Jul 27, 2010
Executives
Donald Seale - Chief Marketing Officer and Executive Vice President Charles Moorman - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee Mark Manion - Chief Operating Officer and Executive Vice President James Squires - Chief Financial Officer and Executive Vice President of Finance Leanne Marilley - Director of Investor Relations
Analysts
Jeffrey Kauffman - Sterne Agee & Leach Inc. John Larkin - Stifel, Nicolaus & Co., Inc.
Garrett Chase - Barclays Capital Ken Hoexter - BofA Merrill Lynch Thomas Wadewitz - JP Morgan Chase & Co Scott Malat - Goldman Sachs Group Inc. Robert Salmon Bill Greene - Morgan Stanley Scott Group - Wolfe Research Christopher Ceraso - Crédit Suisse AG Walter Spracklin - RBC Capital Markets Corporation Christian Wetherbee - Merrill Lynch.
Scott Flower - Macquarie Research Cherilyn Radbourne - TD Newcrest Capital Inc. Jason Seidl - Dahlman Rose & Company, LLC
Operator
Greetings, and welcome to the Norfolk Southern Corporation Second Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Ms.
Leanne Marilley, Norfolk Southern Director of Investor Relations. Thank you.
You may begin.
Leanne Marilley
Thank you and good afternoon. Before we begin today's call, I would like to mention a few items.
First, we remind our listeners and Internet participants that the slides of the presenters are available for your convenience on our website at nscorp.com in the Investors section. Additionally, mp3 downloads of today's call will be available on our website for your convenience.
As usual, transcripts of the call also will be posted on our website. At the end of the prepared portion of today's call, we will conduct a question-and-answer session.
At that time, if you choose to ask a question, an operator will instruct you how to do so from 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 website at nscorp.com in the Investors section.
Now it is my pleasure to introduce Norfolk Southern Chairman, President and CEO, Wick Moorman.
Charles Moorman
Thank you, Leanne, and good afternoon, everyone. It's my pleasure to welcome all of you to our Second Quarter 2010 Earnings Conference Call.
I'm joined today by several members of our senior management team, Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and Jim Squires, our Chief Financial Officer, all of whom you will be hearing from. In the second quarter, Norfolk Southern continued to build on the last four quarters' momentum as we delivered significant double-digit growth in top line revenue, profitability and bottom line results.
Our focus on operating leverage produced a record second quarter operating ratio of 69.8%, which represented a 500-basis point year-over-year improvement. Net income of $392 million was up 59% as a 31% improvement in revenues more than offset a 22% increase in operating expenses.
Importantly, second quarter volumes improved not only 22% year-over-year, but also 9% sequentially from the first quarter and represented the fourth consecutive quarter of sequential volume improvement. We also posted 52-week highs in several commodity groups, and Don will provide more detail in a few moments.
Operationally, we continue to make significant strides in productivity as we safely and reliably ramped up to meet business demands. Against a 22% volume increase, crew starts were up only 10%, locomotive fuel consumption only 18% and equipment rents only 8%.
We have seen unprecedented swings in traffic levels over the past 18 months, and our operations planning systems are continuing to pay dividends in the form of stronger yet more flexible operating plans. Mark will review our operating results in a few minutes and then Jim will provide you with a rundown of our expenses and our cost control efforts.
I'm pleased with a cohesive way all areas of our company have responded to the traffic surge. Securing the business, moving it efficiently and managing the costs led to the substantial improvement at Norfolk Southern's operating results, which has also strengthened our cash position and increased our financial flexibility.
We are making strategic long-term investments that differentiate Norfolk Southern and uniquely positioned our franchise for future growth. Additionally, we are returning value to our owners.
We resumed our share repurchase program during the second quarter, buying back 2 million shares through June 30. As an indication of confidence in our future, our board today not only increased our quarterly dividend 6%, or $0.02 per share, but also authorized an additional 50 million shares for repurchase through 2014.
I'll now turn the program over to Don, Mark and Jim, and then I'll wrap up with some closing comments before we take your questions. Don?
Donald Seale
Thank you, Wick, and get afternoon, everyone. We're pleased that an improving manufacturing and retail economy along with strong project of driving increased volumes in majority of the markets that we serve.
Higher volumes combined with increased revenue per unit generated revenue of $2.4 billion for the quarter, up $573 million or 31%. Approximately 70% of this gain was driven by increased shipments, which represented $404 million.
Improved revenue yield contributed $169 million of the increase as we continue to match market value with our strong service product. With respect to yield as shown on Slide 3, revenue per unit was $1,413, up $98 or 7% over last year.
Record automotive RPU was driven by successful contract renegotiations, while coal’s strong result was driven by re-pricing in the export market and price escalators contained in selected utility contracts. Paper and forest product’s RPU continue to be impacted my motor carrier competition and shorter haul traffic.
While agriculture was also negatively impacted by a significant increase in shorter haul phosphate rock and gains in shorter haul grain shipments. With respect to pricing, our business mix in the second quarter continued to change significantly with the economic recovery and new business initiatives.
In this regard, while revenue was up 22% in the quarter, revenue ton miles were up 25%, and revenue per revenue ton mile was up 5% over last year. In view of these ongoing changes in our base of business, we believe that revenue per unit is the best proxy for our overall pricing trends.
Also, I will add that as we've stated in the past quarters, our ongoing pricing objective is to exceed the rate of rail inflation. We achieved that objective in the second quarter and expect to do so in the future quarters ahead.
Now transitioning to the specifics of volume on Slide 4, total shipments of $1.7 million were up 22% over a very weak second quarter 2009, driven by economic recovery and very targeted project growth. Each of our business groups produced year-over-year gains throughout the quarter, with metals, paper, chemicals and intermodal achieving 52-week higher loadings during the period.
Now drilling down a little bit further in Slide 5, you will note that merchandise volume reached 592,000 units, up 27% in the quarter. Of that total, metals and construction volume was up 50%, bolstered by increased domestic steel production and new business opportunities.
Chemicals volume increased by 32% with improved chemical industry plant operating rates and volumes from new projects across our network. And automotive volume increased by 19%, as auto production rebounded from a low point last year.
Production-related gains in new vehicle business in the Southeast and into the New England market drove volume gains for the quarter as well. And as shown on the next slide, agriculture volume was up 40%, as ethanol volume continue to grow up 21%, along with new sweetener business as with sugar and corn syrup traffic.
Fertilizer volume was up 89%, largely driven by phosphate traffic. And corn was up 17% with increased shipments to ethanol plants, feed mills and the export market.
Finally, paper volume grew 15% in the second quarter, as pulpboard and kale and clay shipments increased due to improving demand; and lumber shipments grew 12%, despite the weak housing market. To summarize on Slide 7, our merchandise volumes continue to see pronounced sequentially improvement, up 27% in the quarter versus a 16% gain in the first quarter.
Now transitioning to our Intermodal business on Slide 8, domestic volume, which was up 32%, led Intermodal growth for the quarter. Truckload conversions and increased demand were the primary drivers for this strong performance.
International volume grew 10% in the quarter with an 8% increase in export and import shipments and 3% gain in exports. Premium volume was up 19% as LTL and truckload carriers used Intermodal to roll out new services in the face of tight trucking capacity and chronic driver shortages.
And Triple Crown continued to grow their business as well, with volume up 7% in the quarter. And as in the merchandise sector, sequential volume improvement continued in Intermodal as shown on Slide 9 with volume up 11% in the first quarter and 20% in the second quarter.
Turning to Slide 10, during the third quarter, we will realize a milestone in Intermodal service with the official opening of the Heartland Corridor in September. This new route will improve service by reducing up to 230 miles from the Port of Norfolk and the Port of Virginia to the Ohio Valley, and provide next-day service from Norfolk to Columbus, and second-day deliveries to the Chicago market.
Now finishing up with our coal business on Slide 11, total coal volume was up 19% in the quarter led by gains in export, domestic Met Coal and shipments to northern utilities and industrial users. As noted on Slide 12, export volume grew by 39,000 loads, or 177%, which exceeded the 28% increase in global steel production.
Strong Asian consumption continues, pulling Australian coal into Asia away from Europe and South America, resulting in increasing demand for high-quality U.S. Met Coals in these traditional markets.
Furthermore, U. S.
Metallurgical Coals are also moving directly to the Chinese market, further pushing up U.S. export volumes.
As depicted on the next slide, Slide 13, domestic Met Coal volumes were up 31,000 loads, or 125% in the quarter. Again, this exceeded the 72% rate of growth for domestic steel production in the quarter as new business gains added to our results.
Including with utility coal on Slide 14, our volume compared to the first quarter was up 5%, but was still down 4% versus the second quarter of 2009. Our northern utility volume was up 1% in the second quarter, as stockpiles in this region are now below targeted levels.
Our southern utility volume remained down for the quarter, but many of these generation plants are approaching targeted stockpiles in the face of very hot weather and increased generation rates. Now looking ahead to the second half of 2010, we expect to see continued volume growth across most of our business segments as the economy gains traction, and our strong service product enables us to secure new projects and business.
As I've just mentioned, we expect positive year-over-year gains for our utility coal business in the second half as electricity consumption is projected to increase by 3% to 4% and stockpiles continue to decline. Our steel-related commodities, which include export and domestic Met Coal and finished iron and steel volumes, are also expected to remain strong.
We're bullish about continuing growth in domestic truckload conversions to our intermodal network as driver pools and truckload capacity remain tight. With our new Heartland Corridor service underway in September and improving international volumes as a whole, we also expect further growth in this intermodal segment as well.
And with this year's automotive production expected to grow 37% over last year, coupled with new business, we now expect to see positive auto volumes for the year despite previously reported offsets from the redesign of the [indiscernible] (18:24) vehicle network. Finally, the outlook for paper and forest products remains uncertain for the second half.
While the group was up by 10% in our first half, lumber and construction materials continue to be challenged as a result of housing. To summarize, our second quarter volume growth of 22% was encouraging, and sequentially, volume was up 137,000 loads, or 9% higher than the first quarter, and 307,000 loads higher than the second quarter of 2009.
As shown on Slide 16, we now have seen sequential volume recovery in each quarter since the third quarter of 2009. These favorable results have been achieved through a healthy combination of economic growth and business development efforts.
We expect this positive trend to continue through the second half of the year and into 2011 as the economic recovery slowly progresses. While the recovery we are seeing is choppy and uneven, it is a clear economic recovery in our view nonetheless, and we expect to fully participate in the opportunity that it presents for us.
We will also continue our focus on improving revenue per unit to ensure that our yield continues to exceed the cost of inflation for delivering good, consistent rail service. Thank you.
And Mark will now review our operations for the quarter. Mark?
Mark Manion
Thank you, Don. I'll start the operations update with safety.
NS has an injury ratio of 0.96 through the second quarter of 2010, an improvement over the first quarter where we had a ratio of 1.07. We continue to focus on rule compliance and employee engagement in the safety process.
Turning to our operating performance, our road and yard crew starts increased 9.6% over the second quarter of 2009 as we modified our operating plan to efficiently handle the increasing volumes. Of course, this is well below our carload unit increase of 22% for the same period.
Turning to the next slide, train and engine [T&E] employment increased by 328, or 3.2%, in the second quarter, as we switched gears from riding attrition down in 2009 to hiring in 2010. Effectively, all T&E employees have been returned from furlough status and we’ve started hiring in areas where traffic levels dictate and based upon expected attrition.
Turning to our composite service performance on Slide 5, I'll remind you this measure is a composite of train performance, connection performance and operating plan adherence. In the second quarter, our performance declined 8.5% from our record performance on reduced traffic volumes in the same period of 2009.
We are responding well to the unprecedented 22% increase in volumes, and as our service improved from the first to second quarters, we will continue to improve as we modulate our asset base to efficiently handle the volumes at our historic service levels. Finally, turning to our productivity scorecard, in light of carload unit volume being up 22% for the quarter, we were able to manage the operating plan to realize only a 10% increase in crew starts.
For the quarter, total railroad employment was maintained at the same level as 2009. Gross ton miles per employee, balance of diesel fuel and train hours all continued improvement in the second quarter as we employed our assets efficiently.
Car hire days per carload increased 4% as the networks slowed. But as I mentioned earlier, we're managing through this by bringing the appropriate resources to bear on the network.
Thank you. And now I’ll turn it over to Jim.
James Squires
Thank you, Mark. I will now review our financial results for the second quarter.
Let's start with our operating results. As Don described, railway operating revenues for the quarter hold $2.4 billion, up $570 million, or 31%, as compared to the second quarter of last year.
Slide 3 shows our total operating expenses, which increased by $308 million, or 22%, for the quarter. Income from railway operations grew 57% to $733 million.
The substantial increase in revenues driven by higher volumes, fuel revenue and pricing was partly offset by increased operating expenses. The resulting operating ratio was 69.8%, a second quarter record.
Turning to our expenses, here are the major components of the $308 million net increase. Compensation and benefits and fuel expenses accounted for nearly 3/4 of the variance.
Slide 5 reflects the components of the 22% increase in compensation and benefits. First, incentive and stock-based compensation increased to $41 million, accounting for over 1/3 of the increase.
The higher expense is due primary to stronger financial results. While our financial measures declined in the second quarter of 2009, they improved in the second quarter of 2010.
Second, volume-related labor was up $29 million, including $18 million related to our train and engine employees. Third, higher agreement wage rates which took effect primarily in July 2009 added $20 million.
Fourth, medical benefits increased $18 million, largely related to higher agreement employee [indiscernible] (0:24:10). Lastly, the $11 million increase in the other category is principally due to increased payroll taxes and pension costs.
As shown on Slide 6, fuel increased by $105 million, or 69%. As displayed on Slide 7, higher prices drove most of the $105 million of additional fuel costs.
Our average price per gallon of diesel fuel was $2.44, a 45% increase compared to the second quarter of 2009. As you saw on Mark’s productivity scorecard slide, gross ton miles per gallon improved by 5%, reflecting the favorable comparison of an 18% increase in consumption to a 24% increase in gross ton miles.
Slide 8 highlights the $47 million or 33% increase in materials and other expenses. This increase reflects the 2009 one-time benefit of a multiyear estate tax dispute settlement, as well as more favorable personal injury claims development in 2009.
Our results also reflect increased roadway and equipment materials usage for maintenance. Purchase services and rents increased $40 million, or 12%, reflecting increased haulage activity, maintenance, intermodal services and equipment rentals.
Turning to our non-operating items on Slide 10, the majority of the net decline is due to decreased returns on corporate-owned life insurance, which fell $12 million. Additionally, 2009 included a favorable adjustment to interest expense for settlement of a tax matter.
As illustrated on Slide 11, income before income taxes increased $244 million, or 62%, principally due to higher operating income. Income taxes totaled $243 million and the effective tax rate was 38.3%.
Income taxes last year were $144 million with an effective rate of 36.8%. Lower results from corporate-owned life insurance contributed to the higher effective rate in 2010.
Turning to Slide 13, second quarter net income was $392 million, an increase of $145 million compared to last year, and diluted earnings per share were $1.04, a $0.38-per-share increase. Lastly, Slide 14 presents our year-to-date cash flows.
Cash provided by operations more than doubled, easily covering capital expenditures, dividends and share repurchases, which we reactivated in late April. In addition, the second quarter included a $300 million debt repayment.
Cash and cash equivalents at end of the quarter equaled $855 million. As Wick mentioned earlier today, our Board of Directors increased our dividend to $0.34 to $0.36 per share.
The board also authorized the repurchase of up to an additional 50 million shares of common stock through December 31, 2014. When combined with the previous share repurchase program, which expires on December 31 of this year, the total number of shares that may be repurchased has increased from 75 million to 125 million.
Thank you for your attention. And now I will turn the program back to Wick.
Charles Moorman
Thank you, Jim. As you've seen, our second quarter results demonstrate the strength of our franchise.
We were particularly pleased to post an operating ratio in the 60s and we certainly hope to do more of that in the future. We do remain confident that we can continue to sustain our operating leverage and improve our efficiency and profitability.
Looking ahead, while we share the common concerns about the ongoing strength of the recovering, our traffic levels remain strong on a comparative and sequential basis. As you heard from Don, we see continuing positives in almost all of the major components of our traffic base based on both a continuing economic recovery and project-related growth.
Overall, Norfolk Southern's second quarter and first half performance underscores our confidence about the future and showcases the fundamental strength of our franchise. And franchise-enhancing growth initiatives, such as the nearly completed Heartland Corridor to the recent rollout of our revolutionary rail edge technology, we remain intent on improving productivity through innovation and striving for continuous improvement in all we do.
Our commitment remains the same as it has always been: To deliver superior value to our customers and superior returns for our shareholders. Thanks for your attention.
And I'll now turn the program over to the operator for your questions.
Operator
[Operator Instructions] Our first question is from the line of Walter Spracklin with RBC Capital Markets.
Walter Spracklin - RBC Capital Markets Corporation
First on, I guess this is a question for Mark on capacity. And I was just wondering when you look across your network, is there any pinch points particularly after the Heartland Corridor initiative and all of those are completed, what areas would you say are our pinch points?
And perhaps can you tie it in with your view of overall network capacity, understanding it can be different by route, and perhaps the long train technology and new initiatives on longer trains, how does that expand that excess capacity?
Donald Seale
Well, Walter, pinch points is just not something we're thinking about. If you go back to 2006, there's just a lot more volume out there then than we have now.
So we got a long way to go to get back to those kind of volumes. But then on top of that, for the last number of years, certainly, since then, we have been doing a lot of things to add capacity in terms of our infrastructure projects, our corridor projects, all the things that we've been doing to pave the way for the future.
So we feel like we can just take on a lot more volume than what we currently have. And of course, another thing that plays a big role there too is the technology that's working in our favor.
So things are looking up.
Walter Spracklin - RBC Capital Markets Corporation
So do you have a number in terms of roughly excess capacity on your network right now?
Charles Moorman
I don't have a percentage for it. Just to say that we got a long way to go.
Walter Spracklin - RBC Capital Markets Corporation
Don, you mentioned that -- there was reference and Wick made reference as well to some of the slowdown that's out there and the extent that you're not really seeing it perhaps. Can you give us a little bit color of your current negotiations with your customers?
Have they changed their tone right now? What’s their temperature in terms of the near-term demand?
And if it varies by segment, you can chime on that, but just rounding it up with what we’re hearing from an overall economic standpoint about the slowdown and corresponding that with your volumes going in the next few months?
Donald Seale
I think it's fair to say right now that we're seeing an unprecedented amount of economic news daily in the press and I would say that if one followed the daily releases of economic data, you're kind of up and down like a yo-yo in terms of perception. But in discussions with our customers, we're just not getting that type of response with respect to their outlook.
What they're telling us is to expect pretty much the run rate that we saw in the first half or a little bit better pretty much across the board. What we are seeing in those discussions with customers, is they're telling us that truckload capacity is severely constrained.
It's very difficult to get additional trucking capacity right now, which obviously, bodes well for our business, the intermodal side, as well as a lot of the merchandise side of the business, both from the volume and yields perspective going forward. And then on the energy side and steel side, while reports continue to come and go with respect to the outlook, we don't see our business materially changing in the second half.
What we're being told is to expect pretty much the same that we're seeing today.
Operator
Our next question is from the line of Jason Seidl with Dahlman Rose.
Jason Seidl - Dahlman Rose & Company, LLC
The Heartland Corridor, I thought that was set to open July. Were there some delays?
Charles Moorman
No. We had said for a long time third quarter.
And we'll be opening it officially September 9. And really that has been the timetable for quite some time now.
So that's a project on track.
Jason Seidl - Dahlman Rose & Company, LLC
When we look at the cost savings associated with it, how should we think about it when we’re modeling. Like for example, if the Heartland Corridor project was in place for all of 2Q, do you have an estimate on what that could've saved in terms of productivity and a dollar amount?
Charles Moorman
It's a great project and we're going to see some operating savings, as well as take additional volume growth as the International business recovers. But operating savings from the standpoint of the overall network are not going to be significant initially.
It's rerouting one particular train and then stacking another train. So we'll see it, but it's not going to be significant when you look at our overall train structure.
Jason Seidl - Dahlman Rose & Company, LLC
So let’s just expect something maybe modest?
Donald Seale
Jason, the real news line is the increased value for customers running that route with a next-day service to Columbus and next-evening service to Chicago. That 230-mile reduction in running time, that's the big story on this.
Jason Seidl - Dahlman Rose & Company, LLC
So as customers pick up on this increased service time, we should probably expect there to be a little bit more growth on the top line in intermodal?
Donald Seale
That's what we're optimistic about.
Jason Seidl - Dahlman Rose & Company, LLC
If I stick on intermodal since that's what a lot of your large projects actually surround, you talked about getting price increases going forward. Clearly, everyone’s seeing the rapid spikes on the truckload spot markets.
Are you finding it easier to price Intermodal in 2Q than you were in 1Q?
Donald Seale
Well, we certainly think that it's beginning to become easier. I would not term it as “easy”.
Negotiating price increases in a competitive marketplace is challenging at any time. But as I was indicating earlier, our customers are telling us that it is more difficult for them to secure additional trucking capacity that bodes well for conversion opportunity and for yield.
And we're optimistic that, that trend will continue because we think a lot of capacity in the industry, the trucking industry, was taken out last year in the depth of the recession.
Jason Seidl - Dahlman Rose & Company, LLC
On the incentive comp and benefits, obviously, it was up a little more than it was in 1Q. Any guidance for 3Q or is that just really dependent upon the performance of the overall railroad?
James Squires
We would be projecting compensation and benefits expense up slightly in the second and third quarter sequentially versus second quarter, but not a great deal. And it depends on financial performance and stock prices as well obviously, but shouldn't be a large change from second quarter.
Operator
Our next question is from the line of Bill Greene with Morgan Stanley.
Bill Greene - Morgan Stanley
I'm wondering if we can just get a breakdown of the RPU. You mentioned that, that's a decent proxy for pricing.
But how would it break out if we took out fuel and mix from that, what was core price then?
Donald Seale
Bill, as we stated in the comments, we we're seeing a lot of change in the composition of our business, the mix of it as we added a lot of new business through new business initiatives. And economic recovery has not come back evenly across our network in terms of the overall volume.
So when we look at the volume being up 22%, as I mentioned revenue ton miles were up 25%, revenue per revenue ton mile was up 5%, and of course, of the RPU was up 7%. So when you put all that together in view of those changes that we saw in the traffic mix, very significant traffic mix, we feel that RPU is the best proxy for the indicator of price.
And I will tell you that because of the moving parts in the quarter, that our internal calculation using our traditional method of calculating core price did not generate a meaningful conclusion for the quarter. So that's why we’re pointing you to the RPU in terms of that proxy for the yield improvement.
Bill Greene - Morgan Stanley
I'm wondering, then, can we sort of get a sense for how big of a contributor to the price number was export coal? There was some sense that, that's kind of one-time in nature when CSX reported it.
So any color on you can add there on export coal and how big a contributor that was would be helpful.
Donald Seale
Well, you know as we pointed out, our export coal volume was 177% from a low base last year. You got to keep the comps in mind.
But our pricing for export coal went in April 1 and will run to April 1, 2011, before we renegotiate that price. So it's not a one-time, one-quarter.
It will run continuously. So export coal was a part of the overall success of the quarter, but I can't quantify it for you.
Bill Greene - Morgan Stanley
You made a comment that you thought the business could perform similarly or even better in the second half versus first half. I'm not sure if you meant sort of sequentially the volumes will improve there.
But if I think about it at a broader sense, you achieved a sub-70 OR this quarter. If the business performs similarly or better, does that suggest the second half could be as good or better than this OR?
Donald Seale
Well I wouldn't want to speculate on the OR, but I was referring to volumes based on customer input for the second half, and based on that input, our plan calls for a run rate in the second half that would be in line with the volume appreciation, volume growth we saw in the first.
Bill Greene - Morgan Stanley
I don't think it's illogical to think that your cost would suddenly spike up in the second half. You would still assume -- I assume you’d get leverage, and price would be sort of in these levels, so I don't think there's any logic to assume it would deteriorate, unless I'm missing something.
Charles Moorman
Well I don't know that you're missing anything. We don't ever try to speculate or forecast the OR.
Clearly, we had an OR in the 60s this quarter, and as I said, it’s our hope that we can continue to do that. We think that's, obviously, a positive thing, and we're going to try to manage the company to continue that to the best of our ability.
Operator
Our next question is from the line of Chris Wetherbee with FBR.
Christian Wetherbee - Merrill Lynch.
I guess maybe the first question if you could just touch on headcount a little bit. You did a nice job holding it flat on a year-over-year basis, slightly, I guess, up a bit sequentially.
How should we think about that in the second half, assuming kind of sequential improvement or potential for sequential improvement in volumes? Do you need to add anywhere?
Is there anywhere that you need to start adding heads?
Donald Seale
Let me address that if I might. We have begun some hiring, so we will gradually see some increase, but pretty modest throughout the rest of the year.
In the T&E area, we're looking at about 100 people that we'll add by year's end. That's on the T&E side, and then a few more in the operations area.
So it will be pretty modest, and we're doing a lot to hold the line on increasing the overall population within the railroad.
Christian Wetherbee - Merrill Lynch.
Okay. That’s helpful.
I appreciate it. And then just from a comp perspective, the increase in the health and welfare, you kind of highlighted that in the second quarter.
Is that a good kind of way to think about the third and fourth quarter from a year-over-year growth perspective?
James Squires
As I mentioned earlier, overall, we're looking at comp and benefits expense up somewhat in the third quarter sequentially versus the second quarter. And some of that will be recurring: increases in medical benefits as well as the effect of higher wage rates and volume-related labor as well.
But it shouldn't be a dramatic uptick in compensation and benefits expense overall.
Christian Wetherbee - Merrill Lynch.
Okay. That’s helpful.
And then just one final kind of bigger-picture question. Wick, for you maybe on the Washington side, just curious kind of what your activity has been as far as dealing with the staff there -- just any sense if there’s any uptick in potential activity or if it just continued to go through the normal kind of process you've been in over the last 18 months or so.
Charles Moorman
I would just say right now that it’s more or less the normal process. The industry, as you know, is still up trying to talk with people and fully prepared to engage on all of these issues, and I think the folks on the hill understand that.
But there's been no change of any significance in what's going on in the past month or so.
Operator
Our next question is from Tom Wadewitz with JPMorgan.
Thomas Wadewitz - JP Morgan Chase & Co
One technical question, I guess -- an operating data question here. What was the fuel surcharge revenue number in second quarter or the magnitude of the year-over-year change in surcharge revenue?
Donald Seale
Tom, it was $137 million increase.
Thomas Wadewitz - JP Morgan Chase & Co
$137 million year-over-year increase?
Donald Seale
Correct.
Thomas Wadewitz - JP Morgan Chase & Co
Okay. In terms of the pricing, are you looking for -- when you negotiate with customers, have you changed what you're looking for in terms of the magnitude of rate increases with your industrial type of rail customer -- not the most truckload-sensitive customers but the more rail-sensitive customers?
Are you changing that at all? Or is that pretty much the same as you would've been seeking a year ago or a couple quarters ago?
Just a little more perspective on kind of how you're viewing pricing and competition at the present time.
Donald Seale
We've had as an objective that we stated before of pricing in excess of the rail rate of inflation. And that remains our target with respect to pricing across our business base.
I don't see a material change in our philosophy with respect to price negotiations for the customers. I will tell you that, if trucking continues to be tight and capacity is constrained as the economy continues to improve, we'll take another look at that because that translates into a changing marketplace.
So that would be an opportunity for us to re-evaluate. But right now, we're looking at that threshold above the rate of inflation, which is running for us 3% to 4%, possibly in that range.
Thomas Wadewitz - JP Morgan Chase & Co
Okay. When you look at train length -- this is going to be a question for Mark -- what does your carload average train length look like in second quarter?
And then kind of room for expansion, and I guess a similar type of perspective on the intermodal average train length and kind of what that potentially can be.
Mark Manion
Currently, while we've seen some increase in train length year-over-year, right now, overall for the fleet as a whole, we're operating about 4,900 feet. And that's about a 7% increase from where we were.
Merchandise is running longer than that, about 5,400 feet, and again, that's about a 5% increase. So what that translates into is there's still good room to grow on existing trains, and that's what we're looking forward to.
Thomas Wadewitz - JP Morgan Chase & Co
Is there a siding limitation to what you can get to? Or can you get to 7,000-foot trains?
Mark Manion
Depends on the route. Different lanes vary.
In many cases, we are restricted to 8,000 feet. But then again, we've got some strong corridors with double track and don't have those kind of limitations, and even today, we're seeing trains out there that are 11,000 feet and more, particularly between Chicago and New Jersey.
But good room to grow.
Operator
Our next question is from the line of Ken Hoexter with Merrill Lynch.
Ken Hoexter - BofA Merrill Lynch
Just looking at your coal export volumes -- back to that -- of, I guess, 66.4 million tons, are you at capacity? Because it looks like every time you kind of hit there, you kind of bounce around that level.
So is your network at a physical capacity at that level?
Donald Seale
And I would wish I could tell you that we were at capacity. We would like to get to that point, but we're not.
We have plenty of excess capacity at Lambert's Point in Norfolk. I will tell you that the available excess capacity at Fort Baltimore is a little bit tighter.
But here in Norfolk, we could add people. If the coal was available and the demand was there, we could ramp up well in excess of what we're seeing today.
Ken Hoexter - BofA Merrill Lynch
Is the demand there? Or is it more the ability to produce the coal?
Donald Seale
I think that coal supply is beginning to tighten just a little bit as the utilities come back into the market. As I’ve mentioned, we expect utilities in the second half to start replenishing stockpiles.
So I see that demand is still strong and coal supply is probably one of the governors on that growth. But I also think that we're meeting current demand also.
So I don't think there's a disconnect in terms of supply versus demand.
Ken Hoexter - BofA Merrill Lynch
Okay. Sticking on that, just in general -- overall volumes, not just coal now -- but do you feel like as you move into peak, is there kind of a pull?
We're hearing a lot of tightness in different areas, whether it's on the shipping side or even on the trucking side, as you mentioned. Are you feeling like some shippers are trying to pre-order, maybe rebuild some inventories back to levels of a couple years ago?
Or are we still kind of feeling out how growth is going right now in the market? Do you get a sense from your shippers?
Donald Seale
Well, when we talk to shippers, Ken, and we look at the inventory sales ratios out there, we know that manufacturing inventories are running pretty much at a normalized level with normalized replenishment now. So it's not a restocking-type scenario, and when we look at retail inventories, they are below norm.
So we fully expect consumer activity, retail-type volume, to have somewhat of a peak this year unlike the previous two or three years that we've seen. Customers are telling us that, and of course, the data points to that as well.
Ken Hoexter - BofA Merrill Lynch
On the Heartland, are you pre-selling for that infrastructure?
Donald Seale
We have been pre-selling for quite some time, and we've had a lot of the shipping companies looking at that Corridor, and we think that it holds great promise.
Operator
Our next question is from the line of Gary Chase with Barclays Capital.
Garrett Chase - Barclays Capital
I wanted to see if I could ask two quick ones for Don. First, I wanted to follow up on the volume discussion.
I think, if I heard you correctly, and I know you tried to follow up on this with Bill Greene. If I heard you correctly, you said sequential growth in the second half.
Was that intended to be up in the third from the second and then up in the fourth from the third?
Donald Seale
No, Gary. What I was referring to was that customers are telling us to expect comparable volumes that we've seen in the first half in the second half.
I was not referring to sequential quarter-over-quarter growth.
Garrett Chase - Barclays Capital
Okay. And then just along those lines, it does look like the first few weeks of July have been just a little bit softer than where you ended the quarter, particularly in some of the categories outside of intermodal.
I was curious if -- and you’ve obviously got to exclude the holiday impact -- but I was curious if there was anything there, any color, or if that’s just kind of normal seasonality as you read it today.
Donald Seale
I think it's one normal seasonality with respect to the miners’ vacation and also the UAW automotive vacations that take place around the Fourth of July. But [indiscernible] (51:35) point is that year-over-year, our comps will get progressively a little bit tougher as we go forward, starting in July.
Our low point last year was April and May, and then we started to pick up in June. So July is a little bit better month last year, plus the seasonality that we do see every year based on those two events
Garrett Chase - Barclays Capital
And then just lastly, I wondered if, Don, if you could give us a little bit of color on -- I’m curious if there were specific mix issues that would've affected revenue per car load in some of the merchandise businesses, especially Chemicals but also Metals & Construction. Was there shorter-haul business in there or something along those lines that might have made the OpEx[ph] (52:20) look a little different than the reality?
Donald Seale
You describe it very well, Gary. The shorter-haul nature of some of the business that has come back in terms of the Metals franchise, as well as some of the project cargo that we’re hauling -- that is attractive business but has a shorter length of haul than the average within the groups.
Garrett Chase - Barclays Capital
And that was distorting some of those yield calculations you were talking to earlier, right?
Donald Seale
That’s correct.
Operator
Our next client question is from the line of Chris Ceraso with Crédit Suisse.
Christopher Ceraso - Crédit Suisse AG
So just to follow up on that. So the net effect of mix from an RPU standpoint would be negative for the quarter.
Is that fair?
Donald Seale
Chris, I will tell you that the mix was not significant, but it was modestly positive because of the Export Coal.
Christopher Ceraso - Crédit Suisse AG
Okay. So that outweighed the shrinking length of haul in some of those other categories?
Donald Seale
Yeah. In terms of the total book.
Christopher Ceraso - Crédit Suisse AG
Okay. On the Export Coal, was there any sign of any kind of a slowdown toward the end of the quarter or into July?
Donald Seale
No, we did not see a sign of a slowdown. We took a planned maintenance period back at the end of the first quarter -- actually, at the beginning of the second quarter.
That was planned, and we did not see a slowdown as we progressed through the quarter.
Operator
Our next question is from the line of Cherilyn Radbourne with TD Newcrest.
Cherilyn Radbourne - TD Newcrest Capital Inc.
I wonder if you could speak to us a little bit about your composite service performance and just what of the measures that make up that composite were sort of pulling it down on a year-over-year basis. Just talk to us about what you think the right level is for that metric and how quickly you can get back to those levels.
Donald Seale
Well, the train performance is largely what we key in on and working hard to push that up a notch. We've been, actually, we've been quite successful as we’ve come into the second half, improving our connection performance.
And actually, we're seeing an uptick now in the train performance as well. So we're going to keep driving at that, and we are -- just like we saw some sequential improvement quarter-over-quarter with the metric overall, we anticipate we're going to see the same thing as we go through the rest of the year and continue to work on that train and connection performance.
Cherilyn Radbourne - TD Newcrest Capital Inc.
And if I could just ask another question on the theme of price. Just trying to understand why you're pointing us to look at RPU as the appropriate measure to assess your core pricing in the quarter, just given that you did have a lot of mix impact in the quarter with a lot of short-haul business coming on.
Just trying to understand why you wouldn't point us to revenue per RTM in that case.
Charles Moorman
Well let me answer both questions. First, I think that looking at revenue per revenue ton mile is not an invalid thing to do.
It certainly could be another proxy. But I think the broader issue is, as Don has stated, that we have ways that we've always tried to look at computing price and mix across a large and very focused business.
And we've done that in order to give some meaningful numbers to folks. And as we've seen, what, as I described, were really unprecedented swings and changes.
These derivations give you numbers that really don't make a whole lot of sense in terms of what we're seeing in some of the other internal data that we look at. So for many years, we looked at RPU as a good proxy, and we think that remains a very good proxy.
Operator
Our next question is from the line of Ed Wolfe with Wolfe Trahan.
Scott Group - Wolfe Research
It’s Scott Group in for Ed. So sorry, but I still want to follow up on this yield issue because when I think about the $137 million increase in fuel surcharge revenue -- and Don, I think I heard you say that mix overall was modestly positive -- it kind of implies that there really wasn't any pricing gains in the quarter, and I want to know if what I'm missing or -- any color you could provide would be really helpful, I think, because I think it's something that's confusing people.
Charles Moorman
Well I think I'll just answer it the way I answered before. That is, if you kind of look at the ways we derive numbers, that those derivations, when we have seen these unprecedented changes in our business volumes and in lengths of haul and in the types of business we're handling, just don't really yield numbers from a formulaic standpoint that are consistent with a lot of the internal data that we're looking at.
And that's why we are trying to point you in a direction that we think has some meaning.
Scott Group - Wolfe Research
Is there a same-store metric that you guys look at that maybe you could provide? Or do you guys not look at it on a same-store basis?
Charles Moorman
It's one of the internal metrics that we look at, but it’s just one of them, and it’s not a number we provide.
Scott Group - Wolfe Research
Okay. And then I want to spend a little more time on the Export Coal.
I was wondering if you can just give us a breakout in the quarter of how much was Met and how much was steam on the Export side.
Donald Seale
Scott, the vast majority of it was Metallurgical Coal.
Scott Group - Wolfe Research
Okay. And when you talk about the 177% increase year-over-year, can you, any chance, break that out by month and maybe what you're seeing so far into July?
Just want to get a sense if you're seeing any slowdown there.
Donald Seale
As we mentioned earlier to a previous question, we have not seen a slowdown per se. You'll still see coal supply there, and you'll still see demand there as well.
Scott Group - Wolfe Research
Okay. And then last two things real quick for Jim.
The other income has been a little choppy, and I was wondering if you can give some guidance on that for the year. And then similarly, with purchased services back up to kind of north of $290 million, is that a good run rate going forward?
James Squires
Let me start with the other income question. Corporate-owned life insurance does lend some volatility to other income net.
And as I mentioned in my prepared remarks, returns on corporate-owned life insurance were lower in the second quarter of this year, and that drove down income net. The other factor there, which was one-off, was the presence last year of an interest component relating to a tax settlement.
So that was the other thing going on in other income net. Looking at the services, it's more volumetric in nature and -- purch services and rents.
And we would be expecting some uptick in purchased services and rents in the third and fourth quarter in long with traffic volume expectations. But again, not dramatically higher than we saw in the second quarter.
Scott Group - Wolfe Research
So up slightly sequentially from second quarter? Okay.
Operator
Our next question is from the line of Justin Yagerman with Deutsche Bank.
Robert Salmon
This is Rob Salmon on for Justin. I guess if I'm looking at your outlook for the back half of the year, you guys indicated that you’re expecting volume similar to the first half in the second half.
Is there anything different with regard to your automotive sector? Which the automotive vertical you guys have kind of indicated has a positive outlook.
Could you give us a sense -- those expectations regarding volumes and what the primary driver for that outlook is? Is it new business?
Or is it automotive production and sales?
Donald Seale
Well as I mentioned, that automotive production for the year is still projected to be up about 37%. Our business, even with the offsets that we have discussed with respect to the redesign of one of our customers’ vehicle networks, we're up 17% in the third quarter with that.
And if we back out the result of that impact of the redesign, we were up 31% in the quarter. So based on that, we're looking ahead, and we see some new models coming out with clients -- large customers at Ford Motor Company -- that we expect to handle increased volumes for in the second half.
And for that reason, we've moved the automotive sector from a neutral to a positive for the second half.
Robert Salmon
All right, thanks. I guess, shifting gears to the ethanol network continued build out, could you give us a sense -- how you see that progressing over the next couple years and the implications to volumes, assuming the EPA mandates end up going through?
Charles Moorman
We see continued growth in the ethanol network. We're continuing to open up new ethanol distribution centers, and we also have new production facilities ramping up just about each quarter.
So the ethanol business has grown significantly over the last five years. We expect that to continue to be a growth commodity for us.
And it's definitely expanding its footprint in today's energy market.
Robert Salmon
Could you give us a sense what percent of your ethanol carloads are currently on unit trains versus the merchandise?
Charles Moorman
Generally speaking, we’re running most of our ethanol in our manifest network. We're running some unit trains to specific destinations, but most of the ethanol moves as part of the manifest TOP -- Thoroughbred Operating Plan -- network.
Operator
Our next question is from the line of Scott Malat with Goldman Sachs.
Scott Malat - Goldman Sachs Group Inc.
I just wanted to circle back on the service index. I guess I thought I wasn't sure from your answer of exactly what happened from 1Q to 2Q.
I thought 1Q got hit by a lot of weather, and I expect to see a little bit better increase. And then just kind of along with that, I just want to understand how that factors into pricing discussions.
And I think for a long time, we talk about service improvements and pricing at inflation-plus in railroads, and if we're down year-over-year, is that brought up in any discussions of, “Hey, your service is down. We don't want to take as much price increase as you're asking for”?
Donald Seale
Let me address your comment about the operating performance. As far as second quarter goes, we were well poised for some good performance and still handled it reasonably well.
But we saw our volumes come on 19% in March, and then sequentially from March, just continued to build from there. So we were paddling pretty hard to keep up with those kind of volumes.
And we were somewhat resource-constrained. But the good news is, of course, that we're catching up with those resources, and we'll continue to show improvement going forward.
Mark Manion
And with respect to the price side of the question, we don't see degradation in the pricing negotiation. Our service is good across-the-board.
We have challenges, as we always do, in circumstances. But generally, it's new [ph] (1:05:15) to be good, and our negotiations on price reflects that.
And we have about half of our book of business for 2011 priced in for 2011.
Operator
Our next question is from the line of Scott Flower with Macquarie Securities.
Scott Flower - Macquarie Research
Just a few questions, and forgive me if some of these has been broached because I've been hopping from calls, but, Don, could you give us some sense -- what did mix do to the overall RPU order magnitude in the quarter? Was it a help or hurt?
Donald Seale
Scott, as I’ve mentioned earlier, it was a very insignificantly level of positive for it because of Export Coal. But I would quickly tell you that, as I mentioned, Export Coal, we had a 1% increase in our northern utility coal, which is much shorter haul.
So for every extension of haul we picked up in the quarter, we had a corresponding offset with a shorter length of haul segment of business. So it did not have a major role to play from a total book.
But within the book of business, there was a lot of noise and a lot of moving parts.
Scott Flower - Macquarie Research
Got it. And then I know that you mentioned the different sort of ideas or thoughts on stockpiles.
But will stockpiles actually go below more targeted levels before you see a kick up in utility volumes? Or are you already seeing some of the response on the utility side now with the burn in degree days?
Donald Seale
Well certainly, we're seeing a response now, and as I mentioned in the North, a 1% increase in the second quarter, so that's already started in terms of year-over-year increases for coal moving to our northern utilities. I will tell you also, Scott, that the southern utilities based on our calculations are within a very small tonnage range of reaching target.
And we know that they are beginning to have discussions with coal suppliers.
Scott Flower - Macquarie Research
Okay. So those should start kicking up at some point, perhaps in the third quarter.
Donald Seale
I think we're beginning to see a lot of dialogue and a lot of discussion right now.
Scott Flower - Macquarie Research
And again for you, Don, is intermodal RPU actually fell this [indiscernible] (1:07:38), and yet last year, it was also down, and I know you all took a GRI. I’m just trying to understand the dynamics of what’s going on in that business from an RPU perspective.
Donald Seale
Scott, for the second quarter, our RPU in intermodal was up 3%. It did not decline.
And we continue to see changes in that business as well. We're seeing a resurgence in our domestic business.
As I pointed out, that was up over 30%, and our international business was up about 10% in the quarter. But total RPU up 3%.
Operator
Our next question is from the line of John Larkin with Stifel, Nicolaus.
John Larkin - Stifel, Nicolaus & Co., Inc.
I don't know if Mark touched on this or not in his remarks, but did you comment on the number of employees that you have under furlough, the number of locomotives you still have in storage and the number of freight cars you still have in storage?
Mark Manion
I did touch on that briefly. We have virtually reduced our furlough down to practically nothing.
Good news is what few there are still left, we are deploying them to various areas of the railroads where we can use them the best, where we've got some of the strongest volumes. Similarly with locomotives, we've taken our locomotives out of storage.
John Larkin - Stifel, Nicolaus & Co., Inc.
How about with respect to freight cars?
Mark Manion
As far as freight cars go, we're at a high. We were at 35,000 stored, and we are now down in the vicinity of 8,000 cars stored.
John Larkin - Stifel, Nicolaus & Co., Inc.
I was wondering also if you could perhaps give us a little more color on the project that you announced -- I think it was during the quarter in conjunction with General Electric -- that potentially could take network velocity up 10%, 15%, I think was the order of magnitude that was mentioned in the earlier press release. Could you just give us a flavor for how that project’s going to be rolled out -- what the timing of it would be and when you would expect to cash in on the benefits?
Mark Manion
Sure, I'd be glad to. We are excited about Movement Planner.
By the end of this year, we will have four, perhaps even five, of our divisions rolled out on Movement Planner. In fact, we just, this week, completed another rollout.
And so we're looking forward to a good benefit as a result of that, and as we go division to division, we are finding that we’re actually able to expedite that. So we're looking at beginning part of 2012 when we have that completely rolled out.
And where we do call it Movement Planner, this is actually GE’s product that they refer to as RailEdge.
John Larkin - Stifel, Nicolaus & Co., Inc.
Okay. And there were several hundred millions of savings associated with each 10% movement in velocity.
Is that an estimate that still holds at this point, and would you think that a 10% improvement in total system velocity is possible with a full rollout by 2012?
Mark Manion
We have actually -- what we have been experiencing so far is a speed increase of anywhere from two to four miles an hour, and that translates into a velocity improvement anywhere between 10% and 20%. And of course, anytime we see those kind of increases, we're looking at a lot of positive impact from the standpoint of asset utilization as well as fuel economy.
Operator
And our final question comes from the line of Jeff Kauffman with Sterne Agee.
Jeffrey Kauffman - Sterne Agee & Leach Inc.
Just a quick one then on cash deployment. Do you have a targeted level in your mind where there is too much cash on the balance sheet -- we got to redeploy it someplace else?
How do you think about your debt leverage and kind of what the right level of leverage is, whether it's debt to EBITDA, debt to equity? Just so I can get a sense for as cash starts to build, as operations start to improve, at what point we decide to start putting more of it to work.
James Squires
We ended the quarter with around $1.1 billion in cash and short-term investments. We have a goal of bringing that balance down by year-end to somewhere around $700 million.
And we're very comfortable with our current credit metrics, be they debt to EBITDA or debt to total capitalization, FFO to debt or other metrics that put us in a credit band of somewhere around, I’m sure [ph] (1:12:56) triple, B+, Baa1, so we’re comfortable with that degree of financial leverage and intend to maintain our capital structure about that point.
Jeffrey Kauffman - Sterne Agee & Leach Inc.
Okay. And if I understand your share repurchase announcement correctly, you had about 9 million shares left on the old authority, 50 million new, so about 59 million shares available to be repurchased.
James Squires
Correct.
Operator
We have no further questions. I would like to turn the floor back over to management for any closing comments.
Charles Moorman
Thanks very much for taking the time to be with us today. We look forward to talking to all of you again in the near future.
Operator
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.