Apr 28, 2011
Executives
Donald Seale - Chief Marketing Officer and Executive Vice President Michael Hostutler - 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
Analysts
Walter Spracklin - RBC Capital Markets, LLC Peter Nesvold - Bear Stearns William Greene - Morgan Stanley Jeffrey Kauffman - Sterne Agee & Leach Inc. Justin Yagerman - Deutsche Bank AG Ken Hoexter - BofA Merrill Lynch Garrett Chase - Barclays Capital Thomas Wadewitz - JP Morgan Chase & Co Scott Malat - Goldman Sachs Group Inc.
Christopher Ceraso - Crédit Suisse AG Jon Langenfeld - Robert W. Baird & Co.
Incorporated Donald Broughton - Avondale Partners, LLC Edward Wolfe - Bear Stearns Christian Wetherbee - Merrill Lynch. Jason Seidl - Dahlman Rose & Company, LLC Matthew Troy - Susquehanna Financial Group, LLLP Cherilyn Radbourne - TD Newcrest Capital Inc.
Scott Flower - Macquarie Research
Operator
Greetings, and welcome to the Norfolk Southern Corp. First Quarter Earnings Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Hostutler, Norfolk Southern's Director of Investor Relations.
Thank you. Mr.
Hostutler, you may begin.
Michael Hostutler
Thank you, and good afternoon. Before we begin today's call, I would like to mention a few items.
First, the slides of the presenters are available on our website at nscorp.com in the Investors section. Additionally, transcripts and mp3 downloads of today's call will be posted on our website for your convenience.
Please be advised that any forward-looking statements made during the course of the call represent our best good faith judgment as to what may occur in the future. Statements that are forward-looking can be identified by the 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 that is non-GAAP numbers, 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, Michael, and good afternoon, everyone. It's my pleasure to welcome you to our first quarter 2011 earnings conference call.
I'm joined by several members of our senior team today, including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and Jim Squires, our Chief Financial Officer, all of whom you'll hear from this afternoon. I am very pleased to report that Norfolk Southern had an excellent first quarter, delivering all-time first quarter highs in revenues, income from railway operations and earnings per share.
We achieved these records in the face of severe winter weather, sharply higher fuel prices and an unfavorable arbitration ruling, which decreased earnings per share by $0.10. Our results were driven by strong top line growth of 17%, which was achieved through a balance of increased volume, as well as increased revenue per unit.
We saw an overall volume increase of 8%, driven by double-digit volume growth in coal, intermodal and automotive. Revenue per unit rose by 8% as well, driven by our continued emphasis on market-based pricing, along with higher fuel surcharges.
Don will provide you with the revenue and traffic details in a few minutes. With respect to service, we, along with all of the other North American rails, battled some unusually disruptive winter weather in the first two months of the quarter.
But our performance improved substantially later in the quarter and on into April as we worked through these weather issues. As most of you know, we constantly measure all aspects of our service and Mark will give you all of the details a little later.
Our improved service and handling of increased traffic volumes were largely the result of the targeted hiring that we have been describing to you. Mark will give you an update on that as well, and I'll give you a little more color on overall employment in my closing remarks.
Our record operating results and strong free cash flow enabled us to continue our focused efforts on investing in our company while at the same time returning cash to our shareholders. We got off to a good start with our capital expenditure program and at the same time, we were able to increase our dividend 11% during the quarter and repurchase over $340 million worth of our share.
We anticipate that our continued focus on service delivery will result in customers moving more traffic on our system. This in turn makes our railroad more efficient, which then leads to our ability to generate more cash to invest and provide superior returns to our owners.
Finally, I would be remiss if I didn't mention the best news of the quarter, which is that we received formal notice that Norfolk Southern will receive its 22nd consecutive Harriman gold medal for employee safety next month. The award, which is for calendar year 2010 is another tribute to the best workforce in the railroad business.
But having said that, we know that there is still room for improvement and we're intent on continuing to drive safety and service to new all-time highs. With that, I'll turn it over to Don for a look at our business in the first quarter.
He'll be followed by Mark and then Jim, and I'll conclude with some remarks before we take your questions. Don?
Donald Seale
Thank you, Wick, and good afternoon, everyone. During the first quarter, our markets continued to rebound, led by new business initiatives, increased manufacturing output and improving global trade patterns.
Strong volume growth and favorable pricing combine to generate revenue of $2.6 billion, up $382 million or 17% over the same period last year. This was our highest revenue quarter since the third quarter of 2008 and our third highest revenue quarter ever.
Approximately 53% or $201 million of the revenue gained in the quarter was driven by higher revenue per unit and the remaining $181 million was the result of increased volume. As with the fourth quarter of 2010, our volumes and related revenue could have been higher but were impacted by harsh winter weather conditions, particularly in February.
Turning to yield for this quarter on Slide 3, you'll note that we achieved our highest revenue per unit ever, reaching $1,531, up $117 or 8%. Improved pricing, based on market demand and tighter transportation capacity across all modes, combined with higher fuel surcharge revenue, drove this record performance.
For the quarter, we set new RPU levels for agriculture, metals, chemicals and coal. Higher RPU in coal was driven by favorable export business, increased rates from contract renewals effective January 1 and escalators in existing coal contracts.
Favorable traffic mix consisting of increased volumes of longer haul utility coal to our Southern utilities also contributed to improved revenue per car. In our merchandise sector, improved pricing and favorable mix drove record RPU results for agricultural and chemicals while metals record RPU was the result of higher pricing and fuel-related revenue.
Finally on automotive, changes in traffic mix due to higher volumes of lower RPU bi-level traffic and reduced volumes of higher rated auto parts and tri-level traffic generated flat revenue per unit for the quarter. With respect to pricing, network investments and improved service combined with tighter capacity in the truck load and barge markets across all commodities bode well for continued price improvement as the year progresses.
In this regard, and as we've previously stated, our plan to price at levels that exceed the rate of rail inflation. We're pleased to advise that we're clearly meeting this objective on a quarterly basis.
Now turning our attention to our volume performance in the first quarter as shown on the next slide, total shipments of 1.7 million loads were up 128,000 units or 8% over the first quarter last year. With the exception of agriculture and chemicals, all of the remaining business units posted year-over-year gains.
During the quarter, we saw our total volume reached a 52-week high, as well as individual market highs in our paper and automotive business groups. And I might add that for the week ending April 2, a new 52-week high was again realized in automotive, along with a new 52-week high in coal as well.
Now transitioning to our major business sectors and starting with our coal markets as shown on Slide 5, coal revenue of $816 million was up $187 million or 30% over the first quarter 2010 and it was our second highest revenue quarter ever. Volume of 406,000 units improved by nearly 42,000 loads or 11% driven by increased global demand, changes in coal sourcing and stockpile replenishment.
Volume weakness in domestic metallurgical coal following a 36% increase in the fourth quarter of last year was driven primarily by reduced coal availability and was more than offset by strong utility and export volumes. We expect domestic met coal shipments to rebound ahead, however, as stock piles in this sector remain at 50% to 70% below targeted levels.
On the resources front, we've added new AC locomotives to our coal fleet and we'll start initial deliveries of 1,500 new coal cars in May, all of which will be built this year. Short-term coal car leases are also being utilized to boost capacity and we've also upgraded additional tracks at our support yard at Lamberts Point.
All of these added resources are focused on imposing service to our valued coal customers and producing further revenue growth ahead. Now turning to the export market in coal, which was our strongest market segment in the first quarter, shipments totaled 71,000 loads, up 25% and 14,000 loads over the first quarter of 2010.
The convergence of flooding in Australia, a 10% increase in global steel production and robust demand for met coal in Asia resulted in our highest export volume since 1999. At Lamberts Point, volume for the quarter reached 51,000 loads, up 16% while shipments over Baltimore were up 49%, both due to high demand for U.S.
met coals in Asia, Europe and South America. With respect to our outlook in this market, global coal supply remains tight in response to the flooding in Australia.
Some major ports and mines there have resumed operation but are operating at greatly reduced capacity. As of today, global demand is exceeding supply and we do not foresee any decline in demand for U.S.
coals from the return of Australian supply for the balance of this year. Reflecting this favorable outlook, current dynamics in the marketplace bode well from export pricing and our C52 export contracts effective April 1 reflect this ongoing strong demand.
Now concluding my discussion of coal on Slide 7, utility volume of nearly 277,000 loads was up 13% over the same period of last year despite a 2% decline in electricity output in our service region. Utility volume benefited from increased shipments to southeastern utilities to replenish low stockpiles and new business.
With respect to utility stockpile levels, many NS Served utilities have inventories that are still well below their targeted levels. Looking ahead, customers will use the shoulder months to replenish coal stocks in preparation for the summer cooling season and we expect our utility tonnage to reflect that favorable trend.
Turning now to intermodal on Slide 8. Revenue of $485 million was up $75 million or 18% over the first quarter 2010.
This revenue gain was primarily from volume growth, fuel-related revenue and contractual rate increases. Volume reached 747,000 units led by strong gains in our domestic and premium business.
Our domestic growth was driven by tightening truck capacity, new business initiatives and improving economic conditions. Also widespread interest in intermodal as a less carbon-intensive alternative to truck continues to increase demand across our customer base.
Of our total domestic increase for the quarter, we estimate that 60% came from local business, east of the Mississippi, which was up 21%, with the remaining 40% from traditional interline business such as the transcontinental market, which increased by 14%. Premium volume, which was up 19% benefited from tight truck capacity and highway conversions in the LTL segment in addition to volume resulting from the new FedEx business that I mentioned in January.
Finally, international and Triple Crown volumes were both up 2% for the quarter as global trade in retail sales slowly improved. As all of you know, we're investing for future growth and improved customer service across our intermodal network.
Shown on Slide 9 are five major new intermodal terminals that we expect to be completed by the summer of 2013 as we continue our unrelenting focus on upgrading corridor speeds and terminal capacity. Our clear objective here is to take intermodal customer service up to the next level and to fully support future growth and higher profitability ahead.
Now turning to merchandise. As shown on Slide 10, total revenue in this broad carload segment was $1.3 billion, up $120 million, or 10% over the first quarter of 2010.
Volume for the quarter was 558,000 carloads, up 3%, led by gains in metals and construction materials, paper and automotive traffic. Drilling down to specific market segments in our merchandise business, automotive volume grew 12% over first quarter 2010 as shown on Slide 11, driven by the increase in North American light vehicle production, robust vehicle sales and quality haul releases from the manufacturers.
Shipments for the Detroit Three, along with the majority of our international brand names saw a year-over-year improvement in the quarter. New vehicle business secured in the third quarter last year also contributed to our ongoing volume growth.
Now turning to our metals and paper business on the next slide, metals and construction business, our first quarter carloads were up 7%, primarily driven by increases in coil steel, miscellaneous construction and aggregates traffic. Coil steel carloads benefited from increased domestic steel production and related volume growth of inter-mill shipments.
Miscellaneous construction was driven by the continued ramp up of natural gas drilling in the Marcellus Shale region of Pennsylvania and aggregates carloads benefited from increased highway construction and paving projects. Our paper and forest products volume was up 2% in the quarter, primarily due to gains in pulp board, newsprint and printing paper, reflecting stronger demand and higher production rates.
Concluding our carload discussion with chemicals and agriculture on Slide 3. Chemicals volume was down 1% in the quarter due to tough comparisons to first quarter of last year that included 5,700 carloads of TVA fly ash business.
Adjusting for the TVA business, which has now been completed, chemicals volume would have been up 5% in the quarter benefiting from increased chemical production, new plastics business and continued ramp up of new business initiatives to handle waste-related products. Finally, agriculture's volume declined 2% as strong soybean shipments could not offset declines in corn traffic to the export market and to selected feed mills.
Corn carryover stocks are headed to a 15-year low this year as high demand for ethanol and domestic and export markets deplete available corn inventories. Despite this decline, we're optimistic about our ag business going forward and continue to invest in our agricultural network.
In that regard, we are purchasing 2,100 new grain hoppers this year to replace leased units, and delivery began in April and will run until October at a rate of 100 per week. The majority of the new cars will be used in our long-haul unit grain train network.
Now transitioning. Looking ahead, as you will note on Slide 14, we expect further growth across most of our portfolio of business for the balance of this year and beyond.
As shown here, we expect automotive volumes to remain positive throughout the year as North American light vehicle production is forecasted to grow by 14%. Our volume will also be driven by the addition of new business that we expect to start handling in August from the new VW Automobile Assembly Plant in Chattanooga, Tennessee.
We expect our metals business to remain solid for the balance of the year driven by domestic steel production and new business from plants locating on our network, including two in the state of Alabama. Our agri business network will continue to expand the growth coming from four new ethanol terminals and higher volumes of grain, and we expect record acreage to be planted this year to support overall demand as we move ahead.
Increased basic chemical production will continue to drive higher chemicals volume, although our growth will be somewhat moderated by difficult year-over-year comparisons as I mentioned before. In our coal markets, we expect utility coal volume to increase as stockpiles are replenished and new business gains ramp up.
And we remain bullish on export in the face of strong Asian and global demand and tight capacity around the world. And worldwide thermal coal demand should also provide some targeted opportunities to move steam coal from NS mines to the global steam coal market.
We remain optimistic about both domestic met coal and steel shipment, although, potential for growth in the met coal segment will be subject to coal availability for the balance of the year. In the domestic and premium intermodal markets, volume will be driven by robust demand and continued highway conversions.
And we're optimistic that international volume levels will continue to increase for the remainder of this year as well. And the only market with prospects that are relatively flat, forest products.
We are cautiously optimistic that lumber and related wood products will improve as the year progresses. But for now, we see it as a modest recovery at best.
To summarize, we are very encouraged by our strong first quarter results and expect to build on this momentum for the remainder of the year. In the months ahead, we plan to fully capitalize on our growth initiatives, the changing nature of overall transportation capacity in our markets and the ongoing economic recovery that we're seeing.
Thank you for your attention, and now Mark will tell you how we're delivering service to our customers in a safe and efficient manner. Mark?
Mark Manion
Thank you, Don, and good afternoon, everyone. Starting with safety.
We ended the first quarter of 2011 with a safety ratio of 0.77 compared to 1.10, that's a 30% improvement over the same period last year. On the service front, we ended the first quarter with a composite service performance of 72.04% versus 75.84% for the same period last year, a 5% reduction.
While it's an old news now, the performance decline was a result of extraordinary weather across the network driven greatly by the record-breaking snowfall in Chicago and the surrounding areas starting on January 31 and the recovery that lasted for weeks afterward. Turning to the next slide, as a result of the winter storms, train speed was severely impacted in February but partially recovered in March followed by continued improvement in April.
On the next slide, the same improvement trend can be seen in terminal dwell. In fact at this point, we have improved over last year reflecting greater fluidity in our yards and terminals.
This next slide illustrates our actual T&E employment count by month from the beginning of 2010 and then projected through the end of 2011. This is a count of currently active qualified T&E employees and trainees.
Since the beginning of 2010, we authorized the hiring of approximately 2,700 conductors. Over the same time period, we have put 760 of these individuals on the ground working.
By the end of the year, we expect our T&E population to be about the same levels as we saw in early 2008. The projected increase of over 1,100 qualified T&E employees by year end is primarily driven by catching up on hiring over the past year, backfilling engineer trainees as we ramp up locomotive engineer training and traffic growth.
And remember, this isn't just the new traffic growth we're experiencing now. This is the traffic growth we are projecting a year from now.
In addition, we also anticipate a higher percentage of retirements than would normally be expected due to an increase in the number of eligible employees who deferred retirement during the most recent business cycle. The training pipeline is full.
As you can see, we've reached the point where we are substantially exceeding attrition at an accelerating rate. But as the year progresses, the hiring and trainee counts are declining as we reach a more steady-state of qualified T&E employees.
Finally, turning to our productivity scorecard. In the first quarter, carload volumes were up 8% while crew starts were up a corresponding 5%.
Total railroad employment was up 7%, driven largely by the increase in conductor trainees that we discussed on the previous slide. Our efficiency metrics of gross ton miles per employee and gross ton miles per train hour were up 2% and 3% respectively.
Gross ton miles per gallons of diesel fuel were down 2% driven by weather-related operational issues that impacted us in the quarter, coupled with the addition of less fuel efficient leased locomotives. With improved velocity, we expect this to improve our fuel efficiency as well.
As you may recall, we added 42 new AC locomotives in the fourth quarter and an additional 50 locomotives that have been received this year. As you've seen today and as we have been saying for a while, we have been aggressively hiring and training conductors since the beginning of 2010.
We're now seeing the benefits of these resources across our network in terms of improved velocity, increased efficiency and improving service performance. 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 first quarter.
As Wick mentioned, we're off to a strong start, having achieved a number of first quarter records including revenue income from operations and earnings per share. Even with the effect of an unfavorable arbitration decision related to certain insurance claims for the 2005 Graniteville derailment.
And I'll speak to this adjustment as I discuss each affected component of our results. As Don described, our railway operating revenues for the quarter reached to $2.6 billion, up $382 million, or 17% compared to first quarter of last year, including an increase in fuel surcharge revenues of $90 million.
We set a new first quarter record for revenues even with an unfavorable fuel lag of $40 million for the quarter. Total railway operating expenses increased by $337 million or 20% to $2 billion for the quarter.
Income from railway operations totaled $600 million, an 8% increase and also a new first quarter record. The resulting operating ratio was 77.1%.
Excluding the $58 million unfavorable Graniteville-related arbitration decision, operating expenses would've increased to $279 million or 17% for the quarter and income from railway operations would have totaled $658 million, up 19%. The resulting operating ratio would have been 74.9% for the quarter, a 30 basis point improvement compared to last year's 75.2%.
Further, when considering the unfavorable fuel revenue lag, our operating ratio would have been reduced to 73.8%. Turning to our expenses.
Fuel and materials and other expenses accounted for almost 2/3 of the $337 million variance. And the next slide reflects that more than 75% of the fuel expense increase is due to higher prices with the balance due to consumption.
As shown next, our average diesel fuel price per gallon continued its upward trend with a steepening slope in the most recent quarter. The $2.88 price per gallon in the first quarter of 2011 was 35% higher than last year's $2.13 and was up 17% compared to last quarter's $2.46.
Delving deeper into diesel fuel price, this slide shows the per gallon components of price comprised of crude oil in gray and other costs in green. These other costs, primarily reflect crack spread sales tax and transportation costs.
What we see here is that while WTI increased by 20%, other costs increased $0.38 per gallon or 146%. This drastic increase in the non-WTI related price per gallon increased diesel fuel expense by $48 million this quarter.
As highlighted next, materials and other expenses were up $81 million or 42%, the majority of this increase is due to the arbitration ruling I mentioned earlier. Maintenance-related locomotive material usage and derailment expenses were also higher.
Next compensation and benefits increased by $66 million or 9%. Looking at the major components of this increase on the following slide, employee activity levels due to higher volumes added $20 million including $7 million more for trainees.
Payroll taxes increased by $12 million due to higher pay levels as well as increased railroad unemployment insurance tax rates. Medical benefits for our agreement employees increased $11 million, largely related to higher health and welfare premiums.
Additional items included increased incentive and stock-based compensation, up $5 million higher, pension expenses, up $4 million and increased agreement wage rates, up $3 million. Purchase services and rents increased $48 million or 14% reflecting volume-related operating activities and equipment rents and the absence of last year's favorable settlement with a freight car supplier.
The next slide displays our non-operating items, other income net was up $7 million or 35% due largely to higher coal royalties and reduced interest expense on uncertain tax positions. Interest expense decreased $7 million, reflecting net debt reductions over the last 12 months.
As illustrated on the following slide, income before income taxes increased $59 million or 13% due largely to higher operating income. Excluding the arbitration ruling income before income taxes would have increased by $117 million or 26%.
Income taxes, displayed next, totaled $190 million, down $9 million compared to 2010. The effective rate was 36.9% in the first quarter 2011 compared to 43.6% in the first quarter of 2010.
The effective tax rate difference is almost entirely due to last year's $27 million deferred tax charge from enactment of healthcare legislation and a favorable adjustment to tax reserves as a result of a tax audit this year. Net income and EPS comparisons are displayed on the following slide, the $68 million net income increases to 26% improvement compared to last year.
Diluted earnings per share was $0.90 or 32% higher than last year, a first quarter record. Excluding the arbitration decision, our net income would have been $361 million, up 40% compared to last year.
Similarly, our diluted earnings per share would have been $1 or 47% higher than last year. Lastly, as displayed on Slide 16, cash from operations usually covered capital expenditures as well as dividends of $142 million.
In addition, we used cash on hand to help pay down $408 million in debt and generate $343 million in share repurchases. Cash and cash equivalents at the end of the quarter totaled $236 million.
This deploys substantial cash over the last year in the form of share repurchases and capital expenditures. The veil of uncertainty we faced this time last year has been removed and we are confident in the future of rail transportation and especially in our franchise.
Thank you for your attention. And I will now turn the program back to Wick.
Charles Moorman
Thanks, Jim. As you can see Norfolk Southern delivered an excellent financial performance during the quarter which reflected the strong market for freight rail transportation and the value of our service product.
As Don told you, we see continuing opportunities for growth in almost every segment of our business. And we're optimistic about our prospects for the balance of 2011.
In closing, I want to say a few words about operating ratio and headcount. As all of you know, Norfolk Southern is focused on reducing its operating ratio for many years, and in fact, we've been an industry leader over the years with respect to operating ratio improvement.
While we don't publish our goals and forecasts, we remain intent on continuing to lower our operating ratio, and we certainly expect to do as well as any carrier in the industry in that regard in the future. However, there is always a tension between efficiency and effectiveness.
And if we see opportunities, which will provide more earnings per share and greater returns for our shareholders while giving up some slight improvement in operating ratio, we'll take that trade-off every time. As to employment, our headcount increases were in three main areas.
The first, as Mark has shown you, is in train and engine service, the people who run our freight trains. As you know, our business levels, to some extent, outran our resource levels last quarter.
And these new employees will help us restore our service levels even as our business continues to grow. Something to note here, as you've heard before, is that the T&E workforce is paid on an activity basis, so that higher headcounts do not translate directly to higher expenses.
The second increase in headcount is in our engineering group and these are employees to execute our expanded capital program. And finally, as we described to you earlier in the year, we've added resources in our mechanical department to restore our locomotive and freight car repair programs to levels commensurate with the business volumes that we anticipate.
I'm particularly proud of the way these new employees have integrated into the Norfolk Southern culture. One important way this has been born out is in the continued progress in our safety process.
Although, 30% of our agreement workforce has been with the company less than five years, they've continued to help generate positive momentum in our safety process as shown by our most recent Harriman award performance. Looking ahead, we feel confident that the economic recovery is well under way, and barring some extraneous events, it will continue well on into 2012.
We are watching the events in Washington very carefully, which parenthetically is the phrase that I could have used in any one of these reports for the past many years, and in particular, we have some concerns about the upcoming STB hearing on competitiveness. However, at the end of the day, the vast majority of public officials and our customers believe that a strong and healthy rail industry is vital to all of our interests.
And I remain optimistic we will continue to be allowed to earn an adequate return and invest in our future. In sum, we at Norfolk Southern feel good about the results we are producing and confident about our future ability to produce superior service for our customers and superior returns for our shareholders.
Thanks, and I'll now turn the program over for your questions.
Operator
[Operator Instructions] Our first question comes from the line of Bill Greene with Morgan Stanley Smith Barney.
William Greene - Morgan Stanley
Yes, hi there. Good afternoon.
Can I ask a question on, Don, on some of your yield comments? In the past, on the calls, you'd sort of talked about yields being a decent proxy for price, but it sounded like there are a lot more moving parts here.
Is it fair for us to use this yield number as a good proxy for price or can you offer more clarity there?
Donald Seale
Well, Bill, it's a good question, and certainly, as I've mentioned, the transportation market continues to evolve. Transportation capacity in the first quarter was tighter and the trucking industry, the barge industry, as well as rail, so our yields, we were pleased with them in the first quarter.
So certainly, I think that you are in line to take a look at the 8% and look at it along those lines.
William Greene - Morgan Stanley
Is it possible for you to break out what the fuel impact was in that then?
Donald Seale
Our fuel year-over-year was $90 million as Jim mentioned.
James Squires
That was the increase. The fuel revenue in 1Q '11 was $249 million versus $159 million in 1Q '10.
William Greene - Morgan Stanley
Okay, perfect. Thanks.
And then, Don, can I also ask, is there a limit on the export coal number? You already had sort of all-time highs, what's sort of the capacity limitation now of the system before you'd have to put more capital to work?
Donald Seale
Bill, we have plenty of extra capacity at Lamberts Point. We're not bumping up against capacity constraints.
The limiting factor is the availability of coal on a given basis, and we see that holding steady. Central app production was up 2.4% in the first quarter.
And I think coal pricing is favorable, and we've noticed that in the past and as we've noted in past calls, that with favorable coal pricing, comes coal production.
William Greene - Morgan Stanley
Right. Okay, thanks for the time.
Donald Seale
Thank you, Bill.
Operator
Our next question comes from the line of Tom Wadewitz from JPMorgan. Please proceed with your question.
Thomas Wadewitz - JP Morgan Chase & Co
Yes. Good afternoon.
I wanted to ask you about a comment that I know you're reluctant to -- a question you're reluctant to give us a lot of detail on but maybe directionally, Don, do you think that your base pricing is potentially stronger this year than what you had seen last year? What can you give us in terms of your thoughts on base pricing?
Donald Seale
Tom, we're seeing the transportation market continue to change as I mentioned. And I would say that pricing is stronger across all modes right now than it was this time last year.
Thomas Wadewitz - JP Morgan Chase & Co
Okay. And when we try to break down that 8% yield growth and you give us some fuel numbers, is there much of a mix effect within that as well or is mix fairly modest?
Donald Seale
The mix effect for the quarter was negative. It wasn't a large number, but it was a negative mix number.
Thomas Wadewitz - JP Morgan Chase & Co
Okay. Let's see, as you're putting resources in place and it seems that recently you've seen a little pickup in velocity, how close are you, I guess, to having adequate capacity in terms of conductors and so forth?
And as that takes place, do you think the incremental margins that you realized will improve from the level you've had in first quarter?
Charles Moorman
Well, we -- as you saw, Mark commented on, we continue to add resources. I would say that you've seen a significant improvement over the past couple of months in our public metrics.
We've certainly seen that in our private metrics. Having said that, as we continue to add resources, we expect continued improvement in all of our metrics on into, I would say, Mark, the second half of the year.
And as we turn the system faster, we get more efficient and our margins start to look better.
James Squires
Tom, let me follow up on that, on the question of incremental margin, in particular. I think we had a couple of incremental margin headwinds this quarter, setting aside the charge.
But one was certainly weather and that dinged expenses and also cost as to defer some revenue as well as Don mentioned. Another factor was fuel.
With the incremental margin or actually decremental margin that you see in fuel, that held back overall incremental margin improvement. The third was labor.
Now on the labor front, we have a lot of trainees in the pipeline and those are not fully productive employees today. As we move through the year, those trainees will become more productive and will start to substitute for employees working overtime today.
And that'll be a good dose of labor productivity for us. In addition, we should start to see -- we'll see the weather effect abate and we should see an abatement of the fuel impact on margin as well, provided fuel stabilizes from here into the second half.
Thomas Wadewitz - JP Morgan Chase & Co
Do you care to give us any numbers around the magnitude of those effects in first quarter?
James Squires
Sure. Well, let's talk a little bit about the adjusted operating ratio.
A number of folks in the community, investor community, have been looking at this in terms of the impact of fuel price changes in both revenue and expense, so why don't I walk through that? Overall, the impacts of fuel price in revenue and expense hit the operating ratio, 180 basis points, as we figure it.
And then on top of that, there was 220 basis points increase in the operating ratio as a result of the arbitration charge. So in total, 400 basis points from the arbitration charge and fuel price taking the operating ratio from what it would have been at 73.1 to the reported 77.1.
And just a little bit more detail on the fuel price components to make sure you have those. We mentioned the $90 million increase in fuel revenue, of that $77 million was price related.
On the expense side, of the $135 million expense increase, $104 million was price related.
Charles Moorman
The other piece of color we can give you is, and these numbers are always very approximate is that, we have a rough estimate that we forewent somewhere between $25 million and $30 million worth of revenues and that the additional expenses incurred were somewhere between $5 million and $10 million. But I caution you, those are somewhat soft numbers.
James Squires
And just lastly to round out the pro-forma adjustments year, with the adjusted operating ratio of 73.3, we would be at about a 43% incremental margin.
Thomas Wadewitz - JP Morgan Chase & Co
Okay, great. All the detail is very helpful.
Good to see the improvement, and thank you for the time.
Operator
Our next question comes from the line of Chris Wetherbee from Citigroup.
Christian Wetherbee - Merrill Lynch.
Great. Thank you very much.
I guess on the headcount side, maybe as you think about the trajectory as you go forward, just want to get a sense, obviously, you've done some pre-hiring here. Just want to get a sense of how that should look kind of sequentially in the near term, maybe 2Q relative to the first quarter, maybe where you ended the quarter as far as headcount is concerned, and then how you think about the potential cost per employee.
Jim, to your point, as you're bringing the employees on as full-time employees, they're replacing some overtime, do you see any benefit in the cost per employee as you cycle these trainees for the program?
James Squires
We should. If you refer to Mark's slide, it shows the trend in headcount, T&E headcount divided between full-time and trainees.
You see the trainee counts start to taper off as those folks get folded in to the permanent workforce. And there will be -- there should be a productivity boost from that.
As I said, those newly minted employees will be standing in for people working overtime today, so we should see a benefit in cost per T&E employee.
Christian Wetherbee - Merrill Lynch.
And then just thoughts on total headcount as you think about 2Q and then maybe 3Q.
Charles Moorman
I don't have the numbers in front of me, it will continue to go up a little, but nominally. We're looking here.
Donald Seale
If I can jump while you're looking at that. Between now and the end of the year, we'll add about 1,100 T&E employees.
And that's pretty much evenly divided out. I mean, it comes out to about 125 to 150 people per month that are on the ground and additional workforce.
And keep in mind, those people are -- about half of those people are actually for a combination of new business projection, as well as taking the place of conductors that are stepping up for engineer training. So that 1,100 people will be pretty well evenly distributed throughout the rest of the year.
Christian Wetherbee - Merrill Lynch.
Okay. That's very hopeful.
And then maybe, Don, just a bit on the coal side. You mentioned the coal stockpiles in the domestic and utility business, just kind of curious if you could give a little bit of color about where they stand relative, I think, you said they were lower than normal but what's the magnitude there, if you could give some color on that?
Donald Seale
First, we have 30% of our utility network that is below target. And on our domestic met market, we've got inventories that are between 50% and 70% below target across the board.
Christian Wetherbee - Merrill Lynch.
Okay. I was just curious on the utility side if there's a level below target that you're seeing on a day basis or how you guys thinking about that?
Donald Seale
Well, we track it on a days-inventory basis and that 30% would reflect those -- essentially 30 utilities out of universe of 100 that are well below their targeted days of inventory that they're comfortable with.
Christian Wetherbee - Merrill Lynch.
Okay. That's helpful.
Then, Wick, finally, I guess, maybe you could elaborate on that, on the comment about the competitiveness hearing. I'm just curious if there's something specific about it.
Obviously, there's concerns about the thought around discussing the hearing here but I'm just kind of curious if there's something specific that you want to elaborate as far as your concern.
Charles Moorman
Well, I'd think the concerns are right now are general. There's going to be a lot of discussion of competitiveness at that hearing.
There are going to be a lot of witnesses. And I think the concern always is that the rail industry articulates its very strong case for the economic regulatory structure that's in place today.
We've got a lot of customers who have written letters of support for us, economic development agencies and the like and we just want to make sure that the board hears the very positive story that the rails have to tell about where we are and where we're going.
Christian Wetherbee - Merrill Lynch.
Okay. Great.
That's helpful. Thank you very much for the time.
I appreciate it.
Operator
Our next question comes from the line of Scott Flower From Macquarie Securities. Please proceed with your question.
Scott Flower - Macquarie Research
Yes. Good afternoon, all.
Just a couple of questions. Don, I guess, I was wondering on the export side, you've had a high run rate in terms of volumes in the first quarter, running about 7.5.
Is that reasonable to think that can be sustained, that would be sort of toward the high end of what you're thinking about in the fourth quarter call?
Donald Seale
Scott, based on what we're seeing in Asia, in terms of overall demand, as well as Europe and South America, and the available global coal supply, we feel that, that is sustainable based on the run rate that our customers are telling us to expect.
Scott Flower - Macquarie Research
Okay. And then I know that you said the capacity at Lambert's was adequate, but is that from some of the capital work you described in terms of staging tracks or is that if you had another shift?
Help me understand the capacity at Lambert's. I wish you can go much higher, but I thought that might take some capital or adding another shift that you want to contract to be sure of that.
Donald Seale
Scott, the capacity is there and what we're doing in terms of some small investments there is just enhancing our efficiency at the pier itself. The investment we made with bringing back some track into service was resuming about 1,100 car spots in truck capacity at the terminal just to improve the efficiency at the pier.
Scott Flower - Macquarie Research
I mean, what do you think the run rate is in terms of the capacity throughput as it currently is configured at Lambert's?
Donald Seale
30 to 35 million tons.
Scott Flower - Macquarie Research
Okay. And then just one other quick coal question.
How much of what you saw in first quarter was met versus thermal? Obviously, the majority is met but I'm just wondering whether some incremental thermal is sneaking in with API2 being this high.
Donald Seale
With respect to our export market the vast majority of it was met. I would say no more than 2% was thermal coal.
Although, as I mentioned in my remarks, we see some opportunities to expand that.
Scott Flower - Macquarie Research
Okay. And then just a couple of quick questions on operations, what would the composite service metric be now?
What is that running in April?
James Squires
We are in the neighborhood of 76, 75 to 76. And the good story is that it is trending in the right direction, Scott.
Scott Flower - Macquarie Research
Absolutely.
James Squires
One other thing that I might add, Scott, if I could elaborate on the Lamberts Point comments you were making. One of the things that we have in the mill to generate more throughput on the side of additional headcount is we are hiring in not only transportation but also engineering and the mechanical side in order to support more two-side operation.
Up to now, for the most part, we can pretty well handle the business that's going through there, dumping on one side. We occasionally have two-side operation, but just to make sure that we can handle more going forward, which we think is a likelihood, we are gearing up to be able to handle two-sided operation much of the time if necessary.
Scott Flower - Macquarie Research
Okay. And then I know that you talked about the locomotives you had delivered through first quarter, but are you adequate in locos or do you have further deliveries through the year?
Donald Seale
We feel good about the locomotives right now. We still got our leased locomotives, about 260 of them.
And as the velocity continues to increase, which we anticipate, our plan is to sideline those locomotives as we see the ability to do so. So that is really what's in our radar right now or in our scope right now is increasing our velocity and actually reducing some of those leased locomotives as we have the opportunity to do it.
Scott Flower - Macquarie Research
Okay. And then two last very quick catch-ups with Jim.
What was the fuel lag impact? I know you mentioned it.
I just happened to miss it.
James Squires
$40 million.
Scott Flower - Macquarie Research
I'm sorry?
James Squires
$40 million.
Scott Flower - Macquarie Research
And then...
James Squires
Negative.
Scott Flower - Macquarie Research
I'm sorry.
James Squires
Negative.
Scott Flower - Macquarie Research
And then you had mentioned there was some favorable tax audit adjustment this year in the tax line?
James Squires
Right. That was relatively minimal.
The big factor in the change in the effective rate was last year's deferred tax asset write-down.
Scott Flower - Macquarie Research
The amount this year was what? $4 million, $5 million or something?
James Squires
Yes. It'd be in that neighborhood to bring it down from sort of a statutory rate plus a standard state income tax rate to the reported 36.9%.
Scott Flower - Macquarie Research
But we'll go back to 38% next quarter?
James Squires
Well, for the full year right now, we're looking at a rate somewhere from the mid-to the high 30s.
Scott Flower - Macquarie Research
Okay, great. Well, thank you all very much.
James Squires
Thank you, Scott.
Operator
Our next question comes from the line of Justin Yagerman from Deutsche Bank.
Justin Yagerman - Deutsche Bank AG
Good afternoon. Thanks for taking my call.
I wanted to ask, I seem to recall you talking about some negative mix issues in prior quarters as it relates to the coal business and shorter haul impacting, and it sounds like you guys have reversed some of that trend and are seeing a longer haul especially on the utility coal side. Can you talk a little bit about what's changed?
Donald Seale
Well, we certainly saw our Southern-based utility coal move at a higher volume. And as I pointed out in the past quarters, our Southern utility coal is generally about 30% higher RPU than our Northern utility coal.
But also, within the export market, as I mentioned, our Baltimore export tonnage was up 49%, which was higher than the increase in Lamberts Point, Lamberts Point, being the higher RPU coal traffic and Baltimore being lower RPU. So there's a lot of moving parts to mix, and the overall effect in the quarter, as I previously mentioned, was modestly negative.
Justin Yagerman - Deutsche Bank AG
Okay. All right.
That's helpful. And on the export coal outlook specifically, I was curious whether you had any thoughts of moving to quarterly contracts.
One of your competitors has discussed that. And when you look at those contracts, if you were to be moving to the quarterly, would those be take or pay contracts?
Donald Seale
Well, we're constantly assessing contract structure and contract production. So I really can't tell you whether we will bill that way or not, but we're assessing the market on a continuous basis.
Justin Yagerman - Deutsche Bank AG
Now the contracts you do have currently, are those take or pay?
Donald Seale
We have volume commitments in some contracts, yes.
Justin Yagerman - Deutsche Bank AG
Okay. Was curious on the automotive side or anywhere else that you're seeing anything, the disruptions due to Japan have impacted any production on your line, is that something you've been hearing about or as we're working through whatever inventory was already stocked prior to that disaster?
Are you starting to hear about any potential issues arising as we look out over the next quarter or two?
Donald Seale
Well, we're certainly watching that situation closely. As I mentioned our auto traffic volume was up 12% in the first quarter and the big three volume continues to outpace what we had projected.
Now the international auto manufacturers that are more dependent upon a supply chain from Japan. We are seeing some production reductions at some of the plants in the U.S.
that are operated by the international manufacturers. We don't know yet what the net effect of all that will be.
But our sense is that the auto market is rising at a fairly rapid pace and that if one manufacturer doesn't supply the product, the consumer will probably buy the product from a manufacturer that does produce the product.
Justin Yagerman - Deutsche Bank AG
Yes, that's a fair assumption. And the last question I had on the export coal side, moving back to that, the interesting commentary around steam coal and the demand albeit a very small part of total, where are you seeing the end market demand for that export steam coal and where do you see that growing fast just in terms of that leaving the East Coast?
Donald Seale
Well, we're seeing South America grow very rapidly. Certainly, we're seeing Korea and China taking their share and of course we're seeing Western Europe, which is our more traditional export metallurgical coal market rebound very well as well because global steel production's up 10% and we see that continuing to surge.
And Australian supply of met coal is still impacted to the tune of about 80% of their production.
Justin Yagerman - Deutsche Bank AG
Yes, but I guess that is definitely interesting. The question was, looking at the steam coal, which I realize is a very small part of this, but you did call that out as something that you see maybe growing in the future, just kind of curious where that growth -- that end market growth is coming from?
Donald Seale
Western Europe would be one of those destinations, and we see some opportunity possibly in Asia as well.
Justin Yagerman - Deutsche Bank AG
Got it. All right.
Thanks so much for your time. I appreciate it.
Operator
Our next question comes from the line of Jon Langenfeld from Robert W. Baird.
Jon Langenfeld - Robert W. Baird & Co. Incorporated
Good afternoon. On the intermodal side, could you reflect a little bit on the modest volume growth on the international side and just what you're hearing from the steam ship lines?
The import volumes to the U.S. have been pretty good, upper single digits, so we continue to see slower growth on the international intermodal across the board.
So wondering if you had any details or explanations behind that?
Donald Seale
Well, on the domestic side, we're seeing increasing opportunities for highway conversion of truckload freight to rail, particularly in the Eastern network that we're ramping up. As it relates to international business, we're continuing to see some international business on the West Coast coming through the West Coast ports transloaded to 53-foot domestic boxes and once that freight is transloaded into those domestic boxes, it's counted in our domestic count.
So while we were up 2% in international ISO boxes, I would say that the volume is slightly higher than that because of the transload activity that's taking place. The final comment that I'll make on international is that, as retail sales and consumption continue to improve, we expect international volumes to follow that.
Jon Langenfeld - Robert W. Baird & Co. Incorporated
And if you look at the international volumes just on the East Coast where I believe transloading to the domestic intermodal is less prevalent, so if you look at international there, how has that trended? And then maybe more specifically, how has that Heartland Corridor helped you?
Donald Seale
We're seeing increased activity on the Heartland Corridor, both organic growth in addition to volume that we have shifted intentionally from the old corridors to the Heartland Corridor for the efficiency of it, and we're continuing to see our volume of other East Coast ports improve as well.
Justin Yagerman - Deutsche Bank AG
So that would be higher -- the 2% international overall, would your East Coast be faster and the transcon international segment be less?
Donald Seale
Yes, that's correct.
Jon Langenfeld - Robert W. Baird & Co. Incorporated
Got it. Thank you.
Operator
Our next question comes from the line of Peter Nesvold from Jefferies & Company.
Peter Nesvold - Bear Stearns
I think a lot of my questions have been addressed. I'm not sure if this was asked.
I had to jump off for a quick second. But you've mentioned during the prepared comment that you're entering a period of elevated attrition as retirements approach.
Is there a point at which you start to see a measurable change in the comp and benefits line as a result of that, i.e., the average age of the workforce arguably should be declining meaningfully, I guess, over the next year or so?
Mark Manion
You will see some decline in terms of the average compensation. One reason that Jim pointed out was overtime, the other is that new contract employees are on step rates and it takes a few years for them to reach 100% of the contract rate.
So there'll be some modest decline as that progresses too.
Peter Nesvold - Bear Stearns
Okay. On the April 1 contract increase for export coal, have you quantified how much the average rate is going up?
Donald Seale
No, we would not quantify that because they're in confidential contracts.
Peter Nesvold - Bear Stearns
And then last question, it looked like you hauled about 8 million tons of export coal in the quarter. Is it fair to just annualized that to 32 million as sort of the run rate for the year?
Donald Seale
Well, it was 7.4 actually. And we're optimistic that, that market will continue to be strong, as I mentioned, based on the input we're getting from both suppliers and customer receivers.
Peter Nesvold - Bear Stearns
Great. Okay, thank you.
Operator
Our next question comes from the line of Ed Wolfe with Wolfe Trahan.
Edward Wolfe - Bear Stearns
Thanks. Good afternoon.
I guess the inverse of Peter's question, as employees start to come online and get trained and then they've become active, at what point in that kind of life of the employee do you start to see the comp per employee increase?
Charles Moorman
I'm not quite sure we understand your question, Ed. In terms of the way the contract employees are paid, there are -- it's a four-year step process, where they start at 80% and then reach 100% of the contract rate.
Once they've been here four years, they are paid 100% of their rate.
Edward Wolfe - Bear Stearns
When they're in the training program, are they getting paid as if -- the day they become active or is there a big step-up at that point, I guess, is what I'm asking?
Charles Moorman
Trainees certainly are compensated, what, Mark?
Mark Manion
I don't know. $700 a period.
Charles Moorman
We can get you an exact figure. The trainees are certainly compensated less than fully qualified employees.
Edward Wolfe - Bear Stearns
So when I think about comp per employee up 2.8% in the first quarter, directionally, throughout the year, I would think that, that would be coming down as you're ramping up the trainees and seeing some people turnover or is that kind of a fair number going forward?
James Squires
Well, I think it'll depend to a significant extent on how much we substitute these new employees for those working overtime today. That's going to be a factor and that is our plan.
We're already seeing overtime come down as a result of the trainees coming online.
Charles Moorman
Yes, I think right now we would expect that to come down.
Edward Wolfe - Bear Stearns
Okay. Switching gears, the coal revenue per carload is up 16% sequentially over fourth quarter.
Can you talk about some of the drivers and what percentage of your export coal business repriced in January relative to April?
Donald Seale
Ed, we had several contracts. I can't give you the percentage but we had three or four utility contracts that repriced January 1.
And then, of course, we have contract escalators that also took modifications in the quarter as well.
Edward Wolfe - Bear Stearns
And what percentage of the business, the export coal business, reprices or escalates in April?
Donald Seale
All of our export coal adjusted April 1.
Edward Wolfe - Bear Stearns
Including the export coal -- the three or four contracts that went on January 1, they also took an increase in April?
Donald Seale
No, Ed, those were domestic utility contracts.
Edward Wolfe - Bear Stearns
Okay. I'm slow.
I appreciate that. What was the increase on average that you took in April 1?
Donald Seale
We can't address that as I mentioned. Those are contract confidential terms.
Edward Wolfe - Bear Stearns
You can't talk about an average across the cost of book?
Donald Seale
No, I can't.
Edward Wolfe - Bear Stearns
Why were Baltimore export volumes, Don, up 3x that of Lamberts in first quarter?
Donald Seale
The demand for Pennsylvania higher sulfur coals that are being blended in the world market were high, the capacity for production out of the Pittsburgh 8 seam was there, and we were very pleased to handle them.
Edward Wolfe - Bear Stearns
So does that mix continue for a little while or does it reverse fairly quickly where Lamberts catches up a little bit?
Donald Seale
We see the mix coming out of the Pittsburgh 8 seam and Pennsylvania continuing to be very strong.
Edward Wolfe - Bear Stearns
Is there an opportunity for coal royalties to materially increase now that we're seeing global demand increase and pricing increase, the value of it?
Donald Seale
Probably not materially. We may see some trend in that direction but it's a relatively small item in the grand scheme of things.
Edward Wolfe - Bear Stearns
Okay, and then last question, just the mix of intermodal. I think I heard Don say 60%, give or take, is local east and 40% of the volume is transcon in first quarter?
Did I hear that right?
Donald Seale
If you look at the split, 60% of our current book in the first quarter was domestic, 40% international. 60% of the growth that we had was east of the Mississippi in our local market.
Edward Wolfe - Bear Stearns
And so how does that look now, that mix, give or take, between the local market and the transcon on the domestic piece?
Donald Seale
We are growing faster in the domestic local market, Ed. I don't have the numbers in front of me here in terms of the total domestic local versus transcon, but we can get that for you.
Edward Wolfe - Bear Stearns
Is the transcon just directionally larger than the domestic?
Donald Seale
Well, you got to keep in mind that the domestic market east of the Mississippi in our local market is a relatively new market. It's ramping up.
It is a huge truckload market that has not been tapped traditionally for intermodal. And we are tapping that and we're seeing it grow.
And as in past quarters, we've been sharing the increases on some of the corridors. And for example, on the Crescent Corridor in the first quarter, our volume was up 37% for domestic intermodal.
Edward Wolfe - Bear Stearns
Okay. I appreciate it.
Donald Seale
It's growing tad much faster than our conventional transcon market.
Edward Wolfe - Bear Stearns
Now I get that. I appreciate it.
Thank you for the time.
Donald Seale
Thanks, Ed.
Operator
Our next question comes from the line of Cherilyn Radbourne from TD Newcrest.
Cherilyn Radbourne - TD Newcrest Capital Inc.
Thank you very much, and good evening. Just continuing on with the intermodal business, was wondering if you would offer any comments on the new business you secured with FedEx and just how that ramped up during the quarter, and whether it was focused in particular lanes or more broadly throughout the network?
Donald Seale
I did not catch your question. Could you repeat it for me?
James Squires
FedEx, how did it ramp up and where?
Donald Seale
We saw FedEx ramp up pretty much across our network in the east. But I will tell you that the strongest lanes were Chicago Harrisburg, Chicago Pittsburgh, those types of lanes in the northeast.
Cherilyn Radbourne - TD Newcrest Capital Inc.
Okay. That's helpful.
Last question for me, is you did mention that you lost some revenue in the quarter due to winter, and depending on what that was presumably, some of that may get moved in Q2, so I was just wondering whether you could comment on if you had a backlog in certain segments as you exited the quarter.
Donald Seale
Well, as we stated, we estimate that we had $25 million to $30 million of weather-impacted revenue that we did not realize in the first quarter. Of that $25 million to $30 million, we estimate that half of that, approximately half of that revenue was deferred, and we will recover that in the second quarter.
Cherilyn Radbourne - TD Newcrest Capital Inc.
Thank you. That's all for me.
Donald Seale
Thank you.
Operator
Our next question comes from the line of Scott Malat from Goldman Sachs. Please proceed with your question.
Scott Malat - Goldman Sachs Group Inc.
Good evening. Thanks.
You gave some great detail around the employees, it's very helpful. I just wanted to understand as I just think about these numbers long-term, if we look at a gross ton miles per employee historically, you kind of peaked in 2004 and it was down every year until 2010 and now we're improving again, but I think the productivity number is still down 10% since those peaks.
Can you help me understand the difference there? Is it that the intermodal needs more employees?
Are there other mix changes that have caused this? I mean, I'm just trying to figure out how to think about the normal run rate of employee productivity going forward for whatever normal is.
Donald Seale
Well, to some extent, there is a mix effect particularly in intermodal. It doesn't generate gross ton miles in quite the same way, so there may be something going on there.
The other thing I would tell you is that you also have to think about it the way we think about it and that is in terms of our service levels. We need a certain number of employees to generate higher service levels.
As we went into the 2005 and 2006 traffic surges, we were adding employees to make sure that we have maintained adequate service levels. As we look ahead, the hiring we've discussed, we're hiring in anticipation, as Mark said, for business that we'll be handling in six months or a year.
And we have realized some efficiencies in terms of operations per employee. We certainly realized some throughout the 2009 downturn that we think we'll hold onto.
So I would tell you that I think we will start to -- we'll continue to push those efficiency numbers up. I don't know without doing a lot of analysis how that would compare ultimately with 2004.
Scott Malat - Goldman Sachs Group Inc.
Okay. Great.
So then, I guess, as I understand it, you're adding employees now for the future. And yes, okay, you could continually improve volumes, you'll continually add but it's a little bit of a stair step-up that you'll digest and get better employee productivity for a while after that.
Is that a fair way to think of it?
Mark Manion
Well, partly it is. The thing that we need to keep in mind is that we still have a need for additional employees for the business that we've got out there.
And if that 1,100 people that I've referred to, about half of that is catching up from over the past year. But as I also referred to, the other half of it is growth that we are looking forward to in the months out, as well as backfilling for these locomotive engineer trainees and so forth.
So there is a need to hire for our current business needs, as well as hiring for the growth that's anticipated in the future, this year and on into 2012.
Charles Moorman
Let me add one other thing that occurs to me about 2004. And that is, it was really only after 2004 that we began hiring and having significant numbers of trainees on the property.
We went through a long period of time in our agreement workforce and our non-agreement workforce where we had relatively low attrition. And we're a company, like every other company, we've got a lot of places where we have an aging workforce and have had that for the past five or six years.
And we consciously decided in the 2000, 2004, 2005 time frame that we had to try to get ahead of that curve, and we're continuing to see that attrition. So at any given time, we have several hundred more trainees on the property than we had in 2004.
Scott Malat - Goldman Sachs Group Inc.
Okay. That's helpful.
The only other thing is just on the premium intermodal volume, just a parcel in the LTL business, following up on that. Can you just help us think about any sizing of this today and then help us think about the opportunity there?
Thanks.
Donald Seale
Well, certainly, those are significantly sized markets with opportunity for growth for us. They represent companies like United Parcel Service and FedEx, both of whom have a very large base of business and an opportunity that's based on service performance.
Scott Malat - Goldman Sachs Group Inc.
There's no way to help us just kind of size that of intermodal -- is it material now? Or it's just pretty small now and it just has a good opportunity?
Donald Seale
Well, it's material now, and it certainly has a good opportunity as well going forward. As the pie chart shows in the presentation, it was 65,000 loads in the quarter.
Scott Malat - Goldman Sachs Group Inc.
Okay. I missed that.
Thanks.
Operator
Our next question comes from the line of Matt Troy from Susquehanna. Please proceed with your question.
Matthew Troy - Susquehanna Financial Group, LLLP
I had a question reverting back to the coal volume, despite CSX doing better on the export side, you trounced them on the utility side. Now they're citing weather and stockpiles.
You don't seem to have those problems. Shifting through the noise, it seems as if you've taken some share.
I was wondering if you could speak to that specifically on the domestic side, and what that new business might look like and how sticky it might be.
Donald Seale
As I mentioned earlier with respect to utility, we saw replenishing stockpiles with existing customers. We also have a TVA plant in Kingston, Tennessee that is ramping back up.
It was down because of an operational issue with the fly ash fill at that location last year, and we've had some modest share gains in a couple of others. But the big drivers in the quarter is stockpile replenishment, number 1, and then a distant second, the ramping up of the TVA plant.
Matthew Troy - Susquehanna Financial Group, LLLP
Interesting. So despite being in the same region and serving similar areas impacted by the same weather, your utility customers have lower stockpiles?
Donald Seale
As I mentioned, based on the data that we're looking at, about 30% of our utility receivers tell us that they would like to improve the level of their stockpiles.
Matthew Troy - Susquehanna Financial Group, LLLP
That's certainly a good new story for you folks. Second question would be in terms of just -- your CapEx budget, has that changed for the year?
And is the bonus tax depreciation leaving you to pull forward any investments that might have been a 2012 or 2013 CapEx expenditure?
James Squires
We are on track pretty well for our announced capital budget of about $2.2 billion. Certainly, the bonus depreciation was something, at least a slight factor in our decision to buy a lot of equipment that we normally lease, but we've not pulled any substantial items forward from 2012 on account of it.
Matthew Troy - Susquehanna Financial Group, LLLP
Okay, thank you. And two last quick ones.
I know that there's some catch-up across the industry in CapEx given what we've been through in the last two, three years. I'm just wondering if you could give what a typical year once your catch-up is done, what CapEx might look like on a run rate basis either in absolute dollars for maintenance or just as a percentage of revenues.
What should we be thinking about modeling in the out years?
Charles Moorman
Well, our out years, for our out years, you should keep in mind that for the next few years, we have a couple of things that we'll be doing. One is obviously the extraordinarily large investment in positive train control, which we all have to undertake.
The second is that we have a substantial percentage of our coal fleet to replace over probably the next five- to seven-year period. We're buying 1,500 coal cars this year.
And that's just because the fleet is becoming life expired. With all of that said, over the long term, we have consistently said, and I think it's still a reasonable place to be, that we'll be somewhere around 15% of revenues, plus or minus.
Matthew Troy - Susquehanna Financial Group, LLLP
Okay. That's excellent.
And then the last question was, Wick, I appreciate your comment earlier on the conference when you said that you would continue to lower your OR as well as anyone else in the industry. I just want to level set expectations because you did have the settlement this quarter.
When we think about the seasonality and flow-through through the year, should we be using that 74.9% OR as kind of the true OR to use as the basis 1Q OR? Fuel is going to be what it's going to be, be x the settlement, is the 74.9% number a good number to base off and expect improvement going forward, x fuel?
Charles Moorman
Well, the wildcard -- let me just say this, the wildcard is fuel because it's hard for me to say it's 74.9% when we had, as Jim pointed out also, a significant lag effect. If you normalize that out, it's a lower number.
But I would just suggest that as you look at our operating ratio and look at our operating ratio trends through past years, we expect to consistently lower the operating ratio year-over-year on a quarterly basis x the items that we really don't have much control over like fuel or an arbitration award or something else that comes along.
Matthew Troy - Susquehanna Financial Group, LLLP
Understood, and congrats on a great quarter, guys. Thank you.
Charles Moorman
Thanks.
Operator
Our next question comes from the line of Gary Chase with Barclays Capital.
Garrett Chase - Barclays Capital
Hey, everybody. Just a quick one for Mark, just want to verify.
When you spoke about the 1,100 heads, that's a net number, right? And presumably, a bit fluid based on whether or not these volumes you've been talking about for 2012 materialize or whether you have a line of sight into those as we approach year end?
Is that...
Mark Manion
That's right, Gary. That is a net number and that does put us about equal where we were in 2008.
And also, keep in mind that we've got some flexibility here. As we see, we need to pull back on that.
We can do that. The people that would be coming out -- that would be with us, for example, on your chart there in the fourth quarter, they're not even in training yet.
Some of those people aren't even hired yet. So we've got flexibility to adjust if we need to.
Garrett Chase - Barclays Capital
And just switching gears, Don, when you talked about the mix shift towards some of these Southern utilities in that coal line, would it be possible to describe that as dramatic? Was there something unusual that happened in the fourth quarter, because this is very difficult to get from the fourth quarter yield numbers to the first.
Is it really feasible to believe that, that was driven largely by that mix shift you described or no?
Donald Seale
Gary, there was no dramatic changes in the first quarter with respect to our utility base. Bottom line is that we handle 13% more volume year-over-year.
We had our southern Utilities taking more coal, and our coal suppliers were mining and shipping that coal to them. So we had the perfect situation of increasing our longer haul Southern-based utility coal.
Garrett Chase - Barclays Capital
And not a dramatic shift from where you were in the fourth quarter, right?
Donald Seale
I will tell you that we did a better job handling coal in the first quarter than we did in the fourth quarter.
Garrett Chase - Barclays Capital
Okay. And then just when you noted the capacity being tighter across a number of markets, I mean, I don't typically think of this business as one where you can sort of immediately monetize those types of conditions.
Am I wrong in thinking that? And if not, does it mean that you think there's more upside as we move through the year?
Donald Seale
I think that as we move quarter-to-quarter, and we've seen a tightening in transportation capacity, since 2009 when some capacity was taken out, as the economy continues to improve and freight demand ramps up each quarter, there certainly is an opportunity for us to realize additional value from our transportation product in each quarter. We have about 68% of our book of business priced for 2011.
So we have remaining business to be priced, and we expect transportation and demand and capacity to both sort out in the subsequent quarters for the rest of the year in a tighter fashion for supply.
Garrett Chase - Barclays Capital
And you think there's opportunity on that remaining 30-odd percent?
Donald Seale
We do.
Garrett Chase - Barclays Capital
Okay. Thanks, everybody.
Operator
Our next question comes from the line of Walter Spracklin from RBC Capital Markets. Please proceed with your question.
Walter Spracklin - RBC Capital Markets, LLC
Thanks very much. Good evening, everyone.
Wick, you mentioned that you're going to keep up -- and this is a follow-on on the operating ratio discussion that you had and you said you're going to sort of keep up with and do better than any of the other competitors. Just so we understand, and we're framing this in the right context, I mean, all of them do have fairly aggressive targets out there in the next, call it, three to five years.
Is that what you're talking about? Are you -- you obviously are aware of those.
Are those comments made in the context of those operating ratio targets?
Charles Moorman
Well, I'll say this. We certainly know what other people say about operating ratio goals, and we're competitive people.
And we're going to work very hard to make sure that we don't fall behind others in what we're keeping in the industry.
Walter Spracklin - RBC Capital Markets, LLC
Okay. And then second question very quickly, I know it's been a long call here.
Back on the domestic local intermodal business, obviously, you're getting some really good growth here. Your investments seem to be paying off quite nicely.
My question is, is it coming in quicker than you would've expected? Is fuel causing that to come onto your network convert from road to rail a little quicker than you're expecting, and is that a sticky business?
In other words if fuel comes back down, have you had some discussions with those customers that might be impressed with the service and more likely to stick around even if fuel prices come back down?
Donald Seale
We're finding a pervasive interest in highway conversion to intermodal from a sustainability perspective, from an overall cost perspective, but also from a service and supply-chain support perspective. So fuel certainly is a component of it, but we see an ongoing building momentum in domestic Intermodal demand as more and more customers are looking to that product as a fundamental shift in their supply-chain support.
Walter Spracklin - RBC Capital Markets, LLC
That's a great story. Okay.
Thanks very much, guys.
Donald Seale
Thank you.
Operator
Our next question comes from the line of Ken Hoexter from Merrill Lynch. Please proceed with your question.
Ken Hoexter - BofA Merrill Lynch
Great. Wick, and a follow-up on your earlier operating ratio commentary and your competitive nature, I like those comments.
But if you step back, was there a change in how you would address pricing in the quarter? Have you adjusted with your sales force anything, because it seems your pricing accelerated pretty significantly.
You were the fastest on pricing amongst all the rails this quarter. So I just want to see if there was something you kind of put to the sales force to go chase that.
Charles Moorman
Ken, I'll just say that we have maintained a consistent philosophy on pricing all along. We price to the market in every instance that we can.
As you know, we've discussed over the past few quarters that there are a lot of moving parts in our business. And because of that, we have opted, and I think rightly so, that we over the long term, revenue per unit is as good an indicator of where the industry and our business is going as any.
But we haven't changed our philosophy about pricing at all.
Ken Hoexter - BofA Merrill Lynch
It just seems like as though the last couple of quarters, maybe the last two quarters, it seemed like you were maybe trailing kind of the group average on that metric and so you're suggesting that it's more mix changes or...
Charles Moorman
Ken, one of the things that you always have to remember, Don has pointed out many, many times, is that pricing -- we maintained a consistent philosophy on pricing and price in the market. Pricing opportunities vary depending on timing.
There are all kinds of things going on, but I can assure you, Don, looking at me nodding his head, that we always have and always will price to the market.
Donald Seale
Ken, that's the basis and we have had no change in our philosophy or our approach in the market. As I pointed out, we are seeing the market change, and we have seen it evolve over the last three to four quarters as demand has increased and supply of transportation is tightened, but we haven't changed our approach within that environment.
We're just pricing to the market, taking advantage of an opportunity where it exists for our service in the marketplace.
Ken Hoexter - BofA Merrill Lynch
Okay. Let me jump -- kind of same thing on volumes.
I mean, you've moved oddly enough in the same quarter to the head of the group in terms of pricing strength as well as on volumes. To a question earlier, it seemed to be just asking solely around coal, but are there some share shifts going on overall within your commodity mix?
In other words, do you think you're gaining some share that's leading that or is it kind of just back to your service provision?
Donald Seale
Well, certainly, first and foremost, it's all about the value of the service in the market place. Secondly, the big share shift that's taking place is from a highway to our intermodal service.
And third, we are working very closely with our customers to collaborate with them on the best way to support their business plans and their supply-chain requirements. We've always done that, though.
That's not a change in our strategy. We'll continue to do that going forward.
Ken Hoexter - BofA Merrill Lynch
Okay. Thanks, I appreciate the time.
Operator
Our next question comes from the line of Chris Ceraso from Credit Suisse Group. Please proceed with your question.
Christopher Ceraso - Crédit Suisse AG
Thanks, good evening. Just couple of questions.
I think you mentioned a couple of quarters ago that you had picked up some very short haul. I think you called it project business.
I'm not sure if that was just in the coal franchise or in other commodities, but has that run its course or is that still with you?
Donald Seale
We still have quite a bit of that, and as you'll recall and I mentioned it in the remarks today, that our domestic metallurgical coal is a good example of that. It's very good business for us but it's shorter haul, a lot of it goes to the river, lower RPU business, it was up 36% in the fourth quarter.
It was down this quarter. So those are the kind of moving parts that we have in the business, and there's not much ratable volume in each market that will be the same each quarter.
Christopher Ceraso - Crédit Suisse AG
How much longer -- is this the typical annual kind of contract or how long does that run?
Donald Seale
Chris, how long does what run?
Christopher Ceraso - Crédit Suisse AG
This project business that you've won, that shorter haul?
Donald Seale
Generally for a 12-month cycle.
Christopher Ceraso - Crédit Suisse AG
Okay. And then just a question for Wick.
You brought up the topic of the hearings in the STB. I mean, outside of an actual change in legislation, what is it exactly that you're concerned the STB might do that might make life more difficult to you?
What sort of bounds do they have to make changes if the laws don't change?
Charles Moorman
Well, they have -- they do have certain bounds and any changes they've made would be made over some period of time, but within their regulatory purview, they have the ability to make changes in our regulatory restructure. And so it's something, as I say, that causes us some concern and we're going to watch that very closely.
Christopher Ceraso - Crédit Suisse AG
Okay. It this definition of types of traffic or anything specific that you're concerned about?
Charles Moorman
There are a number of different changes that one could hypothesize about. As you know, they just had a hearing about exemptions, and this will be around general competitiveness issues.
The STB has a fair number of components of our business that they regulate. So we will watch with interest what they do.
Christopher Ceraso - Crédit Suisse AG
Okay. Thank you.
Operator
Our next question comes from the line of Jason Seidl from Dahlman Rose.
Jason Seidl - Dahlman Rose & Company, LLC
Good evening, gentlemen. I'll try to keep this quick.
You guys mentioned there was a bunch of transloading going on in the 53 footers. We've seen a shortness in this type of equipment before.
Could you talk to where we are right now with 53-foot domestic equipment capabilities?
Donald Seale
Well, coming off last year, Jason, we had a lot of buyers of containers, domestic 53-foot containers, could not get the boxes built in China nor could they get those boxes delivered. We are seeing a better supply of 53-foot domestic boxes this year as those deliveries from China take place.
So we have seen some of our intermodal partners increase their domestic fleet. And as we pointed out in our capital discussions in January, we are also taking delivery of some additional 53-foot containers and supporting chassis this year.
Jason Seidl - Dahlman Rose & Company, LLC
Now when do you think those will hit your network?
Donald Seale
We are already receiving some of those boxes.
Jason Seidl - Dahlman Rose & Company, LLC
Okay. Very good.
My next question also stays on the intermodal side. We talked a little bit about this new FedEx business.
Can you talk about the impacts on the RPU, the FedEx business, is having your intermodal mix? Is that going to be positive, negative or is it a wash?
Donald Seale
It is just beginning and it's ramping up so the impact at this point's immaterial.
Jason Seidl - Dahlman Rose & Company, LLC
But is it shorter length of haul business?
Donald Seale
Pardon me?
Jason Seidl - Dahlman Rose & Company, LLC
Does it have a shorter length of haul than your typical intermodal business or no?
Donald Seale
No. It will have a slight or higher RPU than the mix because it's domestic and longer haul.
Jason Seidl - Dahlman Rose & Company, LLC
Okay. Fair enough.
That's all I have. Thank you very much for all the color today.
Donald Seale
Thanks.
Operator
Our next question comes from the line of Jeff Kauffman from Sterne Agee. Please proceed with your question.
Jeffrey Kauffman - Sterne Agee & Leach Inc.
Thank you. I know it's been a long call, so thank you for taking my question.
Don, I want to follow up on a question Ed Wolfe asked and something we hit on before. The sequential increase on the coal franchise, on basically flat utility volume, it looked like RTMs were up 1.2 billion.
Can you just give me an idea of how much of that 1.2 billion was attributable to the utility coal and since it's kind of flat tonnage, I can get an idea of the length of the haul impact here because your length of the haul sequentially was up about 20 miles, and that is a pretty big jump fourth quarter to the first.
Donald Seale
Well, the overall increase in utility was up 13% in loads, quarter-for-quarter. And of course, our export coal is up 25% as I indicated.
The moving part in utility that was favorable on length of haul was that we had an increase in our Southern utility business that was up greater than the increase in our Northern utility business, which is shorter haul.
Jeffrey Kauffman - Sterne Agee & Leach Inc.
Okay, Don, I'm sorry. When you're talking about that 13%, you mean year-on-year, correct?
I'm talking quarter-over-quarter.
Donald Seale
That's year-over-year, not sequentially, but versus the first quarter of last year.
Jeffrey Kauffman - Sterne Agee & Leach Inc.
Okay. So if I go back to first quarter last year, it's about 1.8 billion ton miles difference.
I could figure out how much utility tonnage is up, but how much of the ton mile change was utility related versus other?
Donald Seale
I don't have that number in front of me, but we can certainly check it.
Jeffrey Kauffman - Sterne Agee & Leach Inc.
Okay. I'll follow up off line with that.
And then one final question, I'll leave it be. About a 10% increase in rev per RTM sequentially, normally, it's a little closer to 5%.
Is it fair to say that the difference between 5% and 10% is the repricing of the three to four utility contracts we spoke about earlier?
Donald Seale
No, I wouldn't be that precise. The utility contracts that we repriced January 1 were not large contracts.
Jeffrey Kauffman - Sterne Agee & Leach Inc.
Okay. So there's more to it than that.
Donald Seale
Yes.
Jeffrey Kauffman - Sterne Agee & Leach Inc.
Well, listen, congratulations, terrific quarter. And thank you, guys.
Donald Seale
Thank you.
Operator
Our last question in the queue comes from the line of Donald Broughton from Avondale Partners. Please proceed with your question.
Donald Broughton - Avondale Partners, LLC
Well, I guess last but not the least. I am the caboose.
I know you don't run them anymore but that said, fuel has got to a price, diesel has gotten to such a price that you're seeing shorter and shorter and shorter lengths of haul converted to intermodal. And certainly, that's a bigger and bigger, as you know, the demand curve there is a lot rhythmic not really linear.
Is there a point at which you changed your thinking in your equipment that you run with fewer -- are willing to run more flats? I mean, I know so much of your investment in these corridors has been on driving double-stack volume.
Is there a point at which there's so much share available you're willing to add more flats to your system?
Donald Seale
Don, first and foremost, in the intermodal market, double-stack technology is, in our view, the way to go with respect to the ultra short-haul market. And a good example of that is Savannah to Atlanta with our international business coming through the Port of Savannah.
A little over 225 miles in the haul. And running a 10,000-foot double-stack clean train is the way to go about that to compete and also to generate the margins that we're seeking.
So double stack, first and foremost, we never say never with respect to adding platforms for trailers. If the money is there and the market evolves to that point, we're certainly not ruling that out.
Donald Broughton - Avondale Partners, LLC
Well, thank you for your patience in answering all of our questions, and congratulations on a good quarter.
Donald Seale
Thank you, Don.
Operator
There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.
Charles Moorman
Thanks for your patience and thanks for all the good questions. We look forward to talking to all of you in the next quarter.
Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
You may disconnect your lines at this time, and have a wonderful day.