Jan 28, 2010
Executives
Leanne Marilley – Director, IR Wick Moorman – Chairman, President & CEO Don Seale – EVP & Chief Marketing Officer Mark Manion – EVP & COO Jim Squires – EVP, Finance & CFO Deb Butler – EVP, Planning & Chief Information Officer
Analysts
Jason Seidl – Dahlman Rose & Co. Tom Wadewitz – JP Morgan Matt Troy – Citigroup Ken Hoexter – Bank of America/Merrill Lynch Chris Ceraso – Credit Suisse Walter Spracklin – RBC Capital Markets Scott Group – Wolfe Research LLC Gary Chase – Barclays Capital Sal Vitale – Sterne Agee Randy Cousins – BMO Capital Markets Cherilyn Radbourne – Scotia Capital Bill Greene – Morgan Stanley Carter Leake – Davenport & Co.
Operator
Greetings, ladies and gentlemen, and welcome to the Norfolk Southern Corporation fourth quarter earnings conference call. At this time, all participants are in listen-only mode.
A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder this conference is being record.
It is now my pleasure to introduce Leanne Marilley, Norfolk Southern, Director of Investor Relations. Thank you Ms.
Marilley. You may now begin.
Leanne Marilley
Thank you, Scott, 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 Slide Numbers of the presenters are available for your convenience on our Web site at nscorp.com in the investor section. Additionally, MP3 downloads of today’s call will be available on our Web site for your convenience.
As usual transcripts of the call also will be posted on our Web site. 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, the operator will instruct you how to do it so from your telephone keypad. Please be advised that any forward-looking statements made during the course of this presentation represent our best good faith judgment as to what may occur in the future.
Statements that are forward-looking can be identified by use of words such as “believe,” “expect,” “anticipate,” and “project.” Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control.
Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important. Additionally, keep in mind that all references to reported results excluding certain adjustments have been reconciled on our Web site at nscorp.com in the investor session.
Now, it’s my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Wick Moorman.
Wick Moorman
Thank you, Leanne, and good afternoon. It’s my pleasure also to welcome you to our fourth quarter 2009 earnings conference call.
Our goal this afternoon is to provide you with a comprehensive overview of our strategic, operational, and financial initiatives going forward. To help do that I'm joined today by several members of our senior management team, including Deb Butler, our Executive Vice President of Planning, Mark Manion, Chief Operating Officer, Don Seale, our Chief Marketing Officer and Jim Squires, our Chief Financial Officer, all of whom you will hear from today.
Our fourth quarter results demonstrate a continuation of the momentum we have generated since the second quarter of 2009. The results reflect a high level of performance throughout Norfolk Southern and showcase the strength and flexibility of our franchise, our industry-leading safety and service performance and continuing strong cost discipline.
Income from railway operations was $549 million, down 32% year-over-year, driven by 16% decline in revenues and an 8% reduction in expenses. Net income of $307 million and earnings per share of $0.82 were also down 32% compared with our record breaking results for the comparable period last year.
While the recession exerted pressure on volumes and revenues, we gained momentum in the fourth quarter with the volume decline limited to single-digit for the first time this year at 9%. On a sequential basis, volumes improved 3% from the third quarter to the fourth quarter and as Don will address in more detail in a moment, we saw a 52-week high in several commodities late in the quarter.
Operationally, we continue to improve productivity against the 9% year-over-year volume decline, crew starts were down 10% and fuel consumption improved 9%. Mark will review with you additional operating efficiencies which we expect to generate even more traction going forward.
As I mentioned, fourth quarter railway operating expenses were down 8% with each expense category showing improvement with the exception of depreciation and compensation and benefit. For the full year, all expense categories except depreciation declined.
Throughout the year in the face of unprecedented volume decline, our people were able to reduce our cost structure. Consistent with our balanced and deliberate approach we made these reductions in such a fashion that many of the benefits should remain when more normalized volumes return.
I am especially proud that these adjustments were accomplished while maintaining industry-leading service and safety. Given the backdrop of continuing modest economic recovery, all of this sets the stage for an improved 2010.
We remain confident in the fundamentals of our business and continue to make strategic investments in our company. In fact, as will you hear more about from Deb we plan to invest $1.4 billion in capital improvements during 2010 to maintain the safety and quality of our franchise to further improve operating efficiency and service and to support future business growth.
I will now turn the program over to Don and you will also hear from Mark, Jim, and Deb, I will close with some comments about the legislative arena, and then we'll take your questions. Don?
Don Seale
Thank you, Wick, and good afternoon, everyone. In my comments today I will recap our fourth quarter and year-end 2009 revenues, volume, and yield, along with the key drivers of these results.
I will then conclude my remarks with our outlook ahead. Starting with fourth quarter revenue, sequential improvement in quarterly volume combined with continued pricing gains produced our highest revenue quarter of the year at $2.1 billion.
Compared to fourth quarter of last year, revenue was down 16% or 396 million. In the face of ongoing economic challenges, volume in the quarter was down 9% versus last year, representing 229 million of the overall revenue decline.
Another large driver of the decline was fuel-related revenue which was down 245 million as the effective price of WTI oil declined by $27 a barrel in the fourth quarter versus last year. In addition we saw a $15 million negative lag effect in our fuel surcharge program during the quarter versus $130 million positive lag of that last year.
But as seen throughout the year we continued to generate improved pricing which along with favorable traffic mix contributed a positive effect offset of 78 million in the quarter. Turning to Slide #3, revenue for the year of 8 billion was down 2.7 billion versus 2008.
The primary drivers of the decline were volume, which was down 19% or a little over $2 billion and fuel-related revenue down 1.3 billion for the year. Pricing and mix effect added $581 million to total revenue for the year as we continued to match price with our high quality service delivery in the transportation marketplace.
Turning to yield on Slide #4, revenue per unit for the quarter was 13.43, falling $107 or 7% below fourth quarter 2008, which was our third highest RPU quarter ever. For the year, RPU of 13.38 fell $113 or 8%.
Reduced fuel related revenue was the driver for both the quarter and full-year declines impacting RPU by $156 and $210 respectively. Our commitment to service delivery and value resulted in an average pricing gain of 4% for the quarter and 6% for the year.
We achieved these results despite excess trucking capacity, which lowered truck rates an estimated 10%. Also we saw a 17% decline in the RKF [ph] rate escalator during the quarter, which primarily impacted certain coal contracts.
Moderation in pricing for the quarter was due to three primary factors. The timing of contract renewals and our book of business which had the largest impact.
Some one-time coal contract adjustments in the quarter and increased competition in the marketplace that I just mentioned. We expect the contract timing effect we saw in the fourth quarter to normalize in the first quarter of this year.
Now turning to Slide #5, total shipments of 1.57 million fell 9% below fourth quarter 2008. This decline was slightly offset as three of our business groups produced year-over-year increases for the quarter.
Agriculture gains were primarily driven by improvements in three markets. Export soybean volumes were up for the quarter following a poor South American harvest.
Ethanol volume was up 22% as new terminals were added to the network and fertilizer volumes grew as a result of an improved demand in the phosphates market. Chemicals volume increased in our four major chemical markets supplemented by a strong project growth.
Automotive volume increased with improving auto sales and easier comps for the fourth quarter of last year. During the quarter North American light vehicle production was up 1% led by Ford’s 28% production increase and Toyota’s 42% increase over the same period last year.
Finally, our domestic intermodal business which was flat for the year was up 5% in the fourth quarter, primarily from highway conversions. We continue to be encouraged by the significant opportunity that this huge market represents.
Turning to Slide #6 I will conclude my quarterly volume discussion with coal. Although our total coal volume declined by 19% in the quarter export met coal shipments shown here increased by 31% over the fourth quarter 2008.
This represented the highest volume of any quarter in ten years led by shipments through Lambert’s Point in Norfolk. Increased demand in China, longer vessel queues in Australia and a shortage of coal in Russia created opportunities for U.S.
coal producers to export coal both into Europe and South America. We expect this opportunity to continue through 2010.
As shown on Slide #7 domestic utility coal is more uncertain as lower electricity demand, based on the economy, competition from natural gas and above normal stockpiles continue to impact demand at this time. But our expectation is that this market will start to improve by mid-year and ramp back up in the second half of 2010.
With respect to year-end volume total as shown on Slide #8 it was one-year ago that our volumes started to fall-off as fourth quarter 2008 shipments fell 9% below strong third quarter results. This negative trend continued in the first quarter of 2009 and after reaching the bottom in the second quarter, our three major business sectors saw sequential improvement in quarterly volumes for the remainder of the year.
Our second half volume increased 8% over the first six months and we ended 2009 with our highest volume quarter of the year as automotive, agriculture and intermodal produced 52-week high car loadings during this period. For the year, total volume of 5.96 million units fell nearly 1.4 million or 19% below 2008 as a result of continued softness in consumer demand along with a weak but improving manufacturing environment.
Now let’s turn to Slide # 9 and our outlook. We expect to maintain the volume momentum from the fourth quarter as we head through the new year.
Growth will come from a slowly improving economy and specific projects that we've been able to identify and implement. In that regard, our January merchandise and intermodal loadings are expected to be up 5% with several markets such as chemicals approaching 52-week high loadings.
Economic growth in our core chemicals markets and strong (inaudible) growth will add volumes throughout the year. In agriculture, we expect continued growth due to a surge in the export soybean market through April.
Fertilizer volumes should continue to recover as phosphate fertilizer production ramps back up and 12 new ethanol terminals and three new ethanol plants will help drive further expansion in this market. As I just mentioned we remain optimistic about the prospects for our export met coal business and finally domestic intermodal’s positive momentum following a 5% gain in the fourth quarter is expected to build into 2010.
Highway conversions continue to escalate and a great example of this is the month of December in which our domestic business surged by 13% over last year. As shown on Slide #10, we're somewhat cautious about the next group of markets but still expect some opportunity to maintain or modestly grow volumes in each segment.
With respect to metals, global steel demand is projected to increase resulting in a 17% gain in steel production which we anticipate will lead to improvement in steel opportunities. New business recently secured will also play a role in this growth.
With respect to utility coal, as I just mentioned we expect some recovery in this market in the second half of the year when we anticipate the stockpile should return to more normalized levels. We're also somewhat optimistic that our paper business will improve during the year and it's already off to a good start reaching a 52-week high in loadings in mid-January.
Paper and forest products volume should see the positive effect of the rebound from historical lows in the housing market and the resulting growth in lumber shipments. And new project growth should enhance paper volume for the year.
And finally, we now see a modest increase in the auto market as sales and production are expected to increase by 17% and 28% respectively for the year. While we will have the volume impact of about 33,000 less loads this year as a result of not handling as many shipments in and out of the Ford mixing center as a result of the Ford mixing center redesign, we will see volumes flat or slightly above last year and revenues substantially above 2009.
Turning to the next Slide #11 we have only one market that we expect to continue to be down that this year and that’s international intermodal. This is a market driven by the consumer and global trade patterns.
Our volume in this sector was down 30% for all of 2009 and down by 22% in the fourth quarter. In our view it will take most of 2010 for this market to show any appreciable recovery.
Now, in closing, we're encouraged by our results for the fourth quarter and the second half of the year and looking at January volumes we remain optimistic that we will see gradual but visible economic recovery in most of our core markets. This gradual recovery and demand will be supplemented by new projects that we implemented throughout 2009 and in many cases are now generating new volumes of business.
In terms of service delivery, our network remains strong and we're ready to handle new businesses in all of our markets. And we remain committed to providing the best customer service in the industry.
From this strong service platform, our pricing strategy remains very consistent. We now have approximately 70% of our 2010 book repriced.
The results of these repricing efforts meet our clear objectives of maintaining pricing above the rate of rail inflation to support both continued investment in service and efficiency. Thank you for your attention and I will now turn the program over to Mark for the operations report.
Mark?
Mark Manion
Okay, thank you, Don, and good afternoon, everyone. Let’s start with safety.
Preliminary numbers show Norfolk Southern with an injury ratio of 1.08 for 2009. We continue to place a priority on the fundamentals, including rule compliance and employee engagement in the safety process.
Turning to operating performance, as we've gone through the year, we have right-sized our operating plan to match our volume. The green line indicates train starts and as Don mentioned car loads declined through the first half of the year.
Train starts were 10% lower in the fourth quarter when compared to the same period last year and 14% lower for the year. While train starts are one of the big levers we can pull in managing costs we don't do it in a vacuum.
We monitor and manage other service and cost drivers, such as car days, car handlings and car miles. As we adjusted our operating plan, first around decreasing volumes, then increasing volumes, we also monitored car days, shown in blue.
Car handlings, next line shown in brown, and car miles shown in gray. As we sized our operating plan, we were careful not to disrupt customer service or network velocity.
You can see these key indicators were not adversely affected by the volume changes and in fact, improved in some areas. Turning to the next page, you see that while cars in storage peaked during late spring, they declined and leveled off at the end of the year at around 20,000 cars.
On the next slide you see the same holds true for locomotives, ending the year around 200 locomotives in storage. On Slide #6, you can see with fewer train starts, locomotive fuel consumption was down 9% year-over-year.
Moving to the next slide you see train and engine employees finished the year down 12% from fourth quarter last year. Since the low point in the second quarter, total train and engine employees have increased 2% over the same period, crew starts have increased 4% and car load volume increased 11%.
Under our composite service measure while we improved year-over-year 2.4%, the last half of the year was a challenge. And we did not have year-over-year improvement in the fourth quarter.
We attribute this to the rate of operating plan changes and also to some disruption in our southeast service area. However, volumes have stabilized and so has the operating plan, particularly since the holidays we've seen a strong recovery in train and connection performance and fully expect this improving trend to continue.
On the last page, this summary scorecard highlights some of our achievements in the face of a struggling economy and continuing weak car load volume while car loads were down 9% below the same period in the prior year, through ongoing efforts to adjust our operating plan, crew starts were reduced 10% across all departments, employment was reduced 9%. We also continued efficiency gains with improvement in key measures, including gross ton miles per employee per gallon and per train hour.
Car hire days per car load remain flat indicating that network velocity remains stable even with significant adjustments to the operating plan. I will now turn the program over to Jim Squires.
Jim Squires
Thank you, Mark. I will now review our financial results for the fourth quarter and bottom-line results for the full year and I will close with some observations about the year ahead.
Let’s start with our operating results. As Don described railway operating revenues for the quarter were $2.1 billion, down $396 million or 16% compared to the fourth quarter of last year which was bolstered by a substantial fuel surcharge lag benefit of 130 million.
Slide #3 shows our operating expenses which decreased by 132 million or 8% for the quarter. Income from railway operations was 549 million, down 32%.
The substantial decrease in revenues driven by lower fuel surcharges and volumes was partly offset by lower operating expenses. The resulting operating ratio was 73.9% compared to our all-time record of 67.5% a year ago.
Turning to our expenses, Slide #4 shows the major components of the 132 million decrease. As you can see cost control efforts contributed to significant savings in materials and other expenses which were down 26%.
Fuel, which was down 18%, and purchase services and rents down 11%. Without the impact of higher stock-based compensation, compensation and benefits would also have been lower.
Now let's go through the details focusing first on the materials and other expense category on Slide #5. Reductions in material spending contributed 15 million.
This was largely due to lower consumption of locomotive and freight car materials due in part to store locomotives and freight cars. Second, casualties and other claims benefited from favorable claims development and reduced personal injury accruals, which together totaled 12 million.
Third, other expenses reflected decreased bad debt, travel, taxes and miscellaneous expenses. On Slide #6 we see that fuel expense declined by 48 million or 18%.
As Mark noted earlier, fourth quarter locomotive fuel consumption was down 9%, which well exceeded the 6% decline in gross ton miles in the quarter. This accounted for the vast majority of our 25 million consumption related fuel savings.
As shown on Slide #8, lower prices provided a 23 million benefit. Our $1.98 average price per gallon was 10% lower than the $2.19 we paid in the fourth quarter of 2008.
Purchase services and rents decreased 43 million or 11%. Slide #10 gives some examples.
Equipment rents declined 9 million, transportation services and operations, which includes crew transportation and automotive costs fell 8 million, mechanical expenses were down 6 million largely due to fewer freight car repairs and intermodal expenses declined 5 million. Other reductions of 15 million reflect cost control efforts throughout the company.
Next, on Slide #11, compensation and benefits increased by 4 million or 1%. Slide #12 shows the major components.
First, stock-based compensation increased 54 million. The large swing is due to two factors.
First, our stock price declined significantly in the fourth quarter of 2008 while it increased in the fourth quarter of 2009. And second, performance metrics deteriorated in the fourth quarter of 2008 while improving in the most recent quarter.
Second, wage rates increased 14 million reflecting agreement pay increases in July 2009. Third, pension costs increased 10 million primarily due to last year ends reduced asset values.
Fourth, volume related labor was down 40 million, of which about 19 million was (inaudible) related. The remaining 21 million was mostly reductions in engineering and mechanical activity levels.
Fifth, incentive compensation was lower in 2009 as we latched strong financial performance in 2008. And finally, payroll taxes and other compensation expenses decreased by 10 million.
Now let’s turn to non-operating items on Slide #13. Interest on tax efficiencies was a favorable 14 million reflecting the IRS’s completion of its review of our 2006 and 2007 returns and the resolution of state tax issues.
Corporate-owned life insurance benefited from higher returns and interest expense was up 7 million. As illustrated on Slide #14 income before income taxes decreased 252 million or 35%, principally due to lower operating income.
Income taxes were 160 million and the effective tax rate was 34.3%. Income taxes last year were 267 million with an effective rate of 37.1%.
The decrease in the effective rate in 2009 was due primarily to the resolution of state tax issues and improved returns from corporate-owned life insurance. Turning to Slide #16, fourth quarter net income was 307 million, a decrease of 145 million or 32%.
Diluted earnings per share were $0.82, which was $0.39 per share or 32% below last year. For the full year, as shown on Slide #17 net income was 1 billion compared to 1.7 billion in 2008.
Earnings per share declined from 452 to $2.76 per share. Turning to Slide #18, even with the decline in net income cash from operations in 2009 was more than adequate to cover capital expenditures and dividends and as in the past several years yielded incremental free cash flow which this year we used to boost liquidity.
Before I conclude let me briefly cover a few factors we expect to pressure operating expenses in 2010 beyond the anticipated volume metric increases from higher car loadings. First, based on the forward curve for oil prices we expect significantly higher fuel costs.
Second, we expect additional annual compensation expense, including payroll taxes from hire union wage rates. Third, union health and welfare expenses will rise due to higher premiums.
We estimate these higher pay rates and health and welfare premiums combined will increase quarterly compensation expense by 37 million. We are also likely to experience higher expenses for incentive compensation and casualties and other claims.
In summary, in 2010 we are projecting strong operating cash flow and financial performance driven by top-line growth, cost control, and productivity. Our balance sheet is in fine shape having weathered the downturn admirably and our access to credit markets is excellent.
Debt payments in 2010 are just 474 million and based on the current schedule will decline from there over the next four years. Our pension plan should not require any funding in 2010.
As we generate free cash flow we will continue to view dividends as a priority mechanism for distributions and will remain flexible with regard to share repurchases. And finally, as Deb Butler will cover next we plan to maintain our commitment to capital investments keeping our rail networks safe and efficient and providing for future growth.
Thank you for your attention. And now I will turn the program over to Deb.
Deb Butler
Thank you, Jim. Good afternoon.
The strategic drivers of Norfolk Southern’s 2010 capital budget remain much the same as they were in 2009. Planned expenditures include investments to maintain the safety and quality of our existing franchise to improve service quality and performance and to support business growth.
Investments to support our track 2012 initiative are woven throughout the budget. As shown on Slide #3 total planned capital investment in 2010 is $1.44 billion.
This is roughly equal to our initial 2009 budget. However, you recall that we reduced planned spending in 2009, primarily for locomotives, facilities and infrastructure as the magnitude of last year’s economic contraction became clear.
As a result our 2010 plan is 11% higher than actual 2009 spending. As in previous years about 75% of our capital expenditures will be invested to ensure the continued safe and reliable operation of our railroad.
This includes protecting the condition of our right of way, replacing equipment and complying with safety and regulatory requirement. The remaining 25% of our 2007 budget supports the growth, efficiency and productivity of our franchise.
Included in this category our projects to improve and expand track and terminal infrastructure and to support the key drivers of our track 2012 initiative, service improvement, fuel efficiency, asset utilization and workforce productivity. On the next two slides I will provide more detail about each of the categories of capital expenditures highlighted on slide.
As shown on Slide #6 almost half of our budget is allocated to keeping our right of way in condition needed to move our customers business safely and reliably. Roadway spending in 2010 is budgeted to be $706 million or 49% of our total capital budget.
Our roadway budget funds the replacement of rail, size and ballast as well as the improvement or replacement of bridges and covets. In 2010 we plan to replace 341 miles of rail, 2.6 million crossties and 2.9 million tons of ballast.
Investment in facilities and terminals throughout our network will total 184 million or 13% of planned capital expenditures. About half of the increased spending in this category is associated with investments in new terminals for the Crescent Corridor.
Other facility investments to support our intermodal network include continued work on our new Charlotte terminal as well as facility upgrades and expansion in the Chicago area. Non-commercial facility investments include new locomotive facilities in Atlanta, Georgia and Pittsburgh, Pennsylvania.
The renovation of several buildings used by transportation and mechanical and new or upgraded waste water treatment plants. As Don alluded to in his remarks, facilities for handling ethanol and other industrial products are among the investments we'll be making to support other marking initiatives.
As shown on Slide #10, investments in computers and technology are budgeted to be $140 million or 10% of the capital budget. Norfolk Southern has made significant capital investments in technology in recent years and that trend will continue in 2010.
New or enhanced technology will be introduced throughout the year to improve safety, increase operational efficiency, improve fuel and equipment utilization and to better plan and manage our network. I will highlight a couple of the major projects.
We're introducing SAP in our financial, human resources and material management systems. That effort will continue throughout the year with implementation scheduled for the first half of 2011.
Leader, a locomotive engineering coaching system is one of our major track 2012 project that will be expanded significantly in 2010. The long awaited movement planner functionality embedded in our unified train control system will come on line this year as well.
And finally, we will spend $40 million on development of the federally mandated but not funded positive train control project. We expect the total cost of PTC on Norfolk Southern to exceed $700 million by the end of 2015.
Investments in infrastructure are budgeted to be $110 million or 8% of capital expenditures. In addition to ongoing network improvement projects investment in our previously announced mid-America corridor initiative with Canadian National begins in 2010.
You will recall that one of the elements of mid-America is an alternate route from Chicago to the southeast. We're also continuing to invest in public/private partnerships such as the Heartland Corridor, which will be completed mid-year and the Chicago CREATE project.
The Crescent Corridor initiative is another prominent public/private partnership. And although there is some moderate infrastructure investment planned for 2010 the majority of the 2010 spending for intermodal terminal to support the corridor is included in the facility in terminal category.
As shown on Slide #14 equipment spending will total $81 million or 5% of our expected capital expenditures this year. We do not plan to acquire new locomotives at least of the traditional variety in 2010.
This is due partly to higher levels of acquisitions in previous years and partly to asset utilization improvements, many of which are tied to track 2012 initiatives. We will, however, continue to make capital improvements to the fleet to maintain capacity and improve efficiency and reliability.
Emission kits for both GE and EMD locomotives will be installed to meet government requirements and as we continue to explore alternative sources for locomotive power we will expand our hybrid initiative to construct additional 4-axle genset locomotives and another 6-axle battery locomotives. We will also take advantage of new technology; construct several locomotives with low emission internal combustion engines.
We do not plan to purchase freight cars in 2010 although the budget does include a small amount for freight car capital repairs. Project to follow outside the categories I have previously described total $221 million or 15% of our planned capital spending in 2010.
These include core investments such as communications and signal project, the replacement of vehicles and roadway machinery, and public improvements such as grade crossing separation. To summarize, the $1.44 billion planned for 2010 capital investments represents an increase of $143 million or 11% compared with actual 2009 capital spending.
Our 2010 capital budget is a reflection of and consistent with our continued confidence in our company’s long-term prospects for growth. Thank you and I will turn the program back over to Wick.
Wick Moorman
Thank you, Deb. Well, as you can see we continue to make significant investments in our company based on our belief in our prospects for 2010 and beyond.
While our traffic is still depressed on a historic level we have seen positive momentum in terms of both volume growth and operating efficiencies. And as evidence, as you heard from Mark, when you compare to our low watermark of the second quarter fourth quarter car loads are up 11% while comparable T&E headcount is up only 2% and crew starts are up just 4%.
That’s great operating leverage. And it’s our plan and expectation that we will maintain this kind of leverage provided that and it’s always a big if we continue to see some reasonable level of economic growth this year.
The biggest black cloud on the horizon for Norfolk Southern and the industry is obviously the threat of unbalanced legislative action. You have already seen one example of this in Deb’s discussion of our 2010 capital spending on PTC.
While the $40 million we're projecting for PTC CapEx this year did not force us to exclude any other critical items from our capital budget, it’s just an installment towards what will be a total expenditure of well over $700 million over the next five years. For that expenditure of over $700 million, by the government’s own estimates, we will receive only $1 in benefit for every $22 spent.
And that imbalance has risen as a result of the FRA’s proposed implementation rules which would force us to extend the technology far beyond the legislative mandate. The upshot of this ill-conceived if well intentioned unfunded mandate and its associated rule making is that we will be forced to forego major capital expenditures for other critical areas of our property over that five-year period.
And the result may well be less capacity than is required to handle traffic volumes, a diminished ability to provide good service, and even possibly a less safe working environment than we might have had otherwise. Now, if PTC was the only thing to come out of Washington it would be bad enough.
But as you all know, we are also facing the possibility of significant changes in the regulatory structure under which the rails operate. Without belaboring the issue, the bill which emerged from the Senate Commerce Committee at the end of last year was a disappointment to say the least, particularly given the dialogue that the industry had had with the Commerce Committee staff over the course of 2009.
As you’ve already heard from some of my peers, it is not legislation that Norfolk Southern or the industry can support in its current form. We are certainly not giving up on the process and we will continue to work with the Commerce Committee on changes which will be essential if we are not to oppose the bill.
We're also working with members of both houses on both sides of the aisle to explain to them how the bill needs to be modified to ensure that it provides for what I believe the vast majority of the Congress and the American public want. A healthy, robust national rail system, which can continue to invest and continue to play a major role in addressing this country's growing infrastructure demand.
At the end of the day, I believe that Congress will vote to encourage and expand our industry rather than consign it to the conditions we experienced in the dark days before the Staggers Act of 1980. In summation I believe that our best days are before us.
We have a great company and a great team and our intention to take the positive momentum that we generated in the past two quarters and continue to move ahead providing increasing value for our customers and our shareholders. Thanks.
And we'll now take your questions.
Operator
Thank you. (Operator instructions) Our first question is coming from the line of Mr.
Jason Seidl with Dahlman Rose & Co. Your line is open; you may proceed with your question.
Jason Seidl – Dahlman Rose & Co.
Thank you. Wick team, good afternoon.
Couple quick questions. Don, just to make sure I understood you, you mentioned that there was a coal true-up for a contract, but that was last year’s contract.
Doesn’t happen in the fourth quarter, did it?
Don Seale
Jason, this is Don. We're referring to nonrecurring contracts adjustments for some coal in the fourth quarter of 2009.
Jason Seidl – Dahlman Rose & Co.
2009. Could you quantify that for us a little bit in terms of dollars?
Don Seale
It was approximately $9 million.
Jason Seidl – Dahlman Rose & Co.
9 million. Okay.
Thank you very much. I guess I will just talk a little bit about leverage.
With volumes up over the third quarter, and your productivity increasing nicely and especially your met coal exports hitting a record number. I'm surprised to see that the margins weren't a little bit better than they were in the quarter.
Were there anything else that you guys didn’t touch on that might have been holding back margin on a sequential basis?
Wick Moorman
Well, I think Don hit all the highlights. The first and I think foremost is just kind of some of the timing of our contract renewal as we have always said they're not ratable on a quarterly basis.
On top of that we had the adjustments that Don mentioned, and it is as Don also mentioned, it’s a more competitive marketplace out there and we respond to that as well. But we were very comfortable with our fourth quarter pricing, and as Don said we continue to see positive pricing as 2010 progresses.
Jason Seidl – Dahlman Rose & Co.
Okay. And, Wick, one more before I want to turn it over to somebody else.
I’m sure there's people on line. A lot of the railroads as you noted spoke out against this bill on Capitol Hill here and also laid out the case for positive train or probably be adjusted a little bit.
What else is there left that you guys can do in terms of lobbying? That’s one.
Two, do you think this is even a 2010 issue given the current political environment? And three, if you have to forego investments down the road before 2015, which one of your current projects will be the one that will be most impacted?
Wick Moorman
Well, let me answer them in reverse order. We have not reached any conclusions about what we will actually do or not do from 2011 onward in terms of CapEx.
We’ll make those decisions as we see how the year unfold and see what our other requirements are. In terms of 2010 being a year in which something might be addressed on this by the Congress, I don’t know that 2010 is the year, as you point out, there are other issues in Washington these days, but I think it’s important and I know that all of the other CEOs in the industry think it’s important to start today to educate members of Congress as to what the implications of this legislation are.
And we are out talking to folks. And quite frankly, I think there are substantial number of legislators who did not really understand what the impact of this might be on the industry in terms of the dollars required and they also did not understand the cost benefit ratio that actually exist for the technology.
So we're in an education mode right now and we'll continue to add and then we'll see how it develops.
Jason Seidl – Dahlman Rose & Co.
It seems like you're going to have some time to further educate some people on Capitol Hill.
Wick Moorman
Well, it’s an ongoing process, Jason.
Jason Seidl – Dahlman Rose & Co.
Appreciate the time as always.
Wick Moorman
Thank you, Seidl.
Operator
Thank you. Our next question is coming from the line of Mr.
Tom Wadewitz with JP Morgan. Your line is open; you may proceed with your question.
Tom Wadewitz – JP Morgan
Yes, good afternoon.
Wick Moorman
Good afternoon, Tom.
Tom Wadewitz – JP Morgan
I wanted to ask you a little bit more on pricing. You talked about the base rate deceleration a bit.
And I think one of the things Don mentioned was an increase in competition in the market. Are you referring, Don, to what’s happening with respect to the more truck sensitive business and intermodal or are you indicating that the dynamics between you and CSX is seen somewhat, or what are your thoughts on that comment?
Don Seale
Tom, as I mentioned, we've seen truck pricing move down in the depressed economic environment in which we're operating. And of course, pricing across transportation right now is more challenging than it was a year ago or the year before.
Tom Wadewitz – JP Morgan
So is that more rail competition or more truck competition?
Don Seale
It’s all of the above.
Tom Wadewitz – JP Morgan
All of the above? Okay.
And I think some of the items that you highlighted on the cost side that Jim highlighted would indicate that rail inflation would be perhaps a bit stronger in 2010 than what we might think of an ongoing number. So if rail inflation is 4% instead of maybe normally 2.5 or 3, are you considering that when you say you will get pricing that’s better than rail inflation in 2010?
Wick Moorman
Yes, we are, Tom. And your conclusion I think about our rail inflation for 2010, as Jim outlined, is a correct conclusion.
Tom Wadewitz – JP Morgan
Right. Okay.
One more and I will pass it along. In terms of coal view, it seems like there’s a lot of uncertainty about how quickly coal will potentially improve, and I guess the more negative comment from your eastern competitor and maybe a little more optimism in the west, but what is it that makes you think that what are your assumptions behind the view that you think the coal might start to show some year-over-year growth in mid-year?
Don Seale
Tom, two basic things. One, we're seeing incremental improvement in manufacturing and industrial demand.
The second is that the weather pattern that we're seeing within our service territory is a weather pattern that’s driving stockpiles downward. To put some color into that the first two weeks of January we have input from some of our larger utilities directly that indicate that their stockpiles have declined by as much as 12% in those first two weeks.
Also, generation peaks have been hit within the first two weeks of January, which generally in the southeast, the mid-Atlantic are hit during the summer, not during the winter. So these are very unusual peak generation periods.
And looking at the data, we feel comfortable that with the continuation of an improvement in the economy, plus this type of weather pattern that we're seeing, we are seeing stockpiles mitigated to the extent that by the end of the first half of this year we should see utility coal start to move back up.
Mark Manion
Tom, I will put a little bit of color on that the calling for the possibility of snow in Norfolk this weekend and we will all enjoy it if it snows.
Don Seale
And a low of 14 deg.
Tom Wadewitz – JP Morgan
Interesting weather in Norfolk this year indeed. All right.
Thank you for the time. I appreciate it.
Very helpful.
Operator
Our next question is coming from the line of Mr. Matt Troy with Citigroup.
Your line is open; you may proceed with your question.
Matt Troy – Citigroup
Yes, thank you. Question for Don on the automotive front.
I was wondering Ford contract was up for renegotiation, which I believe closed in the fourth quarter. That was a deep legacy pricing opportunity.
I was wondering if you could just frame directionally, did pricing come in, in a range that you would have expected? Does that take effect in the first quarter?
And is that your largest customer or one of your top three customers I believe? Did you see any share gain on that contract in the latest renegotiation?
Don Seale
Matt, first, with respect to that legacy contract it did expire at the end of 2009 and we do have new economics in place January 1st. We’re pleased with the outcome of that renegotiation, and as I mentioned, we redesigned the use of the mixing centers in that legacy contract.
And in 2010, result of that redesign is we will be counting 33,000 less loads in and out of each mixing center. So we won’t have to double count that we had in prior years.
What we will see though is in our automotive market in total we expect that market to be flat to improving volume for the full year and a substantial increase in revenue in 2010 over 2009.
Matt Troy – Citigroup
On a near-term basis, obviously, highly publicized problems with Toyota, today talking about halting production eight of its 10 top models. Have you been in dialogue with Toyota, how much of your book of business might be exposed to that?
I know it’s a near-term blip, but probably a sizable one at least for a week or so at least. Could you maybe put some color on that?
Don Seale
We're pleased to say that Toyota is a major customer. We do see this as a short-term phenomenon.
They're making the decision they feel they need to make. We don’t think that will have any material impact on us for the quarter or the year.
Matt Troy – Citigroup
Thanks, Don. One follow-up for, Wick, if I could.
A lot of the questions recently I’ve been getting with the longer-term focus center around the opportunity for eastern port share gains, specifically with the widening of the Panama canal. Just wondering if you could put some thoughts around that, maybe Don, if you could weigh in.
Specifically, are you looking at potential for share gain into the East Coast ports as that canal gets widened in the next couple of years? Are customers talking about it or is this more of an academic exercise and what might be the opportunity there longer-term?
Mark Manion
Matt, I will let Don provide most of the colors. I will tell you that we obviously are looking at that as there are a lot of people and in fact, you hear some wildly divergent opinions about what it will ultimately mean for share.
As we talked before we've clearly seen a substantial growth in east coast business and Don can give you some color on how our share of international intermodal business has shifted over the past five years. We think that the new canal offers some bright opportunities for some of the east coast ports.
We're certainly investing accordingly. The Heartland Corridor project is a big part of our plan for that because we think Hampton Roads is a great port for lot of that traffic.
Don, why don’t you add a little to that?
Don Seale
Matt, obviously we are positioning ourselves as we've said in previous calls, and communications to participate in international growth over either coast. We want to be bicoastal.
But as the investments are made in infrastructure in the Panama Canal and we have deep water draft ports on the east coast we're well positioned for continued growth through those east coast ports, both at Savannah, port of Hampton Rhodes, and on/off the coast, the port of New York as well. So we anticipate the opportunity for greater growth, but with that said we have a firm eye on continued growth over the west coast ports as well.
Matt Troy – Citigroup
Understand. Thank you for the color, guys.
Jim Squires
Thank you, Matt.
Operator
Our next question is coming from the line of Mr. Ken Hoexter with Bank of America/Merrill Lynch.
Your line is open, you may proceed.
Ken Hoexter – Bank of America/Merrill Lynch
Hey, good afternoon. It seems like we're seeing some of the sequential increases in volumes, and I know, Jim, touched on this before, but maybe a little bit more in detail.
It’s just that we’re not seeing the upside leverage on the fixed network that I thought we saw and that it seem like we’ve talked about how you wouldn’t see expenses coming back on a one for one basis. So looking at that 640 basis-point deterioration year-over-year in the operating ratio, how do you guys look at the potential for improvement as these volumes come on?
How much capacity is on the network now as you see those volumes coming back on?
Jim Squires
Thanks, Ken. This is Jim.
Let me comment first on the year-over-year operating ratio decrement. And I think the perspective that we might want to include on that is to adjust both the revenue and the expense for the fuel price variance, and if we do that and work that through, the decrement, the 640 basis points decrement year-over-year turns out to be something like about 70 basis points.
And it had a significant effect on EPS as well. So on a year-over-year basis certainly fuel was a significant part of the EPS decline in the operating ratio increase.
Going forward, we are confident that the sequential improvements in volume will be accompanied by productivity improvements and operating leverage. That’s what we think we have seen in the last two quarters and we'll continue to see as the volumes continue to pick up we hope.
Ken Hoexter – Bank of America/Merrill Lynch
So when you talk about seeing in the last two quarters, I'm just looking at the operating ratio deteriorating sequentially from third quarter to fourth quarter. Where are you seeing, to come back to that question, how much capacity do you think you still have in the network before you have to bring back some of those cost, the locomotive chart, you still have about 300 sitting aside.
How much if you think about the cars and such, how much volumes do you think you can handle before you start bringing back additional equipment?
Jim Squires
In terms of the sequential operating ratio trend, Don went through a couple of nonrecurring factors in revenue in the fourth quarter 2009 which I think held back some of the operating ratio the momentum a little bit in the fourth quarter. In addition, we did see a bit of a sequential headwind in fuel expense in the fourth quarter.
That was up as well. So I think between those two factors it may have held back the improvement sequentially a little bit but that we think that we are going to start to see that margin improvement build momentum as the volumes pick up further.
Wick Moorman
We also saw, Jim, the big Delta fourth quarter on stock-based comp which actually drove benefits and compensation benefits over 4Q of ‘08, so I think, Ken, what I would go back to is what Mark talked about and that is that if you just look at the operating leverage in terms of how much more volume we're handling with only a slight increase in headcount in T&E, and some of that T&E headcount increase actually driven by hours of service rather than volume increases. Mark, anything else would you like to add?
Mark Manion
Ken, just a word about those locomotives. We did bring some locomotives back in and some of that was for the additional unit train business related to export grain and coal business and we hope that’s going to continue on.
But we also have some congestion issues that we have totally worked through and so we’ve really got a locomotive fleet out there that can handle more business than what we currently have and so we're looking forward to taking on more business with the fleet that we've got out there right now.
Ken Hoexter – Bank of America/Merrill Lynch
Appreciate the time. Thank you.
Operator
Thank you. Our next question is coming from the line of Mr.
Chris Ceraso with Credit Suisse. Your line is open, you may proceed.
Chris Ceraso – Credit Suisse
Thanks, good afternoon. Not to harp on this, but revenues were up a little bit from Q3 to Q4, operating profit was down.
Maybe you can just quantify a couple of items. How much was incentive comp or overall comp up from Q3 to Q4 and maybe if you could quantify if there was somewhat of a fuel surcharge lag effect that hurt you from Q3 to Q4 also?
Jim Squires
Oh, Chris, it’s Jim. As I mentioned a minute ago I think probably the biggest factor here was the nonrecurring items that Don mentioned in the fourth quarter revenue.
In terms of other sequential factors in the expenses, comp and benefits was up $15 million sequentially of that variance. Stock-based compensation was a factor.
That was 6 million of the unfavorable variance. And then I mentioned fuel a minute ago.
Fuel went from $192 to $229. And so that was a $29 million unfavorable variance fuel sequentially and about 50/50 price and usage as well.
Chris Ceraso – Credit Suisse
Okay. There’s a mention in the deck about an increase in wage and benefits to 2010 either in dollar terms or percentage terms what do you think that will be for the full year 2010 versus 2009?
How much of an increase?
Jim Squires
In prepared remarks, I cited $37 million quarterly compensation expense increase in 2010 and that’s for higher pay rates and health and welfare premiums combined.
Chris Ceraso – Credit Suisse
Okay. Does that include any change in pension or will there be any change in pension expense?
Jim Squires
That does exclude any pension in fact and pension costs will be up somewhat as well for 2010. However, as I mentioned, we don’t expect to make a cash contribution to our pension fund.
Chris Ceraso – Credit Suisse
And then just the last one. You mentioned that you thought automotive volume would be flat year-over-year after accounting for the 30-odd-thousand change because of the way you're mixing the Ford business.
What’s the underlying assumption either in terms of vehicle sales in the U.S. or vehicle production in North America that gets to you that flat number?
Don Seale
Chris, this is Don. As I mentioned, we're expecting sales and production to rise in automotive from low levels in 2009.
But based on that improvement in the overall sales and production forecast and our position with respect to our accounts, that’s where we’re coming up with either a flat or a modest growth in that volume for 2010.
Chris Ceraso – Credit Suisse
Were there any plant closures, Don that would cause you to not participate as much with the industry as it goes up?
Don Seale
Could you repeat the question, Chris? I didn't catch it.
Chris Ceraso – Credit Suisse
Yes, sorry. Were there any plants that you serve that closed in 2009 such that when industry volumes goes back up maybe you will miss out on some of that?
Don Seale
There’s a possibility of that. We don’t have that built into our assumption for 2010.
Chris Ceraso – Credit Suisse
Okay. Thanks a lot.
Operator
Thank you. Our next question comes from the line of Mr.
Walter Spracklin with RBC Capital Markets. Your line is open, you may proceed.
Walter Spracklin – RBC Capital Markets
Thanks very much. Good afternoon, everyone.
Wanted to ask a question just to clarify the pricing because obviously this has been one of focus and I want to make sure you're being compared apples to apples here. So when you look at the 4% that you mentioned in the fourth quarter can you give us if that includes the RCAF adjusted for fuel?
Can you give us that number excluding any fuel adjustment within the RCAF?
Mark Manion
That 4% excludes the RCAF impact.
Walter Spracklin – RBC Capital Markets
That excludes the RCAF. So that’s comparable to the 7.1% that you did in the first quarter or in the third quarter?
Mark Manion
In the fourth quarter of '08, quarter-over-quarter, we had a 7% price and a 2% positive RCAF.
Walter Spracklin – RBC Capital Markets
Okay. Now, you mentioned three items you said 9 million for the coal contract, nonrecurring coal contract change.
Can you give us either in percentage or in dollars, the quantification of the other two, most importantly, the timing of the contract renewals I think you said that was the biggest factor in the quarter?
Mark Manion
The timing of contract renegotiation, I can't give you a percentage of that other than the fact that we expect it to normalize in the first quarter of 2010 and going forward. So we don’t expect that to continue.
As Wick mentioned, we don’t have a ratable number of contracts in each quarter that are renegotiated and repriced, so there’s a little bit of differential quarter-to-quarter as we go forward on that. The RCAF was about 1 percentage point, about 100 basis points and also we had a positive mix effect of about 22 million.
Walter Spracklin – RBC Capital Markets
Okay. And, Wick, you mentioned when you were talking about the Surface Transportation of Reauthorization Act, you mentioned that you're going to be explaining to Congress or the committee how it needs to be modified.
Can you go into a little bit of detail what those items are that need to be modified in the act that is proposed right now?
Wick Moorman
There are several items that need to be modified. Clearly, the items around access but a significant number of other items.
And I'd rather just kind of make the global comment that the point that we're trying to make is that under the Staggers Act, the clear intent of that legislation was to let the market prevail, but provide an outlet for shippers when there was some possibility of market failure. And only to those shippers which had particular lines of traffic where there might be such a market failure.
The bill, as it’s currently written, in fact, turns that on its head, and in fact, let rulings of the Surface Transportation Board prevail in lieu of the market, and we think that that is going to be highly detrimental to our industry over the short-term and the long-term and that is the philosophy we're espousing, and we're trying to point out to the committee the places where modifications need to happen so that in fact is not what happens.
Walter Spracklin – RBC Capital Markets
Last question here. Now it’s back on the operating leverage story.
I think a lot of expectations are built in for all these rails for an operating leverage into 2010. Jim, perhaps if you could just give us a few examples just to manage in terms of that expectation that’s being built in, what items are not likely to go the right way in terms of operating leverage?
Or likely to go the opposite way? You touched on a fewer casualty reserves, incentive-based compensation, depreciation I guess would be in there as well.
Can you highlight the main ones so that we have built in that these are the items that aren't going to necessarily move in the right direction 2010 and then we can look at the ones that will move in the right direction?
Jim Squires
Sure. Certainly, the ones that you mentioned, in addition, fuel is likely to be a headwind as we lap lower fuel prices in 2009.
So that plus the volume metric impact on fuel expense is likely to make fuel expense a significant headwind in terms of overall operating expenses. And then I mentioned the additional compensation expense associated with higher union wage rates and that plus a higher union health and welfare benefit payments will be another headwind.
And then casualty and other claims, although, it is difficult for us even to quantify the amount of the casualty and other claims expected headwind in 2010 because as you know, it is an actuarially calculated number, but it’s likely that the string of favorable reserve adjustments we’ve been having ill eventually run out. It's just a question of when and what the glide path might look like, but certainly we think we will see a bit of a headwind there.
I guess in terms of the potential for operating leverage, we are really focused on the productivity metrics that Mark went through, monitoring very closely and emphasizing internally metrics like GTMs per employee, per gallon, per train hour, measurements of labor productivity, fuel productivity and asset productivity. Those will be key to generating positive operating leverage and earnings leverage in 2010.
So we’ll be monitoring those closely and suggest it to you too.
Walter Spracklin – RBC Capital Markets
That’s all my questions. Thanks very much for the color.
Operator
Thank you. Our next question is coming from the line of Mr.
Edward Wolfe with Wolfe Research LLC. Your line is open, you may proceed.
Scott Group – Wolfe Research LLC
Thanks. It's Scott Group in for Ed.
Afternoon, guys.
Wick Moorman
Afternoon, Ed.
Scott Group – Wolfe Research LLC
Just to follow-up on Tom's question from earlier; is 4% kind of the number you guys are thinking about in terms of inflation next year or could it be a bit higher?
Jim Squires
Scott, it’s Jim. I'll take the question.
I think as we’ve been through we’re going to have some expense headwinds in the year that will be above and beyond what we would normally consider to be inflation what the real inflation a general inflation. The key to the year and to generating the earnings momentum that we think we are going to generate will be to produce some level of pricing based on value for services above that amount plus volume growth plus productivity improvement and if we can do all that we certainly should see the operating leverage, the margin improvement and the earnings growth.
Scott Group – Wolfe Research LLC
And in that scenario of rising costs but pricing and volumes and productivity, what’s your level of conviction in margins improving next year? I know Wick tends to have a cloudy crystal ball, but what are your thoughts on that?
Jim Squires
It's relatively high. And I hope we convey that our outlook is pretty upbeat for the year.
Much depends on the economy and it's certainly true that there is lingering concern over direction of the economy, but based on what we're seeing now in our car loads and our customers’ behavior, we're feeling pretty confident about the year to come.
Scott Group – Wolfe Research LLC
Great. On the pricing side, Don, your comment about contract renewals, the timing normalizing into first quarter does that imply that the pricing should be better than 4% in the first quarter?
Don Seale
What we're seeing there is that the activity in repricing will return to a higher level than we saw in the fourth quarter in terms of the number of authorities and contracts and specific instruments that we are renegotiating. We average 6% for the year and 4% for the fourth quarter and I think we're comfortable with those two numbers.
Scott Group – Wolfe Research LLC
With the contract renewals coming back is there something new coming that’s going to offset that and keep us at that 4% level?
Don Seale
No, nothing on the horizon that would do that.
Scott Group – Wolfe Research LLC
Great. And then last question if I can, thanks for the time, Canadian National announced earlier this week that they were starting up share repurchases again and announced a dividend increase.
Jim, any thoughts on the billion of cash that you guys have in timing for putting that to use?
Jim Squires
Well, our liquidity position is secured. I think that’s a good thing given as I said lingering, turn about the directional economy.
But our confidence is building and as we become more certain that conditions are, in fact, improving, it's probable that we will deploy some of the cash on hand-for distributions, debt repayments certainly another possibility as is additional capital investment as opportunities rise.
Scott Group – Wolfe Research LLC
Okay, thanks for the time, guys.
Operator
Thank you. Our next question comes from the line of Mr.
Gary Chase with Barclays Capital. Your line is open.
You may proceed with your question.
Gary Chase – Barclays Capital
Good afternoon, everyone. Just a quick one for Jim and then just a quick one for Don.
You mentioned some of the headwinds in the comp and Ben line for next year. You mentioned incentive comp but didn’t quantify.
Should we be thinking that that's going to be a material item and a material swing as we move from 9 into 10?
Jim Squires
Our expectation in incentive compensation will be a headwind rests on our expectation that we will see improvements in operating ratio pretax net income and service. All of which drive incentive compensation.
And I think we've said we are expecting the year ahead to be better in all three areas. And that will drive incentive compensation.
The better of the improvement in pretax net income, operating ratio and service, the higher the incentive compensation and bigger the headwind.
Gary Chase – Barclays Capital
Could it conceivably compare to that $37 million number you're using on the health and wage inflation or is it going to be considerably smaller than that?
Jim Squires
No, certainly not. Certainly not comparable to that number.
That was a quarterly number. I'd expect incentive compensation the headwind to be that large on a quarterly basis.
Gary Chase – Barclays Capital
And then just for, Don, there’s a lot of the questions kind of suggested, I guess I'm wondering is to what extent are pricing and inflation independent of one another. Is there a way to quantify what percentage of the book has some locked amount of escalation regardless of what inflation is and how much of it is going to move at least to an extent as a function of what railroad inflation ends up actually being next year?
Don Seale
Gary, unfortunately I cannot give you a number that would help you with that question. I will reiterate though that with having the high percentage of the 2010 book already repriced 70% and we will have a relatively active first quarter in repricing, which will move that number higher.
We are comfortable that our price reflects that objective that I mentioned in my comments of having a price plus an added above the rate of rail inflation.
Gary Chase – Barclays Capital
Okay and then just curious if there was anything mix related in the ag line that might have affected the pricing comps year-on-year in that specific segment.
Don Seale
No, we did not have any negative mix effect in ag. We had a very active export program in the fourth quarter, very active ethanol shipments as we've had in previous quarters, and the normal domestic feed mill cycling trains that we have.
Gary Chase – Barclays Capital
Okay, guys, appreciate it.
Don Seale
Thanks.
Operator
Thank you. Our next question is coming from the line of Mr.
Jeff Kauffman with Sterne Agee. Your line is open.
You may proceed. Excuse me, Mr.
Kauffman; your line is now open.
Sal Vitale – Sterne Agee
Hello? Hi, this is Sal Vitale for Jeff Kauffman.
How are you?
Wick Moorman
Fine. How are you, Sal?
Sal Vitale – Sterne Agee
Okay, not too bad. Just a few questions.
First question, earlier I think you mentioned that domestic intermodal volumes were up about 5% for the quarter. Can you give some color on what international volumes were for the quarter?
Wick Moorman
International volume as I mentioned in my comments were off 22% in the quarter.
Sal Vitale – Sterne Agee
Down 22% and was that more weighted towards any month, was any month more disproportionate contributed to that?
Wick Moorman
No, not really. We basically saw that the ongoing trend that our export component that number was better and the import component was not better.
Sal Vitale – Sterne Agee
Okay. And then just switching to the outlook for 2010, you provided guidance of higher volumes.
What is your expectation of headcount? Do you expect to do that with the continued decline in headcount?
Mark Manion
I would expect that we would see headcount right around, if, in fact, volumes do increase, I think you might see a nominal increase in headcount, but it would only be nominal. If we continue to run more trains at some point we're going to need a few more people and maybe a few more people to maintain our cars and locomotives, but we are not looking for headcount increase that would be anything like proportional to the volume increase.
Sal Vitale – Sterne Agee
Okay, so it sounds like you're pretty much on the headcount side, you’re pretty much at capacity whereas for on the equipment side for locomotives and car loads still have ample excess capacity. Is that correct?
Mark Manion
Let me say this. I think we still have capacity on the headcount side as well, but if you are asking about the entire year, as the year goes along, if we continue to see volume growth at some point or another we might have to bring back a few more people.
Sal Vitale – Sterne Agee
Okay. And then just looking at the outlook again, on the housing side, I think there was one of the slides indicated an expectation of improved housing market.
What level of housing starts do you have on regarding that expectation?
Wick Moorman
Moving from about 550,000 starts, which was a World War II low, in 2009, moving back up to about 860,000 starts for 2010. But that’s not the entire color on that.
It's a combination of forest products, including paper, which we have gained some new business in projects, so in combination with the improvement in housing, a little bit of uptick in lumber, and a better portfolio of paper traffic in 2010 is the combination story.
Sal Vitale – Sterne Agee
Okay. And then just one final question.
One of the questions earlier, I forget who asked it, I think you mentioned that you're seeing more rail competition and more truck competition. What particular segments, what commodities are you seeing more rail competition in or is it across the board?
Wick Moorman
My general comment on competition was centered around capacity for transportation in today’s market. Demand is down for transportation, and as long as we have additional capacity available in all modes, the competitive market is more challenging with that type of scenario than we would have if we had a full economic output taking place with very little excess capacity in transportation.
Sal Vitale – Sterne Agee
Okay, thank you. And then just one final quick question for Jim.
What’s a good tax rate to use for 2010?
Jim Squires
In the high 30s, Sal, is kind of what we would be expecting.
Sal Vitale – Sterne Agee
Okay, thank you for your time.
Jim Squires
Thanks.
Operator
Thank you. Our next question is coming from the line of Mr.
Randy Cousins with BMO Capital Markets. Your line is open.
You may proceed.
Randy Cousins – BMO Capital Markets
Good afternoon.
Wick Moorman
Afternoon.
Randy Cousins – BMO Capital Markets
Don, just a couple. Your slide that you got on export coal, my recollection is there was some production or shipment problems at Lambert’s Point.
How much of that impact to Q4 volumes? Is there room to actually increase this number?
Should we look at this 59.9 as sort of a sustainable number through 2010? How should we think about the export opportunity?
And I wonder if you could give us some color as to sort of opportunities that are met versus thermal. Is this all metallurgical coal that you are moving?
Don Seale
Okay, first of all, in terms of the outlook, would have to say that as you know metallurgical coal is priced in the world market April to April, so we still have to see those settlements take place, and those are beginning to take place as they normally do this time of year. So, based on what we're hearing from the receivers in Western Europe, some in China and some in India, we are comfortable that we will see an ongoing run rate of export coal that is higher than what we handled last year.
Certainly in the first half of last year. We did have a short disruption of dumping at Lambert’s Point with a belt issue.
We lost several days of dumping. I don’t think that’s going to be a material thing.
We're recovering that in January, so that’s not something that will be material going forward. But our outlook for export coal, and this is metallurgical coal, is good for 2010 and it’s as I mentioned, it’s largely driven off of a very extensive demand for coke and iron ore and coal in China based on steel production there.
Randy Cousins – BMO Capital Markets
Don, do you think you could actually replicate what you did in 2008 in terms of sort of export coal volumes?
Don Seale
Well, certainly after being up over 40% in 2008 and export volume, we exceeded that run rate in the fourth quarter of 2009. So if the coal is there available, and we feel it is in terms of production, and we don’t see any double dip or unanticipated decline in the economy, we remain optimistic along those lines.
Randy Cousins – BMO Capital Markets
What about pricing? There’s a lot of debate about what the coal price is going to settle in for, for 2010.
Can you give us any sense as to sort of whether higher met coal prices are going to have a positive impact on the rates that you get on your export business?
Don Seale
Well, of course, we look at transportation as transportation, and we don't price our service based on the cost of the product that we transport.
Randy Cousins – BMO Capital Markets
Okay. That’s it for me.
Thank you.
Operator
Thank you. Our next question is coming from the line of Ms.
Cherilyn Radbourne with Scotia Capital. Your line is open.
You may proceed.
Cherilyn Radbourne – Scotia Capital
Thanks very much and good afternoon. I was going to ask similar question about met coal.
So maybe I'll just ask one with respect to utility coal. And if you could provide some commentary in terms of how a mix shift away from utility coal next year may influence your reported core pricing and also your ability to achieve operating ratio improvements?
Don Seale
Well, first of all, the utility market through 2009 was a challenging market and we had the perfect storm, weather patterns that were not conducive to a lot of generation, industrial demand being down by about overall electrical demand being down about 4% nationwide, which is unheard of in any recession that we've seen, and then strong competition from natural gas. We've seen natural gas prices rise back up above $5 in the $5.80 range.
We've seen weather, certainly a weather pattern currently, we don't know how long that's going to last, but certainly that current weather pattern is conducive to a much, much higher generation rate. And we're seeing is industrial demand pick-up as well.
So while we expect utility to be somewhat soft in the first half, we think that stockpiles by at least June or July will start to reach somewhat of a normalized level and we'll see utility orders pick up, and utility volume pick up. Just to add one more data point to that, Genscape tabulates informational stockpile in consumption of coal and based on their study since December 1st of 2009 through the middle of January there was 29 million more tons of coal burned than shipped.
And that's the kind of reduction in coal stocks that will lead to opportunities in the utility market for growth later on in the year.
Cherilyn Radbourne – Scotia Capital
Okay. So if it is a headwind, it sort of a headwind in the first half of the year?
Don Seale
Yes.
Cherilyn Radbourne – Scotia Capital
Okay, thank you. That’s all my questions.
Operator
Thank you. Our next question is coming from the line of Mr.
Bill Greene with Morgan Stanley. Your line is open.
You may proceed.
Bill Greene – Morgan Stanley
Good afternoon. Wick, I just had a question for you.
Under the current regulations, if we think about revenue adequacy, you may not be revenue adequate for 2009. And so does that reset the clock do you think for in terms of pricing regulation?
Wick Moorman
Well, I think your assumption about 2009 is probably correct. We don’t know is the best answer I can give you.
We don’t know if there is a clock or if gets set or reset. So I will just take a pass on that.
I don't know that we have a good answer for you. But it certainly does look like we won’t be revenue adequate in 2009.
Bill Greene – Morgan Stanley
Okay. Let me ask you from the perspective coal versus intermodal, intermodal is our growth area.
Coal seems to be at least in some way under a bit of pressure longer-term, especially if climate legislation is passed. So when I think about returns on capital coal strikes me as being a better returning business than intermodal.
How do we think about maintaining long-term margins and returns if that structural trend is in place?
Wick Moorman
Well, I guess I would say first of all that we love all of our businesses and we really don’t try to differentiate between them in that way. But I will answer your question in this way.
You're exactly right that coal is a very, very significant part of our business. And we, along with all of the other carriers are watching what happens with climate legislation, we're trying to make our voices heard with a lot of other folks in terms of the importance of coal and the need for rational thinking in terms of controlling carbon and using appropriate technology so that we don’t forego the use of what really is our most abundant energy supply.
So that’s one side of the equation. The other side of the equation, as you point out is that intermodal is a growth business.
And one of the strong reasons that it's a growth business is that we and I think the rest of the world believe that sustained higher fuel prices are with us to stay. And as fuel prices increase our ability to both capture traffic and grow our business and grow our business at better margins because of our fuel efficiency increases as well.
So we see a very bright future ahead in terms of being able to grow intermodal business with increasing prices and increasing margin, and it’s good business today. As we grew business intermodal business, five years or six years, last five years or six years, you, in fact, saw our operating ratio go down.
So that’s the best answer I give you. Don?
Don Seale
Bill, the only thing I would add is also keep in mind with respect to coal in 2009 versus 2008, that in 2008 we set an all-time record for coal tonnage at 194 million tons. And a lot of that record was laid in, in the second half of 2008.
We were up 5% in each quarter, 2008 versus 2007. So we had extremely strong comps for the entire year of 2009 versus the previous year, and in particular, the final two quarters of the year.
So while a lot of this was impacted by the economy and the other factors that I mentioned previously, I think that just keep in mind that our performance in coal in 2009 was against a record backdrop.
Bill Greene – Morgan Stanley
Right. So, the depth [ph] of coal is premature.
Maybe I could just ask one last one just on domestic intermodal. You mentioned 13% growth I think.
Is that really just the J.B. Hunt contract, or did you win elsewhere too?
How much was non-J.B. Hunt in other words I guess?
Don Seale
That was for the month of December. We don’t think that was holiday peak, because usually you see holiday shipments move much earlier in the quarter than in December.
Certainly some of that growth was J. B.
Hunt, but we also saw growth of our and our other intermodal providers.
Bill Greene – Morgan Stanley
Thank you for the time.
Wick Moorman
Thanks, Bill.
Operator
Thank you. Ladies and gentlemen, our last question is coming from the line of Mr.
Carter Leake with Davenport & Co. Your line is open.
You may proceed with your question.
Carter Leake – Davenport & Co.
Good evening. Of the remaining 30% contracts that are yet to be repriced for 2010 can you provide any color as to which segments this repricing might apply?
Mark Manion
It's pretty much across the board, with more concentration in coal and merchandise and less in intermodal.
Carter Leake – Davenport & Co.
Great, thanks. And then how about with completion of the Heartland Corridor project fast approaching?
Can you provide any color as to how this distance in volume improvement might impact any of your traditional operating efficiency metrics?
Wick Moorman
We have managed throughout the course of the project to maintain a highly efficient route through there. In fact, I will tell you that we did a lot of service planning to avoid disruptions.
That gone remarkably well and we have not had to do some of the things that we thought we might have to do in terms of rerouting trains. So we don’t look for it to have a significant impact in that regard.
Where we do look for a significant impact is in the reroute of the current double stack traffic that’s flowing between Hampton Roads and Rickenbacker and Columbus and beyond. Clearly, the magnitude of those savings depend to some extent upon the traffic levels.
And as you heard Don say our international traffic is depressed right now, and we don’t really look for a very rapid recovery. But we will see immediate ongoing savings once that last clearance restriction is limited.
And as the traffic through Hampton Roads grows, driven in part by the improved service we'll offer, we'll see both volume and revenue growth and operating efficiencies.
Carter Leake – Davenport & Co.
Great. And just one more.
Are there any fuel efficiency initiatives that we should consider in our fuel burn assumptions for 2010 and 2011?
Don Seale
Well, as far as giving you any actual statistics, I don't know that I can really pin that down. But, I can say this; we're making good headway with several of our technologies, one of which is our leader technology.
We're rolling that out more rapidly in 2010, and in fact, we operated our first train yesterday starting in Chicago, moving east ward over our northern region and we'll have that technology apply to 500 locomotives throughout this year and we'll be operating between Chicago and New Jersey on a regular basis. In addition to that, our UTCS rollout particularly with the additional technology that movement planner gives us is going to help improve fuel efficiency and we've got plans to get UTCS rolled out over eight divisions by the end of this year, movement planner over five divisions.
And when you start adding these technologies up, I'm sure it will have an impact, but I really can’t give you a statistic that would help you.
Carter Leake – Davenport & Co.
Okay, great. Thanks for your color.
Don Seale
You're welcome.
Operator
Thank you. Ladies and gentlemen, this does conclude our question-and-answer session.
I would like to turn the floor back to management for any closing comments.
Wick Moorman
Thanks, everyone for listening. We look forward to talking to you next quarter.
Operator
Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time.
Thank you very much for your participation and have a wonderful afternoon.