan
So that service is meeting your expectations, it's coming in as you would have expected. What about the international?
You talked about closing that terminal in Kingsport, which seems to make sense. Should we look at the run rate for international in second quarter and expect that to continue for a couple quarters as a result of the closures, or are you optimistic that international volume growth would pick up a bit in third and fourth quarter and perhaps be positive looking out a few quarters?
Michael Ward
You can expect that volume growth in international for three more quarters to reflect the loss of that Kingsport, Tennessee business which was about 25% of the total international volume that was down. As we move into the fall peak and into the strong seasonal shipping business and international traffic, we expect that will grow some.
Tom Wadewitz – JP Morgan
Is there anything else going on in international driving that softness, or is it just a weaker market in addition to the closure?
Michael Ward
Well some of the steamship lines, as you're aware, pulled out of certain points. You would know that as the IPI, the InterPoint Intermodal traffic.
That traffic in turn moves as domestic traffic.
Operator
Our next question comes from John Barnes - BBT Capital Markets.
John Barnes - BBT Capital Markets
Congratulations on a nice number. A couple things on productivity.
Tony, can you talk a little bit about your trends in terms of have you been able to, with the safety improvement and some of the improvement in on-time originations and arrivals, have you been able to do anything in terms of train size? Are you seeing a significant increase in cars per train, train starts, anything like that?
Where do you think those numbers can go?
Tony Ingram
John, yes, we've seen some improvement in our train size, 2% or 3%, primarily because we've taken out a number of trains and shrunk some of the network trains that we operate on a daily basis. Also, with the automotive being a little weak, we've taken some trains out in that line, which has added cars to other trains.
John Barnes - BBT Capital Markets
How much more do you think you have on that front, or do you think you've really exhausted your ability to continue to improve that?
Tony Ingram
John, we're raising the bar every day. We're not satisfied where we are, we're looking for a few more every time we run a train.
John Barnes - BBT Capital Markets
Very good. Oscar, can you give us an idea, average price per share on your repurchase during the quarter?
Oscar Munoz
About $44.50. I think if you do the math on the 550 and the 12.3 million shares that we have, that should be about $44.50.
John Barnes - BBT Capital Markets
I just wanted to make sure it wasn't skewed by a move in the stock. The other question on that front, I'm trying to get a sense, do you know how many shares a day you're allowed to purchase?
I know it's a rolling kind of thing, but right off the top of your head, do you know what the maximum number per day you can buy is?
Oscar Munoz
I don't.
Clarence Gooden
My recollection, it's no more than 25% of the last two-week average.
John Barnes - BBT Capital Markets
Clarence, lastly some of the follow-up on pricing. Of that 15% of your outstanding contracts that haven't been repriced since '04, do you have a feel for how many of those contracts, what percentage of the remaining business that hasn't been touched, how much of that are we talking about that hasn't been repriced in ten years?
Is it more shorter duration since it has been touched, or is it half of it that hasn't been touched in ten or 15 years? I'm trying to get a sense of the remaining piece, what's the magnitude of increase we may see.
Clarence Gooden
I really don't know how much of it hasn't been touched in ten years, because I don't look at it that way. I look at it, when am I going to touch it?
The principal and preponderance of that will be repriced in 2008 and 2009.
Operator
Our next question comes from Scott Flower - Banc of America Securities.
Scott Flower - Banc of America Securities
I wondered if I could get a little color. Clarence, I know that in the past you've been able to break out RPU as a percentage between mix and price and fuel surcharge.
I'm wondering if I could get that sense from you now for this quarter?
Clarence Gooden
Well, as you know, we transitioned, Scott, to a new mileage-based program that has a slightly different trigger point. We're focusing on that same-store sales perspective, which we've shown you now for the last several quarters.
The same-store sales is up 6.5% and the RPU is up 6.9% and the difference in the two was due to fuel and mix.
Scott Flower - Banc of America Securities
What is your coverage on fuel surcharge between fuel surcharge and RCAP currently?
Clarence Gooden
85%.
Scott Flower - Banc of America Securities
I just want clarification, you've mentioned obviously the Kingsport facility, and you also in your comments talked about international account losses. Was that the Kingsport facility you're talking about, or were there other contracts that moved away?
Clarence Gooden
There were certain lanes that shifted away.
Scott Flower - Banc of America Securities
That's was what you were talking about in terms of the IPI changes?
Clarence Gooden
That was part of it.
Scott Flower - Banc of America Securities
Was some of the other business that walked away based on price, or did it move just in terms of where it embarked into the country in terms of broader changes at the steamship company?
Clarence Gooden
It moved by where the steamship lines actually routed the freight.
Scott Flower - Banc of America Securities
The last thing I had, maybe this is for you, Michael. Obviously, there have been some other industry settlements.
I'm just wondering where does that leave the industry relative to the remaining employee groups that are still outstanding in terms of labor contracts?
Michael Ward
As you probably know, Scott, we've reached with the RLBC, the Rail Labor Bargaining Coalition, which is a combination of seven unions, six of those ratified, the seventh is out for a revote, it is very close and they think it will pass. That will be back in August.
That will take care of about 50% of the industry’s employees. We are currently in discussion with TCU, our clerical coalition for another five unions.
Those discussions are occurring at this point and we're hopeful that they will follow the pattern set by the beginning 50% and then finally we'll have the UTU, which would be the last to come this round.
Operator
Our next question comes from Jason Seidl - Credit Suisse.
Jason Seidl - Credit Suisse
Good morning, gentleman. A quick question about the personal injury reserve adjustment.
You said you do a review two times a year. If the trends continue on your safety record, should we expect another adjustment the next time you look at this?
Oscar Munoz
It's difficult to forecast that. There are many issues that go into that adjustment, but clearly our best driver of that that we control is continuing that great safety record.
So that is what we focus on, and then as the third party actuarial do their work, the resultant number is what we work through.
Jason Seidl - Credit Suisse
You talked about some of the long-term productivity targets, can you give us a little bit more color behind that in terms of what they specifically are?
Oscar Munoz
I think that the focus we're trying to articulate is moving from within year, within quarter kind of initiatives to a longer-term timeframe as Tony and his team get some of the processes they have been getting, the decisions for moving longer term are important. That we look at our investments, our tools and resources and training over a much longer-term horizon.
It's the same basic issues, running the railroad and efficiency and productivity, but just on a longer-term basis.
Jason Seidl - Credit Suisse
So there's nothing you specifically have in terms of here's our goals for train speeds, here’s our goal reducing the crew rates, terminal…
Oscar Munoz
Every initiative has an efficiency and a productivity measurement that we monitor and work through. I won’t necessarily talk about those publicly, they are more internal ones, but yes.
Every initiative has a very specific objective that's measured and monitored by the executive team. It is clearly a key to getting to that operating ratio in the low 70s.
Jason Seidl - Credit Suisse
Just related to the economy, everyone's talking about a second half turnaround. Have you guys started to see anything that would cause you to believe that we're starting to see it move in the right direction in terms of your customers and your traffic?
Clarence Gooden
We're seeing in certain segments of the economy, as I mentioned in our agricultural business our ethanol business is strong, our chemical business continues to be strong. We put our intermodal business in a neutral sort of category.
Our coal business is sort of flat, moving there, and we still see issues in the housing sector. But overall, it looks to us like it's slightly trending up as we move into this second half.
Operator
Our next question comes from William Green - Morgan Stanley.
William Green - Morgan Stanley
Hi. I'm wondering if you guys have a sense for how much of your volume change is due to the economy and how much might be due to yield management efforts, the whole pricing story?
Clarence Gooden
I would say the preponderance of our volume change was due to the housing and automotive sectors, mainly. We had some decline in our metals business because of the inventories building up as a result of the automotive sectors, but in general if you saw our other markets we are fairly good as we moved in.
William Green - Morgan Stanley
Okay. It so doesn't seem like the pricing is chasing volume off the rail?
Clarence Gooden
No, I don't think so.
William Green - Morgan Stanley
If we look at the ROIC target that you talked about, Oscar, how do you commute that cost of capital? Do you use regulatory definition or cap M or some other metric?
Oscar Munoz
Cap M.
William Green - Morgan Stanley
Lastly in terms of a productivity metric, we often look at carloads per employee, that's been falling for six or seven or eight quarters, something like that. How should we think about that going forward?
Are you going to be able to start to drive that higher as you go through attrition or is this a number that has to wait for volumes to recover?
Oscar Munoz
I think as the volume comes back, I think that will improve that metric.
William Green - Morgan Stanley
So we'll hold on to what we got because of all of the regular attrition.
Oscar Munoz
They'll move with volume.
Operator
Our next question comes from John Larkin - Stifel Nicolaus.
John Larkin - Stifel Nicolaus
In thinking back to the session you held at the New York Stock Exchange a couple years ago where you laid out a very coherent plan that envisioned 2% to 3% volume growth over a five-plus year period and since that time, the economy has softened and volumes have turned negative. As you look forward here in your plans for 2010, can you give us a sense for how you see volumes trending?
When do you think the year-over-year comparisons will turn positive? Will they tend to gravitate back to that 2% to 3% level, or do you think they'll initially ramp back a little faster than that so the long-term five-year average might be more like 2% to 3%?
As a follow on to that, will that return to tonnage growth make tonnage job a lot more difficult in terms of continuing to show such dramatic improvement in the operating metrics? Lastly, will there be additional capital projects that will be needed to accommodate that growth beyond the Hudson River Corridor and the O&M improvement that I would gather are nearing completion?
Michael Ward
John, I hope you didn't think all those questions up by yourself. On the volumes going forward, if the housing hasn’t hit us as hard as it did as an industry and the automotive downturns, we could have had much better volume here.
I expect as the housing starts to come back sometime in late 2008 that you'll see the volume start to ramp back up. If we have a hot summer like we're having and hot nights and get a good electric burn on our coal, you'll see our coal business do good.
With the dollar staying as weak as it is right now, you'll see our export coal volumes stay strong and I wouldn't be surprised if you didn't see some of the soy beans and ag products being exported as a result of the weaker dollar. Moving forward into the out years and out through 2010, I think we're on target to see our 2% to 3% annual growth as we've outlined.
John Larkin - Stifel Nicolaus
Will there be a catch-up, do you think initially, or are we going to gravitate back off the lower base to a 2% to 3% growth?
Michael Ward
Unless we have just some quantum jump in the economy, it will be a glide.
Tony Ingram
John, addressing the capital, as we indicated there in I think it was 2005, we had a two-year program to build some capacity between Chicago and Jacksonville and we're on target to complete that this year. We're seeing some improvements and we'll look at that as we go forward.
We are planning long term to look at different capital improvements based on the outlook of business to come. The assistance with our new program, our Total Service Integration that we'll share with you guys a little later in the year, will be a great tool in looking at how we lay out our capital program going forward.
Operator
Our next question comes from John Kartsonas - Citigroup.
John Kartsonas – Citigroup
As you look at your $3 billion share buyback program, probably you will need to stop at the debt markets in the next year-and-a-half here. Any thoughts on whether that's going to be a gradual process?
Like a certain amount per quarter, or is it going to be a one-off like the second quarter?
Oscar Munoz
John, are you talking about the debt?
John Kartsonas – Citigroup
Yes.
Oscar Munoz
Usually we tend to do that in relatively large traunches as opposed to scatter them over time. That's been our historical trend anyway.
John Kartsonas – Citigroup
Any thought on your cash balances, using some of that, maybe?
Oscar Munoz
We continue to use a balance of cash on hand and other methods, but a lot of it will be fueled by debt.
John Kartsonas – Citigroup
So you'd expect the $800 million to stay relatively flat?
Oscar Munoz
I think it will go down a little bit.
Operator
Our next question comes from Amy Young - Caylon Securities.
Amy Young - Caylon Securities
Just a couple of questions on the safety costs. As we think about modeling out safety improvements, what level of cash costs should we expect to model out in the second half of 2007 and 2008?
Any color you can add on that?
Tony Ingram
Amy, safety costs are a very broad swath of costs across our entire P&L. It's really difficult to forecast that on an independent basis.
So what we try to give you is broad coverage on each of the individual line items, which we did today: labor, MS&O, rent and such. That's probably the best guidance we can provide you at this time.
Amy Young - Caylon Securities
Back on to the yield of 7%, is there any way you could quantify how much of that was mix?
Clarence Gooden
No, Amy, as I mentioned earlier to that question, we had transitioned over to a mileage-based program that's got a fuel surcharge that's got a little bit different trigger point and our focus has tried to stay on a same-store sales perspective, which you may have seen for the last two or three quarters. So our same-store sales were up 6.5% and ARPU was up 6.9%.
So the difference in those two is both fuel and mix.
Oscar Munoz
So true price increase was 6.5%.
Operator
Our final question comes from Donald Broughton - A.G. Edwards.
Donald Broughton - A.G. Edwards
Can you give us some insight into how the April 26 transition to the mileage-based fuel surcharge program went? Really any insight into how it went on a commodity-by-commodity basis?
Michael Ward
Donald, it went very well. We had essentially no problems.
As our contracts have renewed, we've taken the customers to the newer mileage-based fuel surcharge. I'm not aware of any issues that we've had in any of our commodities.
Donald Broughton - A.G. Edwards
And it doesn't necessarily affect the deregulated commodities, right? They continue to operate on the old program?
Michael Ward
That is correct.
Donald Broughton - A.G. Edwards
Of course, of course. But obviously it does affect a number of them.
Can you give us a quick update on the FRA investigation, a status update and how, if any, it has changed your CapEx allocation plans?
Oscar Munoz
Yes. We've been working very closely with the FRA over the last three to four months.
I think they're very pleased with the programs we're putting in place. A lot of it has to do with behaviors and making sure we're doing things in a safe manner.
We've engaged in a number of programs with them. The spending side of it is not real big, Donald.
It's deploying some technology over the next couple of years, detection technology, which are not overly expensive. So I think it's more around putting good processes, good programs in place more than huge capital infusions required.
I think the FRA is very pleased with the program we have in place and the progress we're making and as Tony alluded to, last quarter was one of our safest quarters ever.
David Baggs
Thanks, everybody for joining us today. I think that concludes our call.
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