Jul 24, 2012
Executives
Michael Hostutler Charles Wick Moorman - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee Donald W. Seale - Chief Marketing Officer and Executive Vice President Mark D.
Manion - Chief Operating Officer and Executive Vice President James A. Squires - Chief Financial Officer and Executive Vice President of Finance
Analysts
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division Justin B.
Yagerman - Deutsche Bank AG, Research Division Scott H. Group - Wolfe Trahan & Co.
William J. Greene - Morgan Stanley, Research Division Thomas R.
Wadewitz - JP Morgan Chase & Co, Research Division Christian Wetherbee - Citigroup Inc, Research Division H. Peter Nesvold - Jefferies & Company, Inc., Research Division Christopher J.
Ceraso - Crédit Suisse AG, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Keith Schoonmaker - Morningstar Inc., Research Division Brandon R. Oglenski - Barclays Capital, Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Cherilyn Radbourne - TD Securities Equity Research Anthony P.
Gallo - Wells Fargo Securities, LLC, Research Division John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
Operator
Greetings, and welcome to the Norfolk Southern's Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Michael Hostutler, Norfolk Southern 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.
Also, keep in mind that all references to reported results, excluding certain adjustments, that is non-GAAP numbers, have been reconciled on our website in the Investors section. Now, it is my pleasure to introduce Norfolk Southern Chairman, President and CEO, Wick Moorman.
Charles Wick Moorman
Thank you, Michael, and good afternoon, everyone. It is my pleasure to welcome you to our Second Quarter 2012 Earnings Conference Call.
With me today are several members of our senior management team, including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and Jim Squires, Chief Financial Officer. All of whom you will hear from this afternoon.
I am very happy to report that Norfolk Southern had another outstanding quarter. Our results included second quarter records for both revenues and income from railway operations.
Diluted earnings per share of $1.60 represent an all-time high, and the operating ratio of 67.5% equaled our best-ever quarterly performance. Beginning with the top line, revenues for the second quarter rose 1% to $2.9 billion.
Similar to the first quarter, volumes were up 1%, despite a 12% decline in coal traffic. The overall volume increase was led by double-digit growth in automotive, as well as domestic intermodal.
And as usual, Don will provide you with all of our revenue details in a few minutes. On the expense side, we reaped the benefits of improved rail operations, which provided for higher asset velocity, larger roadway maintenance windows and reduced equipment usage.
These allowed us to hold down cost increases in wages, purchase services and equipment rents, as well as providing a high level of customer service. Jim will give you all of those financial details a little later.
With respect to service, we were able to maintain our superior service levels from the previous quarter, as the second quarter composite service index remained at 83%. In addition, we handled a 1% increase in traffic volumes with a reduction in crew starts of 2%, and Mark will give you all of those details in a few minutes as well.
On all fronts, we continue to strive for improvement. Our capital program and technology initiatives, both of which should benefit future quarters and years, are on or ahead of schedule and meeting our return expectations.
Our cash flow is strong, and it enabled us to pay $308 million so far this year in dividends, an 18% per share increase versus 2011. We've also repurchased 12.3 million shares for a total of $850 million through the first half of the year.
And these items are clearly indicative of our belief in the continued success of Norfolk Southern. I will now turn the program over to the team, beginning with Don.
And I'll return with some closing remarks before we take your questions.
Donald W. Seale
Thank you, Wick, and good afternoon, everyone. During the second quarter, our diverse portfolio of markets generated record second quarter revenue of $2.9 billion, up $8 million versus second quarter 2011 despite a weaker coal market.
Both our merchandise and intermodal networks achieved all-time revenue records, up 9% and 4%, respectively, while coal revenue was down 15%, driven by declines within the utility sector. Revenue per unit at $1,597 was down $7 or less than 1/2 of 1% compared to last year.
Total volume grew by 1%, or 12,400 units. In terms of yield, our merchandise sector posted another all-time record of $2,576 per unit, up $115 or 5% versus 2011.
3 of the 5 business units, which comprise merchandise, set all-time highs: Paper, Chemicals and Automotive. Revenue per unit within intermodal was down $3, as a result of increased volumes of shorter haul local eastern highway conversions and lower fuel surcharge revenue.
Revenue per unit in coal declined by 4% in the quarter due primarily to increased market competition in our export market segment and a record level of shorter haul export coal via the Port of Baltimore, along with higher volumes of lower revenue per unit steam coal exports. In total, revenue per unit for the quarter was down $7 per unit.
With respect to volume, as shown on Slide 4, total volume for the quarter was up 1%, or over 12,000 loads, as intermodal and merchandise gains offset weaker coal volumes. Continued double-digit volume gains within domestic intermodal, which was up 10%, resulted in a 5% increase in total intermodal shipments for the quarter.
The 4% volume increase in merchandise was led by gains in Automotive, Metals & Construction and Chemicals, which more than offset the 3% decline in Paper. Now, drilling down into our major markets, starting with coal.
Revenue for the quarter of $755 million was down $138 million, or 15%, due primarily to a 12% decline in total coal volume. As shown here, we were able to reduce coal transportation crew starts by 14%, outpacing the 12% volume decline, thereby creating positive operating leverage in our coal network.
Breaking out our coal market segments on the next slide. Utility coal, which is the largest driver of our overall decline in the quarter, was down 21%.
Utility volumes were impacted by competition from natural gas, as well as reduced demand for electricity due to milder temperatures. Export volume posted a 6% gain for the quarter.
Reduced metallurgical coal volume through Lamberts Point, which was down 6%, was more than offset by a 27% increase in total shipments via the Port of Baltimore. Volume through Baltimore set an all time monthly record during June, and hit a new quarterly high as well.
New export steam coal also drove volume gains for the quarter, as steam coal rose to 30% of our total export volume in the quarter. And finally, domestic metallurgical volume was up 2%, as continuing demand for automotive steel was offset by reduced volumes of iron ore due to the recent closure of RG Steel in Warren, Ohio.
The next slide depicts the relative length of haul across our coal book of business and the respective percentage of total coal volume accounted for by each market. As I've indicated previously to you, there's a market difference between length of haul for our northern and southern utilities, with the latter averaging about 200 more miles than the former.
And while our export business represents the longest length of haul for any of the coal markets, volume changes across various export segments impact overall revenue per unit. For example, steam coal exports and Port of Baltimore traffic have lower revenue per unit characteristics than met coal exports via Lamberts Point in north.
Now let's turn next to our intermodal network. Intermodal revenue in the quarter reached $563 million, up $23 million or 4% over second quarter 2011, driven by 5% higher volumes.
As shown on the next slide, our volume increase in intermodal came mainly from double-digit gains within our domestic market segment, which was up 10%, or over 39,000 loads for the quarter, due primarily to highway conversions. Premium volume was up 3% due to increased demand, while the International segment declined 1% as volume reductions associated with Maersk were partially offset by growth across our international customer base.
As with the first quarter, we saw significant improvement in the stacking of containers across our network. In the second quarter, 87% of all containers moved on stack cars, which was a 10-point improvement compared to the second quarter of 2011.
This helped to create additional capacity and efficiency across the network. We also achieved noteworthy efficiency improvements in intermodal crew starts for the quarter, as we handled 5% more volume with 3% less intermodal crew starts in the quarter.
In our domestic book of business, we continue to convert freight from the highway to our key intermodal corridors. During the second quarter and the first half, volume increased 22%, along our Crescent Corridor.
We also experienced a significant increase in business over the Heartland Corridor, which was up 27% in the quarter. And our business over corridors reaching the Gulf and New England markets were up 14% and 3%, respectively, for the quarter.
Along those same lines, we are pleased to announce that the first of our new Crescent Corridor terminals opened its operation July 1. Our new Memphis terminal is open for business and will soon be followed by Birmingham and Greencastle, both of which are scheduled for completion later this year.
The new Memphis facility will substantially increase our capacity in this strategic market, which will accelerate highway conversions into our Crescent Corridor. It also holds solid potential for East Coast import shipments as well.
Now wrapping up with our merchandise sector on the next slide, revenue for the quarter at merchandise reached $1.6 billion, up $123 million or 9% over last year. As I mentioned earlier, this was an all-time revenue record for our merchandise business, surpassing the record that was previously established during the first quarter.
A 5% gain in revenue per unit, combined with a 4% volume increase, led to a 9% overall revenue growth for the quarter. And merchandise crew starts were up 2% versus the 4% increase in volume, again, representing improved operating leverage across this book of business.
In terms of the market segments within Merchandise, Automotive, which was up 16%, led the volume gains for the quarter. Project growth with several manufacturers, along with higher auto sales, helped drive our performance.
With the average age of light vehicles in the U.S. now nearing 11 years, pent-up demand has been fueling new car sales, which were up 22% during the month of June, 16% for the quarter, and we're now on page for an annual rate of 14 million units in sales.
Now let's turn to our Industrial Product segments. In Industrial Products, improved domestic steel production and project growth drove steel volumes up 5% in the quarter.
And miscellaneous construction volumes were up 16%, due mainly to continued strong demand in materials associated with natural gas drilling. Chemicals volume was up 3% for the quarter, due to new crude oil business from the Bakken and Canadian oilfields, as well as a 5% gain in shipments of plastics.
For the quarter, agricultural volume was approximately 150,000 carloads, essentially flat with last year. Corn volume was down 16%, which reduced shipments to several poultry and ethanol producers, while the increased feed volumes were up 19% for the quarter, offsetting the decline.
Our Paper segment was the only Merchandise sector to experience a volume decline for the quarter. Reduced shipments of municipal solid waste, along with weaker volumes of pulp and graphic paper, were responsible for the majority of this decline.
This was partially offset by lumber, which was up 6% in the quarter. Now concluding with our outlook for the rest of the year, we expect that utility coal volumes will continue to be impacted by high stockpiles.
And to the extent that natural gas prices remain at historic lows, the overall market demand for utility coal will be affected. But with much higher temperatures across our utility network and with some mitigation in natural gas prices recently, we're beginning to see some customers add train sets and increase orders of coal.
In fact, over the last month, the estimated average stockpiles in our utility network have declined by 14%. We expect domestic met coal to show moderate strength ahead as demand for steel to support auto production continues into third quarter.
The growth in this segment will be tempered due to the closure of RG Steel and the unfavorable comp associated with that event. In our export coal markets, we see weaker demand ahead in Europe for both steam and met coal, while opportunities in Asia should help offset this softness.
Within our intermodal sector, conditions remain favorable for continued highway conversions. The opening of our Memphis terminal on July 1, along with other terminal openings later this year, will support higher volumes ahead.
In addition, shipments with key international and premium customers are expected to drive growth going forward, which will mitigate the unfavorable comp in international over the second half of the year. Finally, the outlook for our merchandise business remains largely positive, as growth in crude oil and plastics and continued demand for automotive and energy-related transportation help drive volumes higher.
In terms of the agricultural sector, as I'm sure most of you have already noted, the USDA recently lowered projected corn yields by 20 bushels per acre, which is a 12% reduction from their previous forecast. Intense heat and drought conditions across the Midwest have taken a toll on crops, and we will continue to monitor harvest conditions, but at this point we expect a weaker fall grain harvest.
And now to summarize, we remain optimistic that our diverse franchise will generate volume growth ahead despite headwinds in coal and ongoing economic uncertainties. And we remain fully dedicated to providing industry-leading safety and service to our customers, while realizing market-based pricing that equals or exceeds the rate of rail inflation.
Thank you for your time. And with that, I'll turn it over to Mark for our operations report.
Mark?
Mark D. Manion
Thank you, Don. Good afternoon, everyone.
Starting with safety, we ended the second quarter with a ratio of 0.73, that's an 11% improvement over the second quarter last year. We continue to keep employees focused on safety and service.
Reduced injuries and accidents and safe on-time delivery is a winning combination for our employees and customers. Our employees gain improved quality of life, we reduced our costs, improve our operating performance and gain business.
Our workforce continues to drive these improvements with their commitment to safety and service. Turning to service, as expressed in our composite service metric, for the quarter, we posted a composite performance of 82.9%, an 8% improvement over the same period last year.
The improvement is led by train performance, but all the service components, train performance, connection performance and plan adherence, showed significant year-over-year improvement. We have continued the gains we saw in the first quarter.
Improved resource availability has improved network velocity, operating performance and service, continuing the trend we've seen for the last several quarters. Performance remains at historically high levels not seen since the second quarter of 2009, but with 27% more volume.
Turning to the next page, measures of network velocity also reflect improved operations. Train speed for the second quarter improved 2.6 miles per hour, or 12%, over the same period last year.
Like the service composite, we're approaching our record-setting 2009 velocities but with significantly more traffic. Terminal Dwell, the second major component of network velocity, also showed continued improvement in the second quarter compared to the second quarter last year, a reduction of 2.3 hours or 10%, outpacing even our 2009 performance.
Turning to the last page, those improvements in network velocity are reflected in continuing improvements in productivity and asset utilization. Compared with the second quarter last year, train and engine service overtime has been reduced 16%, re-crews have been reduced to a sizable 31%.
Equipment rents have reduced as a whole, with a portion of equipment rents driven by velocity, has been reduced by 9%. Locomotives in service have been reduced by 4%, fuel consumption reduced by 2% and gross ton miles per gallon improved 1%.
This quarter, and in fact, the last 3, punctuate the importance of having the right resources in place to run the network. As we've seen, when properly applied, those resources drive service and velocity.
Our customers receive both superior service and productivity is driven to the bottom line. And now, I'll turn it over to Jim.
James A. Squires
Thank you, Mark. I will now review our financial results.
Similar to the first quarter, we set second quarter records for most measures and all-time records for our operating ratio and earnings per share. Let's start with our second quarter operating results.
As Don described, our railway operating revenues for the quarter totaled $2.9 billion, up $8 million compared to the second quarter of last year. These results include a $61 million favorable fuel surcharge lag effect.
Railway operating expenses decreased to $51 million or 3% for the quarter, reflecting improved operating efficiencies and effective cost control. Income from railway operations totaled $934 million, up $59 million or 7%.
Our operating ratio, aided by the fuel lag, was 67.5%, a 200 basis point improvement. Both measures reflect second quarter records, and our operating ratio set an all-time quarterly record.
Turning to our expenses. The next slide shows the major components of the $51 million net decrease.
As displayed on the following slide, the $22 million decrease in fuel expense was due to reduced prices and consumption. Our average diesel fuel price per gallon was $3.15, 3% lower than last year, as fuel prices fell throughout the quarter.
Diesel fuel consumption decreased 2% relative to a 1% increase in volume and a 1% decline in gross ton miles, a continuation of the favorable productivity gains we shared with you last quarter. Next, materials and other, decreased by $17 million or 8%, reflecting more favorable personal injury claims development and lower materials spending.
Compensation and benefits decreased by $15 million or 2%. Looking at the major components of this decrease on the following slide.
First, employee activity levels were down $17 million due to reduced maintenance and a more fluid network. Second, health and welfare costs were $7 million lower, primarily reflecting favorable experience in our agreement with labor premium rates.
We anticipate that this favorable second quarter rate-related experience will be offset over the remainder of the year or largely related to the increase in our employee base. Third, payroll taxes decreased $4 million.
And these favorable results were partly offset by increased pay rates and higher incentive compensation. Purchased services and rents decreased $13 million.
Similar with first quarter, we've benefited from the reduction of equipment leases and lower equipment rents due to network velocity improvements. Reduced haulage expenses were offset by increased costs associated with higher intermodal volumes and professional consulting fees.
The 8% increase in depreciation reflects our larger capital base, and is consistent with first quarter's results. Turning to our non-operating items.
Higher interest expense on uncertain tax positions was partially offset by net increases in other miscellaneous income items. Interest expense on debt was up by $9 million due to increased net borrowings.
Next, income taxes totaled $319 million, and the effective tax rate was 37.8%. Income taxes in the second quarter of 2011 were $239 million, with an effective rate of 30%.
The higher effective rate primarily reflects the absence of 2 favorable prior year items. First was the resolution of an IRS examination of NS' 2008 return and review of certain claims for refund totaling $40 million.
The second was for state tax law changes that reduced deferred tax expense by $19 million. Net income and EPS comparisons are displayed on the following slide.
Net income was $524 million, a decrease of $33 million or 6% compared to 2011. Diluted earnings per share was $1.60, an all-time record, exceeding second quarter 2011 by $0.04 per share or 3%.
Lastly, as displayed on Slide 13, cash from operations for the first 6 months was $1.7 billion, down slightly from last year. Operating cash easily covered property additions.
Free cash flow, plus net borrowing activities, provided for share repurchases and dividends. Cash and cash equivalents equaled $356 million at the end of the period.
Thank you for your attention. And now, I will turn the program back to Wick.
Charles Wick Moorman
Thanks, Jim. As you've heard, Norfolk Southern produced excellent operating and financial results for the second quarter, the product of our continuing operation of the railroad high service levels, along with strength across many of the segments of our diverse and balanced franchise.
Obviously, our results were particularly strong in light of the continuing substantial decline in our utility coal franchise, which is a large and profitable component of our book of business. Mark and Jim have already discussed the benefits of operating the railroad at its current levels.
And we feel confident that we will continue to do so as coal volumes return and as our other business grows, even in the face of significant network disruptions such as the storms that we experienced across the mid-Atlantic state a few weeks ago. However, as important as those operating benefits are, perhaps even more important are the service benefits to our customers, as we make shipping on Norfolk Southern an even more attractive option.
But, as well as the railroad is running today, we're still not satisfied, and we have plans underway in terms of the new capacity, technology and process to drive asset velocity and service delivery at our company to even higher levels over the next few years. Looking ahead at the third quarter and second half, Don has already outlined our outlook for continuing weakness in our coal business, as well as where we see opportunities in other areas of our franchise.
Stepping back a little more, we remain concerned about the broader economic landscape. While the data is not completely clear, there is a growing belief that the U.S.
economy is slowing a little, and it does seem clear that Europe has slowed even more. Combining those factors with some moderation in growth in China, as well as issues like the upcoming fiscal cliff and sequestration, makes our always hazy crystal ball even more murky than usual.
That being said, while the short-term outlook may be cloudy, we remain very optimistic about our longer- term prospects. We have a great franchise, and we're investing in smart ways to make it even stronger.
The new Crescent Corridor intermodal terminals are a terrific example of building facilities that will provide a significant competitive advantage for us and set the stage for even more growth in our intermodal network. Technologies like LEADER and UTCS are now starting to pay dividends as well.
And as I mentioned earlier, we see other opportunities to speed up our networks and enhance our customer service even further. We are also optimistic about our ability to grow over the longer term.
Our combination of superior service and network abilities, along with project-driven growth, should enable us to drive our merchandise and intermodal businesses to growth at higher than GDP rates, and at pricing levels that continue to meet or exceed the rate of rail inflation. As for coal, the weather will normalize, and gas prices will eventually go up.
And we're optimistic about the prospects for continued growth in export thermal coal in the near term, as well as for export metallurgical coal over the longer term. Our goal remains what it always has been, to manage the company as effectively as we possibly can through whatever economic conditions exists, with a focus on efficiency, customer service and returning value to our shareholders.
We have a great team at Norfolk Southern, and I'm confident that we'll continue to do just that. Thanks for your attention, and I will now turn it over to the operator to moderate your questions.
Operator
[Operator Instructions] Our first question is from the line of Jason Seidl with Dahlman Rose.
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
A couple of questions. One on the coal front, you talked about some new export steam coal.
Could give us a little more color about that, remind us when this started, and about how much, in terms of tons, it added this quarter?
Donald W. Seale
This is Don. We handled right at 2.5 million tons of steam coal in the quarter.
To kind of give you the color of this, in the first quarter, we only handled 9% of our export for steam. And it ramped up to 30% export steam coal in the second quarter, sequentially.
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
Okay. I guess I will stick on coal a little bit here.
You talked about how you had a couple of customers that were taking train sets, and then you saw stockpiles decline. I mean, it's still going to be a challenging 3Q, I assume, for coal based on some of your commentary.
But sequentially, can you give us some flavor on what you're expecting for the sequential utility coal outlook compared to 2Q?
Donald W. Seale
Well, certainly, it's going to be a challenging second half. Stockpiles are still above target, as I've mentioned.
It is encouraging that we're seeing natural gas back to $3.11, $3.12. If the hot weather continues, I think we will see that rate probably continue to go up for gas as demand continues to go up for utility generation.
So in all, it's really based on the weather for the rest of the summer, and the shoulder months that we're going to see in September, October as to whether or not coal, utility coal, really starts to move late in the fourth quarter, mid fourth quarter or it gets geared up for early 2013.
Operator
Our next question is from Justin Yagerman with Deutsche Bank.
Justin B. Yagerman - Deutsche Bank AG, Research Division
Thinking about your coal franchise, your East Coast competitor is talking a bit about utility coal in the East having moved from base load to surge. And their mix of utilities served is quite a bit different than yours.
And I'd love to get your take on how you see the next couple of years playing out in terms of the shifts that we've seen this year, and how that's going to translate, in your opinion, on a go-forward basis? So I guess, to rephrase, is the East now completely in a surge from a coal power generation standpoint?
Or do you still feel like the majority of the utilities you guys serve are base load coal?
Donald W. Seale
Justin, this is Don. We see strongly that our coal utility generation is base load.
It's certainly not surge capacity. In that regard, with the heat that we've had from -- starting the second week of June up through the current period, we're seeing all of our coal-fired utility plants run as base load.
And we're being advised by our customers to that regard -- in that regard.
Justin B. Yagerman - Deutsche Bank AG, Research Division
Okay, that's helpful. And then, I guess, the second question I want to ask you guys, on the automotive side, obviously, that's been one of the bright points in the U.S.
economy in the first half of this year. You stated the case of an old fleet on the road, which is something that we've heard quite often.
But more specifically, when you talk to your customers and you look at the plants on your line, how do you see the back half of the year shaking out from an auto standpoint? What kind of volume growth are you guys budgeting as you think about that?
And is there any -- are there any cracks in that armor that you guys are seeing at this point in time that would lead you to believe there's any risk in that?
Donald W. Seale
At this point in time, with a run rate on sales of about $14.1 million and total production approximating 15 million, we think the second half is poised for good growth in the automotive market. If housing continues to move up in a marginal way, which it is right now, we're even seeing some increased demand for utility trucks and pickup trucks associated with that sector.
So it's encouraging. We certainly don't see a significant leap in housing, but it's encouraging to see it move from an annual rate of about 650,000 to about 760,000.
And the reason I'm mentioning housing, it does have a positive support for a segment of some of the automotive business and [indiscernible] demand in the age of vehicles.
Operator
Our next question is from the line of Scott Group with Wolfe Trahan.
Scott H. Group - Wolfe Trahan & Co.
So Don, with the total yields pretty flattish, I'm wondering if you could help kind of give us some color on the impact of fuel and mix in the quarter so we can try and get a bit of a better sense of what underlying pricing is in the quarter?
Donald W. Seale
The year-over-year increase in fuel revenue, Scott, was only $4 million for the quarter. So it was marginal with respect to the delta year-over-year.
We did have a lot of moving parts with changes of length of haul across all of business. In intermodal, and let me take that first.
In intermodal, as I've mentioned in my comments, we continue to have increased local Eastern highway conversions that tend to be shorter haul, profitable business but lower revenue per unit. And also, I would remind everyone on the call that our fuel surcharge in intermodal is based on an on-highway diesel fuel, which is subject to weekly changes and has no lag.
So we saw on-highway diesel fuel expenses decline from the first quarter to the second quarter, which impacted revenue per unit, along with the mix of traffic. So that's intermodal.
In the green business, in our ag business, I mentioned, which -- deals were flat on 150,000 cars. Then we hauled less long haul corn traffic to ethanol producers and to feed mills, but we handled more-- 19% more feed, finished feed, to the river, for river terminals, which is shorter haul, attractive business but a different set of characteristics than long-haul unit train corn.
So -- and then on the coal side, I mentioned the moving parts with respect to revenue per unit. Certainly, market competition at the export market is more intense this year than it was last, obviously.
Second, we set a record at Port of Baltimore, which is shorter haul, attractive export coal. Thirdly, we handled more lower revenue per unit steam coal, attractive but lower revenue per unit than met coal.
And then finally, in the coal sector, which I did not mention in my prepared remarks, is that we got an increase in shorter haul utility business in the Midwest, both from Illinois Basin source coal, as well as Powder River Basin coal coming to us over the St. Louis Gateway, terminating in Illinois.
That's a lot of moving parts, but it should give you a pretty good feel for some of the RPU drivers.
Scott H. Group - Wolfe Trahan & Co.
That's very helpful. So it feels like overall mix was a headwind of a few percentage points.
But overall, pricing kind of in that, maybe in the 3% to 4% range, which feels like a deceleration from where we've been in the past few years. I don't know if you think that, that's a fair characterization.
But if so, what do you think is driving the relative deceleration in pricing, not just for you but from we've seen from some of the other rail reports so far?
Donald W. Seale
We feel that we're still pricing equal to or in excess of the rate of rail inflation, which is running between 2.5% and 3%, north of that. So we're comfortable where we're pricing.
Frankly, we have not seen a deceleration per se. But one would have to say that the market is not quite as strong as it was this time last year, or anything for transportation or just basic market demand.
Scott H. Group - Wolfe Trahan & Co.
Okay, that's helpful. And just last thing, Don, the slide with the length of haul in the coal segment, that was really helpful.
Any chance that you have the numbers for the percent of volume for each of those segments for the year-ago period?
Donald W. Seale
Yes, those percentages on the slide show, we can give you that data, we just didn't include it in the slide. But, yes, we can give that to you.
Operator
Our next question is from the line of William Greene with Morgan Stanley.
William J. Greene - Morgan Stanley, Research Division
I'm curious what you think about the idea that the weakness in coal, is there a silver lining here? How much of that is in fact the driver behind the productivity gains that you saw?
So if coal remains weak, is there an argument for sustainably better margins, which is actually kind of remarkable given how profitable we all think coal is?
Charles Wick Moorman
Bill, I'd say that no, we don't look at it that way. In any particular business segment, we obviously adjust to the extent that we can in terms of train operations, if business goes up or down.
Don mentioned that we were able to reduce crew starts in coal by 2 percentage points more than the volume loss. But no, I don't -- looking at Mark.
Mark, I don't think you would say that?
Mark D. Manion
No, I wouldn't. The only place where it would have some effect is it frees up more locomotives.
But we've got plenty of locomotives anyway. So that would be the only real...
Charles Wick Moorman
Yes, if we were tight for resources, really tight for resources, you would see an acceleration and velocity in the network. But we're operating the network at a high velocity, anyway.
William J. Greene - Morgan Stanley, Research Division
Yes, okay. That makes sense.
Wick, on the last call I sort of asked you about the idea of deregulating coal, just given the competition with natural gas. And I know that's sort of probably way in the future if it ever happened.
But given that it's still a largely regulated commodity domestically, is there a case for raising pricing now that we've had this decline in coal? Because I would think that the assets that are dedicated there really haven't moved that much, and yet obviously, you're earning far less on that business.
Does that make sense, or is that just so tone deaf in the market that it doesn't make sense?
Charles Wick Moorman
Well, Bill, when I heard your suggestion last fall, the 2 words that sprang to my mind were pure genius. And in fact, we had some conversation about that.
I think in a rational world, that is an argument that can make some amount of sense, given the dynamics of natural gas, the ability of the utilities to do a lot of switching and sourcing, where they want to generate power. Having said that, I think that from a practical standpoint, it's not an argument that would go very far.
William J. Greene - Morgan Stanley, Research Division
And so is there an argument, though, in this regulated world that the lower level of volume means we need more price?
Charles Wick Moorman
I think we would have to watch that play out in the regulatory arena before we could answer that.
Operator
Our next question is from the line of Tom Wadewitz with JPMorgan Chase.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
I wanted to ask a question for you, Don, on export coal. It sounds like you think you're going to see weakening in both steam and met in the European market, which is your primary market.
So how does that -- should we translate that to a decline year-over-year in export coal in the second half, or am I overreading your comment on a weakening European demand?
Donald W. Seale
We're very concerned about Europe across-the-board, with both met and steam. As I mentioned in my comments, and you've seen the record increase in imports into China, they were up 60% for the first half of this year, all-time record.
As I've mentioned, we believe Asia will help us offset most of the softness in Europe, and we expect our export coal in the quarter -- in the third quarter to be positive.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
Yes. So export ton is positive year-over-year in the third quarter?
Donald W. Seale
Yes.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
Okay. Let's see, on the -- let's see, the comp and benefit side, you had, let's see, which slide this is, there is a breakdown on that, and you showed employee activity levels, rated favorable, about $17 million year-over-year.
Is that -- it sounds like that's primarily a function of running your railroad well, and train speed is up and so forth. Is that number something that you can see?
If you put up the same slide in third quarter, fourth quarter, could we see a favorable benefit like that recur? Or is there something unusual about that, it would only be applicable to the second quarter?
James A. Squires
Tom, it's Jim. What we think, we'll see a continuation of that trend.
That's a pure byproduct of more efficient operations and higher velocity out on the railroad, and we should see that sort of benefits sustained through the rest of the year.
Donald W. Seale
We saw it in the first quarter.
Operator
Our next question is from the line of Chris Wetherbee from Citigroup.
Christian Wetherbee - Citigroup Inc, Research Division
Maybe just a question on the mix within export coal. I know you saw, seemingly, a pretty strong ramp-up on the thermal export side through Baltimore.
I guess, based on your comments and kind of on the back of Tom's question about exports in the third quarter, should we assume a continued acceleration of thermal as a percent of total exports as we go forward? I guess, trying to get a sense of how that looks, maybe even just through the first couple of weeks of July.
Donald W. Seale
Well, we see it continuing to grow. I would not want to comment with respect to the percentages, but we expect it to continue to grow.
Christian Wetherbee - Citigroup Inc, Research Division
So that certainly will be part of the growth driver of export, total export tonnage as you look into the third quarter?
Donald W. Seale
Yes.
Christian Wetherbee - Citigroup Inc, Research Division
Okay, that's helpful, I appreciate it. And then switching gears onto intermodal side, Don, you mentioned some of the puts and takes on length of haul and growth in the Eastern half of the U.S.
I guess I'm just curious how the pricing dynamic with truck kind of looks in the Eastern half of the U.S., particularly in the second quarter? Did you see any kind of pressure on the margin, as fuel prices kind of came down at all?
I guess I just wanted to get a little bit more color on that, if I could.
Donald W. Seale
Well, we're certainly seeing a competitive truck market. But their cost pressures over and above fuel continue.
And that's something that's getting us additional support in pricing in intermodal, in that market. One of the things that we're watching very closely is the age of the Class A tractor fleet, and it's now back to a 1999 level over 6 years old.
And Class A tractor sales are off by double digits, so as much as 20% over the past quarter. So truck capacity, as well as truck costs, are still pressuring that sector, which is enabling us to continue to defer to prices that are acceptable to us.
Christian Wetherbee - Citigroup Inc, Research Division
Okay, that's helpful. And then just one quick stat, if you do have it.
Do you have a sense of what the growth on the intermodal side, what's going on existing train starts as it stands right now? I know you gave the double stack percentage, but I'm just curious, I'm guessing most of it, but I'm just kind of want to get a sense there.
Donald W. Seale
Yes, what we are continuing to focus on is increasing the percentage of our total container traffic that is stacked, double stacked. And we've got our network completely cleared.
We've mentioned that in previous calls, we're about 97%, 98%, cleared across the network. And we're taking advantage of that.
So we're improving the efficiency of intermodal train service, and that enabled us to reduce the crew starts by 3% against the 5% increase in volume.
Operator
Our next question is from the line of Peter Nesvold with Jefferies & Company.
H. Peter Nesvold - Jefferies & Company, Inc., Research Division
I guess, I'm down to just a couple here. Can you quantify what the impact to yields was from fuel both overall, and then maybe, specifically, in the intermodal piece?
Donald W. Seale
Jim can address the lag in fuel.
James A. Squires
Sure. The lag effect was $61 million favorable in the quarter.
And remember, what we mean by lag effect, that's a metric that captures the effect of the 60-day look back in the fuel surcharge mechanism. So it's strictly a timing phenomenon quarter-to-quarter, sequentially.
The increase in fuel surcharge revenue on a year-over-year basis was just $4 million, as Don mentioned.
H. Peter Nesvold - Jefferies & Company, Inc., Research Division
Any material difference between what they look like in intermodal versus the other parts of the business? I mean sometimes, the intermodal will reprice faster.
Donald W. Seale
In intermodal -- this is Don. As I mentioned previously, the lag does not apply, because we're using on-highway diesel fuel expense changes weekly to govern that as opposed to West Texas intermediate oil prices for the lag.
H. Peter Nesvold - Jefferies & Company, Inc., Research Division
Got you. And what's left on the buyback?
James A. Squires
We are down to a relatively small amount of remaining authorization on the buybacks. But we'll certainly be seeking and will expect to obtain approval from our Board of Directors for additional buybacks authorization.
Operator
Our next question is from the line of Chris Ceraso from Crédit Suisse.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
I have a question about inflation and productivity. I think you said railroad inflation for you is running in the low 2s.
Can you think about productivity on that same basis? It looks like you generated an awful lot of productivity in the quarter.
Relative to that, let's call it 2.5%, would you say you're on pace to do 3% or 3.5%, or what level of productivity do you expect to achieve this year?
James A. Squires
Chris, the tricky thing about measuring this productivity-- the productivity component of margin changes is isolating what is true productivity from investments in business processes or in technology, for example, and what is operating leverage from changes in traffic mix, in particular, the growth in general merchandise we saw in the second quarter. So because of that, it can be a little tricky to sort out.
We're a little reluctant to quantify exactly what is the productivity aspect of that. But we are confident that we saw productivity and operating leverage both in the quarter, and we went through and tried to quantify some of the areas.
In particular, we saw those dollars savings and compensation benefits and equipment rents and purchase services and fuel, for example.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Okay. And was there a tweak in your commentary about price?
I think in the past, you'd said greater than rail inflation, and today, greater than or equal to. Or am I making that up?
Donald W. Seale
It was the same.
Charles Wick Moorman
Yes. We've said at or above -- I said meets or exceeds, and that's the language that we've used for a long time.
Operator
Our next question is from the line of Ken Hoexter with Bank of America Merrill Lynch.
Ken Hoexter - BofA Merrill Lynch, Research Division
Can you just, Don, talk through on the international coal side? You mentioned all the mix changes.
Is there a difference in profitability between your terminals? Should we look at -- I know you're not going to give exact numbers, but if you look at growing that steam at Baltimore versus met at Lamberts, should we look into any profitability difference within that?
Donald W. Seale
Ken, I was asked the question last quarter about which of those we would prefer to handle, and I answered it both. Both segments are attractive for us.
Certainly, steam coal is lower revenue per unit, because the market is different than metallurgical coal. It's still attractive business for us.
And of course, Lamberts Point versus Baltimore, there's a mileage differential with respect to mine to port transportation supply chain. Again, attractive to us, just a different characteristic of the haul.
Ken Hoexter - BofA Merrill Lynch, Research Division
So if we look at your yields on the coal side, it came in down 4% on a revenue per car basis. Just to clarify that, was there anything going on in the domestic utility side that adjusted that?
Or is that more a mix basis from the international export side?
Donald W. Seale
Ken, the international export was a big component. As I mentioned, we also had some Midwestern utility coal that was shorter haul, that also moved in the quarter in substantial volumes.
One moved from the Powder River Basin going into Illinois over St. Louis to a utility, several moves from Illinois Basin originations.
Our Illinois Basin originations were up 18% of our book -- or 12% of our book, excuse me, 12% of our book in the quarter. So that business continues to ramp up.
And we had some moving parts associated with that.
Ken Hoexter - BofA Merrill Lynch, Research Division
But just to clarify, there were no, then, domestic price adjustments?
Donald W. Seale
Correct.
Keith Schoonmaker - Morningstar Inc., Research Division
Okay. And then lastly, just on the intermodal side.
Can you talk about the capacity that you are adding with the new yards? And how quickly we can see that growth ramp up?
Charles Wick Moorman
Well, we're adding a substantial amount of capacity. If you look across the entire book of business, as you know, we measure terminals in terms of lifts.
And that's not always directly equatable to carloads. But we're certainly adding, over the period of the next 1.5 years, a number of hundreds of thousands of lifts in terms of capacity.
In terms of the ramp-up of business, we certainly don't expect it to be a cliff. We expect to bring these facilities online.
As we bring the facilities online, we'll start to introduce new services. And we hope to grow quickly there.
But it will be growth, I think, that we look forward to starting to realize in 2013.
Operator
Our next question is from the line of Brandon Oglenski with Barclays.
Brandon R. Oglenski - Barclays Capital, Research Division
Jim, if I could just come back to your comment about the $61 million fuel lag benefit. If I'm hearing you correctly, that's just the difference between the price of fuel you're paying for in the quarter and what you're recovering, right?
James A. Squires
That's correct.
Brandon R. Oglenski - Barclays Capital, Research Division
So is that something we should assume a pretty similar level for the third quarter then, from a lag perspective, right?
James A. Squires
No, I think if you look at the trend in WTI, we'll see probably a neutral lag effect. There might be a little bit of a tailwind in the very early part of the quarter.
But given the overall trend, we would expect it to be flat.
Brandon R. Oglenski - Barclays Capital, Research Division
Okay. And then I think you mentioned on the compensation side, and this comes back to an earlier question, that there was some rate realizations in the quarter that you didn't expect to continue.
Can you just help us from a modeling perspective how to think about headcounts and wage inflation per head going forward?
James A. Squires
Okay. So just working down the changes in compensation and benefits expense in the quarter and thinking about how those are going to trend for the rest of the year, we covered employee activity levels that we would expect to see from the higher velocity more efficient network a continuation of that trend.
Then, health and welfare benefits, I mentioned in my remarks, were favorable in the second quarter. But that one, we would look to turn around in the second half.
And not to a major degree, but we would expect to see year-over-year increases in the second half in health and welfare premiums. And then, let's see, other items are relatively immaterial, I think the changes for the rest of the year.
Pension and other post-employment benefit costs, retiree medical benefit costs will probably somewhat unfavorable on a year-over-year basis in the back half. Incentive compensation was modestly unfavorable in the second quarter.
And that one, we would expect to turn around and perhaps be favorable within comp and benefits in the second half, partially offsetting the increases in some of the other items.
Brandon R. Oglenski - Barclays Capital, Research Division
I guess if I could hear you maybe focus on the run rate in the second quarter, then when we were in the first.
James A. Squires
Probably, something along those lines. One other I should mention is the wage rates.
We're going to see in the second half the effect of the July 1 wage rate reset on the agreement side. That was in effect in the first half as well.
However, the -- it was masked somewhat by accrual changes we made last year as we were getting close to the finish line on the collective bargaining agreements last year. So on the agreement side of wage rates, year-over-year, we didn't see any increase in the second quarter.
That flips in the second half, and we start to feel the effects of the wage rate increase that take effect July 1, sort of a blended 3%, 3.3% increase in the second half.
Charles Wick Moorman
If you look at our employee counts, they were stable, actually down just a few folks sequentially over the first quarter. We would anticipate in the second half that we might start doing a little hiring in our mechanical and engineering areas.
We're looking that over. We know we're facing some significant attrition, that we're going to have to make up for, try and get ahead of just a little bit.
And we also want to make sure that we're adequately staffing some of the very good capital programs that we have underway. But we don't anticipate anything really meaningful in terms of headcount changes.
Operator
Our next question is from the line of Matt Troy with Susquehanna.
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
I wanted to ask about pricing, specifically, Don. How much of your pricing for next year, or how much of your business is currently under contract?
And a derivative on that, how much of your pricing overall is tied to RCAF x fuel?
Donald W. Seale
Matt, the latter part of your question, first. Very little is tied to RCAF.
It's de minimis at this point. The second thing is that we usually run with about 2/3 to 70% of our business under contract.
And at this point for next year, we're about 60% priced in.
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
Okay. So when we think about that RCAF component being de minimis, even looking at RCAF x fuel, because if you look at the mechanism, there is a deceleration or deflation in pricing lift on how we define rail inflation, which the railroads use to benchmark pricing.
You don't think that the deceleration in the RCAF x fuel metric is having a significant drag on pricing today up there?
Donald W. Seale
No, I don't, Matt.
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
Okay. And my second question, I think we all look at very similar economic metrics, market metrics on the dashboard of where the economy is going.
I was just curious to hear your take on direct conversations you've had with your customers around their expectations around peak season. It's obviously shaping up to be lackluster to date.
It's still early, but I'm just trying to get a sense of expectations of the cloud, and at least the press and Wall Street tend to be a little bit more alarmed about larger ahead of the trend? What you're really seeing from people that are actually moving stuff or expect to move stuff for a living about peak?
Donald W. Seale
That's a great question. The last week of June, closing out the quarter, we saw an all-time high in our intermodal loadings, about last week.
And on the international side, for the quarter, if we back out the Maersk comp, our international volume would've been up 11%, as opposed to being down 1%. So we're seeing some fundamental strengths in the international business.
And of course, the domestic business, as I mentioned, was up 10%. So looking on through the second half and into the fall, we believe that the traditional fall peak has been evened out.
It starts earlier in the summer, because inventory carrying costs are so low. And more companies are taking inventory through the summer, into the fall.
So we don't expect a traditional fall peak. We'll see a moderate increase in the fall, but we think a lot of that activity has already begun.
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
So the caution there or skepticism we're seeing in the market, you're not really -- you're not having that permeate your customer conversations yet? It's more just slow growth, low growth, but not expectations for deceleration, is that fair?
Donald W. Seale
Yes, the slow growth is what we're hearing.
Charles Wick Moorman
Yes, I will say that we are hearing more and more, as you are, everyone is, some of the concerns that I was talking about earlier, as we get closer to the end of the year, any uncertainty growth, I think, more and more of our customers are getting a little more nervous. But no one seems to be taking definitive action yet in that regard.
Operator
Our next question is from the line of Walter Spracklin with RBC Capital Markets.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Just following up on the intermodal question here. And you pulled out the Maersk to give a good comp.
And just wondering if you could go an extra level here, and look at what kind of traffic has come over to your system as a result of your very timely investments in double stacking and your corridor initiatives with a view to -- if how much is left if you're thinking, are we 90% done now that double stacking in this year is the lift we got from that? Next year, lapping those comps, we won't see as much?
Or do you have, like you mentioned, you have some more initiatives planned, are we looking at a continuation of above normal growth in intermodal as a result of the initiatives that you're putting into your intermodal network?
Charles Wick Moorman
Well, as you said and as Don pointed out, we continue to invest in this network. You saw all of the growth rates that Don mentioned.
Some of those, for example, Crescent in particular, are also still fairly low basis. We're making a lot of investments in major new intermodal terminals, and we have a very strong belief that we're going to have a service level that is going to be well-received in the marketplace, and we know there's a lot of traffic out there.
So we don't see ourselves as 90% into this by any means. We think there is a lot of growth, and we're going to continue to invest to capture that growth.
And as you've pointed out, Don's comp is an indication that even our investments in infrastructure out of the ports, the Heartland Corridor, investments we made to serve Savannah and the other ports, are continuing to pay dividends for us.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Absolutely, I completely agree. Switching gears a little bit, and over to Mark now, I guess, is last recession, there was obviously a response that you made to the downturn that rightly or wrongly criticized in terms of how quickly Norfolk Southern reacted to the downturn.
Now I'm seeing in your discussions, at least, already talking about operating leverage and so on with the lower volumes even further, further lower crew starts and so on. Are you approaching the thought or the aspect of a weaker economy differently than you did in '09?
And can you shed some color on the differences, if, in fact, you are looking at it differently?
Mark D. Manion
I think we are looking at it a bit differently. And you can see that in the second quarter, we were real conscientious about our cost control.
And we will continue to be so coming up here in the second half. And the improved velocity helps in that regard, improved velocity helps us to reduce costs.
It helps us control our overtime. It even helps us with our inventory control.
So we've got a lot of things working to watch our costs very closely, and we're certainly going to do that in the third quarter.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Any changes to your furloughing strategy at all?
Mark D. Manion
Yes. Actually, what we have done is we have actually moved away from so much furlough.
In fact, as we speak, we have got literally a handful of people that are furloughed. And instead, we've got a process in place where we will subsidize, if you will, some of the compensation for people that are not working as much as they would like to.
And on many of -- not all, but on many of our extra boards that don't turn as quickly as they would with more robust business, we will give them the equivalent of about 4 days a week pay to the extent that they're not already getting that. So we are spending some money.
And we feel like it's money really well spent, because it keeps those people active with railroads so that we do have them available when business turns up. And as you know, when you furlough, you're really rolling the dice as to whether people are going to stay with you, and then you've got rehiring costs and training costs and a lot of inefficiency associated with people that leave the railroad.
So that's a pretty significant change.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Am I reading to that strategy as being perhaps cost might not come down as much during troughs, but better suited to capture rebounds? Is that a fair assessment of that strategy?
Charles Wick Moorman
Mark is exactly right. And it's a very good question.
And I think that you have put your finger on one of the issues, which is that a lot of where we are doing, what Mark described, are places where we currently have weakness in our coal franchise. And if we continue to have a hot summer and gas prices go up in mid fourth quarter, which isn't far away, our customers, once they start shipping substantially more coal, we want to be ready to handle that coal.
The second thing that I think is different this time is that recall that our merchandise business has been strong. Our intermodal business has been strong.
And we have to be very careful as we think about furloughs and cost reduction activity that we don't impact the rest of the network. Just because one very significant piece, but by no means the majority of the activity, is impacted, we really like, and our customers really like, the way the railroad is operating right now, the service we're providing.
So Mark and his team are being very careful to make sure that we're not having negative impacts. Now this is compared to 2009 where nothing was up.
Business went away across the entire franchise. When that happens, you take very different actions.
Operator
Our next question is from the line of Cherilyn Radbourne with TD Securities.
Cherilyn Radbourne - TD Securities Equity Research
I think most of my questions have been asked. I wanted to ask you something, just really general.
This is the second, if not the third, summer in a row where we sort of run into a soft patch in June, July. And so setting aside utility coal, I just wonder, as you look at your traffic patterns, talk to customers, what this year feels like last year?
And what strikes you to think that maybe there's something different this time?
Donald W. Seale
This is Don. We really, fundamentally, don't see a lot of difference this summer versus last summer, other than the fact that gas prices continue to trend downward on the coal side and has impacted the utility coal franchise.
Certainly, the ongoing news coming out of Europe, which seems to not get better but is continuing to be very concerning, that's different this summer than last. But from our customer perspective, I think in a macro sense, everyone is concerned, and Wick has certainly highlighted this, on a macro perspective, the election, the fiscal cliff, the uncertainty associated with that, that's all a backdrop that we didn't have as much of that last year.
Other than that, customers have order books that are fairly stable.
Cherilyn Radbourne - TD Securities Equity Research
Okay, that's helpful. And a very quick one.
When you referred to opportunities in Asia to offset the weaker demand you're anticipating in Europe for met and steam coal, is that a met or steam comment into Asia or both?
Donald W. Seale
Both. We're handling both into China, Korea and Japan.
Operator
Our next question is from the line of Anthony Gallo with Wells Fargo.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
Intermodal question. The percent of containers that are stacked, you said 87% this quarter, 77% year-ago period.
What do you think that was a couple of years ago? And if we look out 12 to 18 months, is there a theoretical cap on that?
Donald W. Seale
I don't have the number where we were 2 or 3 years ago. We can certainly go back and take a look at that.
As far as the theoretical cap, at some point, we reached an optimum level where car supply is optimized with stacking. And we wouldn't want to reposition cars or generate an additional activity to get another 0.5% or 1% of stacking.
I don't think we're near that point yet. We're very encouraged by the efforts we have that are generating the results that you see here in the quarter.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
Okay. And if I try to think about the components that impact your intermodal margins, where does stacking stack, for lack of a better term?
How does that rank? I know there's length of haul, there's RPU, but where does this piece fall into intermodal margins?
Donald W. Seale
Double stacking is the most cost-effective means of transporting both international and domestic containers. It generates the lowest cost per mile in our network for intermodal.
Operator
And our next question is from the line of Keith Schoonmaker with MorningStar.
Keith Schoonmaker - Morningstar Inc., Research Division
Your productivity improvements slide cited a number of improvements like T&E overtime and re-crewing, curious, if these are due principally to lower coal volume or if other operating improvements contributed as well?
Donald W. Seale
Principally, the driver behind these things are the improved velocity on the railroad. And we essentially saw that in a larger way beginning about 7.5, 8 months ago and have every intention of keeping it up for the rest of the year.
Keith Schoonmaker - Morningstar Inc., Research Division
And overall velocity number, we see the velocity is up in more sectors than just low volume coal segment?
Donald W. Seale
No, the velocity is across -- it's across the system. I mean, keeping in mind that we are handling, with the exception of some real defined business in the coal fields, we are calling all the different business groups on the same track with the same crews and the same locomotive power.
So it's a systemwide thing.
Keith Schoonmaker - Morningstar Inc., Research Division
You mentioned pricing in excess of real inflation during the period. I might have missed this, but could you provide corn sort of the same railroad price increases maybe exclusive of coal?
Donald W. Seale
No. We do not provide that type of number.
Keith Schoonmaker - Morningstar Inc., Research Division
All right, let me try again. How about your observations on housing-related carloads perhaps, in particular if you're seeing any increased lumber similar, perhaps, Don, for similar regions more than others?
So I guess, this is sort of a directional flow type of question.
Donald W. Seale
Our lumber business for the quarter was up 6%. So we're seeing from a lower base, obviously, a recovery mode.
But it is encouraging that we're seeing that. And certainly, the Mid-Atlantic to Southeastern states, we're seeing probably a little more of a rebound in the Mid-Atlantic right now in terms of our lumber business versus the Atlanta market, for example.
Operator
And our final question comes from the line of John Larkin with Stifel, Nicolaus.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
I think Don mentioned that there was a fair amount of oil beginning to move from the Bakken and from Canada. Could you talk a little bit about how big that opportunity could be over time?
Whether the Utica Shale is well-positioned around your network to perhaps generate some additional volume of this type? And whether your growth has been constrained by lack of available tank cars?
Donald W. Seale
Not necessarily. That's a great question.
We see a significant growth opportunity in crude oil franchise from both Bakken and the Canadian oilfields. It's just beginning to ramp up.
So it's early in the first inning with respect to that market. I will make a comparison for that market to the Marcellus Shale.
Our Marcellus Shale input business was up 36% in the second quarter after being up over 50% in the first quarter. So the Utica Shale business adjacent and under Marcellus, as you know, will be the next tranche.
And we do see a lot of leverage and opportunities with distribution facilities that have gone in that is supporting Marcellus when Utica ramps up. The tank car question, tank car rental charges have gone up significantly, and they are short.
But as you know, a lot of tank cars being built in Mexico add to the fleet. So as this business continues to build, we'll see the tank car supply match up pretty quickly.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
Are these very long-haul moves that ultimately end up either on the East Coast or on the Gulf Coast?
Donald W. Seale
We are handling predominantly Chicago gateway trains that run to the East Coast refineries, so relatively long-haul. But unit train in nature and not necessarily a revenue per unit that would equate to the average for chemical traffic, for example.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
Got it. And maybe just a final question, it would be great if we get Wick's assessment of whether we'll ultimately see a delay in the deadline for the installation of PTC, number one.
And then number two, do you have any reason to believe that something onerous might be coming out of the STB on the competition issue here in the next couple of months?
Charles Wick Moorman
The answer to your first question is yes. We will ultimately see a delay, primarily because, and this is something that we've been saying now for some time, we're just not going to make the deadline for the rail network.
And that is not because of a lack of investment, as you know, our investment this year is close to $250 million, or a lack of effort. It's just a question of the scope and complexity and the very new nature of this technology.
And as I say about this, ultimately, the laws of physics will prevail, and we'll get a delay. And I think more and more, the folks on Capitol Hill understand the issues and understand what's going on, and understand that we are making every effort to get this technology ready to go and to have it operate in such a way that the rail network can operate with the appropriate reliability.
In terms of your second question, the STB, yes. I got so upset thinking about PTC.
The -- right now, there's a lot of speculation that they're going to do something this year on competition. I remain an optimist that they're not going to do anything that is damaging in any meaningful way to our industry.
I think the STB understands that the rail industry is a tremendous success story in terms of its ability to reinvest, grow capacity, as well as do a lot of hiring. They see us putting enormous amounts of money back into our infrastructure, to grow even more.
And it's a business model that works, and I think they will be low to do anything which might substantially impair our continued ability to earn an adequate return and to invest.
Operator
Thank you. We have no questions at this time.
I'd like to turn the floor back over to Mr. Moorman for closing remarks.
Charles Wick Moorman
Thanks everyone for your patience, and for joining us today. We look forward to talking with you again 3 months from now.
Operator
Thank you. Ladies and gentlemen, this concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation.