Oct 23, 2008
Executives
Jim Young – Chairman, President and CEO Jack Koraleski – EVP, Marketing and Sales Dennis Duffy – EVP, Operations Rob Knight – EVP of Finance and CFO
Analysts
Tom Wadewitz – JP Morgan Adam Lawson [ph] – Morgan Stanley Edward Wolfe – Wolfe Research John Barnes [ph] – Boston Company Ken Hoexter – Merrill Lynch David Feinberg – Goldman Sachs Randy Cousins – BMO Capital Markets Brandon Oklanski [ph] – Barclays John Larkin – Stifel Nicolaus Jason Seidl
Operator
Greetings, ladies and gentlemen and welcome to the Union Pacific third quarter 2008 earnings release conference call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded and the slides today will be user control.
It is now my pleasure to introduce your host, Mr. Jim Young, Chairman and CEO for Union Pacific.
Thank you Mr. Young, you may begin.
Jim Young
Good morning, everybody. Welcome to Union Pacific's third quarter earnings conference call.
Joining me today are Rob Knight, CFO; Jack Koraleski, Executive Vice President of Marketing and Sales and Dennis Duffy, our Executive Vice President of Operations. Today UP's reporting record results.
Third quarter earnings grew 38% or $1.38 per share. Solid pricing our fuel cost recoveries and strong operating productivity all combined to produce record quarterly operating income of $1.2 billion, up 21%.
All the economic environment has clearly weaken during the year, we have maintained our focus in running a profitable railroad and are delivering strong results for both our customers and shareholders. UP's franchise diversity provide us with a solid based load demand, as evidenced by the 1% growth in revenue ton-miles during the quarter.
Our business mix was favorably impacted by the strong demand for both commodities, which brings with that high-density long haul moves. With coal in particular we set a number of Southern Powder River Basin loading records in the quarter.
Capital investments in the Joint Line UP's train size initiatives and co-dated efforts were both producers and receivers all contributed to these achievements. Third quarter carloads, despite 5% year-over-year decrease was still a strongest of the year.
Although, most of this weakness is clearly related to the economy about one point of the decline can be attributed to Gulf Coast hurricane. Operating revenue of $4.8 billion was a quarterly best, up 16% from the strength of both price improvement and fuel cost recoveries.
As we announced this September moderating fuel prices were also good news in the quarter. Rob will walk you through the details that Union Pacific lower diesel fuel price is up our bottom line, since we don’t recover 100% of the higher cost.
Operationally, we had a very good quarter, despite hurricane distributions, we set quarterly operating best and attain to our highest quarterly network velocity in five years. Better network efficiency translates directly in to lower operating costs and increased customers' satisfaction.
With that I’ll turn over to Jack to talk you about our revenue results.
Jack Koraleski
Thank you, Jim, and good morning. Our strong price improvement in each of our six businesses drove a 16% increase in freight revenue to a record $4.6 billion.
Overcoming a 5% decline in volume resulting from continued economic softness in the disruption caused by hurricanes Gustav and Ike. Five of our six businesses set best ever marks for revenue with only automotive failing to set a new record.
And at the same time we had another great year-over-year improvement in customer satisfaction. In the third quarter, we continued to grow in market tides of the global demand for energy and food, but two hurricanes and the weak demand in some of our key rail markets, more than offset that growth leaving our volume down 5% for the quarter overall.
Economic softness continues to be most evident in the automotive and construction related markets, along with the international segment of our intermodal business. Production cutbacks by the largest auto manufactures let to a 25% drop in vehicle shipments and our parts lines were down almost 22%.
Industrial products volumes drop 3% below last year. Our steel shipments grew 23% and markets related the energy demand like resin [ph] pipe and wind components remain strong, but still was it not to over overcome the softness lead by a 24% decline in lumber volumes and the 9% falloff in rock shipments.
Well, all of our business groups saw some impact from the two hurricanes, the impact of the chemicals business along the Gulf Coast was most significant, back without hurricanes I think chemical business likely would have come in flat, compared to a year ago. The two groups that have done the strongest all year grew again this quarter.
Coal demand remains strong in a 38% increase in ethanol and DDG set the pace for our young products growth. During the quarter, we began to see whole grain volumes lose a little of theirs strength, were shipments down about 1%.
Most notable decline was in Gulf wheat exports, which were at 20% from last years record setting level. Going forward, we expect that world production ocean great spread, the shipping value was the dollar lower feeds of our life stock numbers and global economic problems are going to cause our grain shipments to fall back in 2008 strong market.
Maybe even to slightly below 2007. This morning I would like to take the closer look at our chemical intermodal and energy businesses.
Although, chemical volumes declined 6%, a 20% increase in average revenue car drove a 12% increase in revenues. The two charts on the left highlight the impact of hurricanes are, on the two largest segments of chemicals business plastics and liquid and dry chemicals.
The falloff in September comes from not only the disruption that occurs as the storms came through, but also the after maths is, we waited for commercial power to be restored and production to flow these are brought back online. Customer recovery from these storms are still not complete and we expect to lose probably as much as 2000 cars here in the fourth quarter, mostly in plastic where plants are not yet back in full production.
Beyond the clear impact of the hurricanes on September volumes both liquid and dry, and plastic are also starting to see some softening due to their ties to housing consumer markets and automotive business. And higher oil prices are impacting our (inaudible) and diesel volumes.
On a brighter note global demand for food continues to drive growth in fertilizer with our volume up 6%. Intermodal revenue grew 9% with a 19% improvement in average per unit, more than offsetting a 9% decline in volume.
As I indicated earlier, the decline in intermodal was driven by weakness in the international segment were a 14% drop in volume was only partially offset by the 2% growth in domestic. Significant portions of the international intermodal markets are tied to housing and automotive.
The economic conditions in those two industries along with reduced consumer spending have resulting in a decline throughout the year and imports from Asia. Also influencing the comparison for international is the evolving status of our legacy contract.
Last year favorable pricing in the remaining legacy deals in our international business actually attracted volume. Some of those deals have now then repriced in 2008, portions of that business have shifted off the Union Pacific and that’s pretty much consistent with our focus on improving pricing and returns, and we saw that reflected in the intermodal groups third quarter results.
On the domestic side, a contract loss going in to the year continues to impact our comparisons year-over-year. Offsetting that loss was a 29% increase in our EMP volumes with IMCs and some share gain from the highway.
We also saw volumes improved in our domestic legacy contracts. We had continued strong demand for coal a 3% increase in energy volume combine with a 24% in average revenue for coal to drive revenue up 28% over $1 billion.
Energy is the first of our commodity businesses to top that mark in the quarter. Coal moved at a record setting pace from the Southern Powder River Basin during the quarter.
Tried on the upper left highlights of the strong trains per day performance through out the quarter. Network productivity and efficiency translated in to the best ever quarter for trains, for carloads and tons, were tonnage at 7% from a year ago.
Unfortunately, difficult mining conditions and poor coal quality lead to a 7% decline in Colorado Utah tonnage. Network performance was lone bright spot for this segment as we said best ever tons to train.
We expect Colorado, Utah growth to be back in the plus side for fourth quarter, a comparison that’s going to benefit from last years relatively low tonnage. And we expect the full year for the segment to the up slightly from 2007.
For the Powder River Basin we still expect growth, again in the fourth quarter even against the last year’s record tonnage and resulting of the full outlook for the basin remains unchanged at 5%. Strong service performance continues to translate in the customer value, which in turn is leading to higher levels of customer satisfaction.
Customer satisfaction improved four points from year ago coming in at 83, which matches last quarter at the highest level, since early back in 1995. Now looking ahead for the rest of the year, it’s clear, but we are not going to see any improvement in the economy.
Strong demand for energy remains one of the key drivers of our growth opportunities. For our energy and our Ag products group that means continued growth in coal and ethanol, although the pace for both may slow some from third quarter levels.
Ag's going to benefit from the recent expansion of our railroads [ph] express service for perishables, a new train from California to New York, which is providing the same great service customers experience than the original Washington to New York train. However, as I mentioned earlier we expect grain volumes going to soften slightly from the very strong levels that we’ve seen so far through 2008 and with that Ag moves kind of down in to our mix demand drivers grouping.
With some softening of chemical segment that are tied to housing, our chemical business price up. Really depending on the expected strength in fertilizer and soda ash and how quickly customers can get back to full operations, as they recover from hurricanes.
Energy related demand for resin [ph], for pipe, for wind components is going to continue strong for our industrial products business, but steel have now fallen back to our normal levels, as projects and spending have slow our weakness in housing related markets continued. Domestic intermodal should continue, the kind of hold it’s on year-over-year.
International Intermodal will continue to run below last year and continued economic growth is going to keep our automotive volumes below a year ago levels as well. Put it all together, and we expect overall volume in the fourth quarter to be down, probably around 5% versus last year, which we’ve got the full year outlook at about down 3%.
Now again, some pretty strong comps, we expect volume run softer then down 5 through October, and November. And we are going to makeup some ground in December where we are hit by storms last year.
As in previous quarters car price improvement, fuel surcharge are going to drive revenue growth despite the volume shortfall. Based on what we are hearing from our customers and what the economic prognosticators tell us and recognizing, but there is still a lot of uncertainty out their in the economy.
That’s why we are currently thinking about 2009. Right now, it’s pretty hide to see that, much is going to change for the better in 2009.
Volumes are expected to be flat to down 2%. Any improvement in market conditions will looks like it’s going to be in the second half of the year.
And the second half should also look stronger, because comps were going to be lower quit obviously. Grain shipments likely are going to match 2008, a very strong demand and forecast projected vehicle sales and housing starts are going to decline slightly next year, from the already low levels.
In chemical and industrial products, the outlooks for commodities and the wheat construction markets are going to stay soft, while those markets that have been strong are expected to continue. Demand in all energy related markets is going to stay strong.
But we are going face some pretty tough comp comparisons to 2008 in our coal business. The cost and environmental advantages of rail are going to combined with our continued service improvements, it created additional opportunities for conversion high way traffic to rail across our business, especially in our domestic Intermodal business.
The anticipated weakness in imports were result in international Intermodal being slightly softer, but we still anticipate a peak season, which we was a no show this year, we thing that will reappear at least to some extent in 2009. As a result of our renegotiated legacy deals and built in escalators we have about 70% of our 2009 price plan will be in the market by the time the year start on January 1st, and with those pricing gains and improved fuel cost recovery, we expect to see solid revenue growth again in 2009.
With that, I am going to turn it over to Dennis for the operating results.
Dennis Duffy
Thank you, Jack, and good morning. The 2008 story lines for UP's the operating team continues to be improvement and resiliency.
As this start illustrates, we significantly increased network velocity year-to-date, despite a number of weather related disruptions. For the third quarter, we made steady velocity gains coming out of June 1st, only it to get knock back again in September with two Gulf Coast hurricanes.
Fortunately, our railroad do not sustain any major infrastructure damage from hurricanes the primary issue was the loss of commercial power needed to operate signals crossing gates and switches. But as you can see, we again quickly bounce back from the storms and our network is running very well.
In fact third quarter, velocity increased more than two-miles an hour over ’07 to 23.7 miles per hour. Year-to-date, the velocity is averaging more than 1-mile per hour faster at a 6% gain.
Beyond velocity gains our network management initiatives send it around the unified plan, flow control and strict inventory management are continuing to drive further productivity in service improvements. In the quarter, (inaudible) was a best ever 24.4 hours and system inventory at a little more than 300,000 cars improved 4% in the quarter.
Last time our inventory was at this level, was in March ’03 when we are averaging about 171,070 carloads versus nearly 185,000 in third quarter ’08. Another key driver is our continued effort to improved train productivity.
By making our transportation point and more volume variable. We continue to achieve train starts savings relative designed.
For the third quarter year-over-year, we reduced train starts by 5% and yard local starts by 4% on 3% lower gross ton-miles. These achievements are especially considering the impact of the hurricane, although turnout [ph] well.
Times in both Houston yards by to over 90 hours coming out of hurricane Ike that were back to near normal within the week. This demonstrate the resiliency of our network, it's also attribute to the coordinate of planning and preparedness of UP team in advance of the storm.
As the result we’re able to quickly restore rail services to our customers. Better-inventoried well and speed translates the better freight car utilization, which measures the number of days between the originated loads.
Year-over-year our utilization improved 6% to our record 9.2 days. Faster asset terms help both UP and our customers lower their equipment costs and long-term capital needs.
Better performance in our terminals and crossed our main lines has the added benefit of driving better free utilizations. Has shown in the top right and bottom left, we improve both our reaccrual rate and our overall labor productivity.
A one point reduction in the reaccrual rate saves us more than a 100 train and engine employees. Throughout 2008, we have reduced hiring levels and workforce as business levels had been somewhat below the expectation and asset productivity has improved.
The overall train crew workforce will be down about a 1,000 people year-end ’08 versus ’07. Both our crew and locomotive resources have provided us with ample search capacity, during this year is whether events.
We are translating greater efficiency, whether would be freight cars, crews, and train size into more reliable service product. We have told you earlier, that our customer satisfaction index at lower rate is a record levels.
These metric show good progress that we also have many opportunities ahead us to further increase productivity and enhanced our service. We expect to close out the fourth quarter with a same momentum and improvement we demonstrated today.
Specifically, solid safety improvements and network that is well resourced and resilience to deliver improving service, our capital programs are on target and delivering the anticipated benefits and achieving further service and productivity improvements. By managing our cost structure to more volume variable in the somewhat uncertain economy.
With that, let me turn it over to Rob for the financial review.
Rob Knight
Thanks, Dennis, and good morning. We start today with look at our income statement.
Third quarter operating revenue totaled $4.8 billion, up 16% versus 2007. Operating Expenses increased $445 million or 14%, primarily driven by a $349 million increase in third quarter fuel expense.
Also contributing to the higher expense was $66 million increase in other expense. If you recall, the last year we’ve reported a $47 million casualty expense reduction related to our semi-annual actuarial studies.
So, if you isolated the fuel and other lines ongoing operating expenses grew about $49 million or 2%. Strong revenue growth in ongoing efficiency gains combined to produce third quarter operating income of $1.2 billion, a 21% increase.
UP produced very strong quarterly results, especially when you factor in the impact of the Gulf Coast hurricane. Lost revenue and higher cost related to the hurricanes took roughly $0.08 per share out of our third quarter earnings.
Revenue losses coming out the hurricanes with somewhat less than what we had anticipated saving us about $0.02 per share versus our September guidance. Looking at third quarter freight revenue, we’ve reported 16% growth the $4.6 billion.
Although, our carload volumes decline 5% year-over-year increased fuel cost recoveries and strong pricing gains more than overcame the deficit. Driven by record high diesel fuel prices fuel cost recoveries were the biggest contributed to the quarterly growth.
In addition, we are improving returns on each piece of our business at evidence by approximately 6.5% core pricing gains in the quarter. The mix of the business was also factor, adding about five points of growth to the average revenue per car.
Increased agricultural loadings, which carry our highest arc, coupled with fewer intermodal moves, which have our lower arc were the primary contributor. Turning to slide 21, compensation and benefit expense grow 3% in the quarter for $1.1 billion.
As we discussed in our second quarter earnings call, cost in this line were pressured by the 4% wage increase that became effected for our Union employees on July 1st. There were also added costs in the quarter related to post retirement benefits.
And as you may recall, last year’s third quarter expense including favorable one time adjustments associated with the structure of labor contract ratifications as well as our long-term visibility plan. Offsetting some of these headwinds our ongoing efficiency efforts related to both field and office personal.
Greater labor productivity is evidenced by 1% gain in gross ton-miles moved for employee. In addition as you heard from Dennis, fewer train starts and lower reaccrual rates are helping to further reduced our true needs as volume demand stay soft.
Altogether comp and benefit expense is usually a couple of points higher sequentially in the fourth quarter, we expect to somewhat smaller increase this quarter. Turning it now to fuel expense.
Total cost increased 44% in the quarter to $1.1 billion. The good news is extends since peaking in July prices have moderated, averaging $3.70 per gallon for the quarter.
This saved us nearly $0.10 share from our estimated third quarter fuel price up $4 per gallon. The bad news is we still paid a $1.38 per gallon more year-over-year for a 59% increase in our cost per gallon.
And although, we did see some catch up on our fuel recovery lag, we basically drove even for the quarter, when you compare the increase in fuel prices overall benchmark rate for the actual recoveries. As we look out the fourth quarter, we are assuming on average diesel fuel price of around $2.95 per gallon are so.
If that estimate holds, we would be paying $0.33 per gallon more than we did a year ago for a 13% increase. Because we do not have 100% cost recovery, higher year-over-year fuel prices are cost hurtle for us.
But as a result of the two months lag in most our programs; we could actually experience in earnings fuel win, if diesel fuel prices stay at the current levels. Purchase services and material expense will basically flat in the quarter up only $2 million.
Clean up cost associated with the Gulf Coast hurricanes increased expenses $11 million in the quarter. In addition increased usage and prices for freight car wheel set add $7 million of expense.
Offsetting in these items, were proceeds from rail scrap and reduced locomotive contract manner. Equipments and other rents expense declined 5% in the quarter of $326 million.
Increased asset utilization illustrated by records freight car utilization as well as fewer shipments of finished vehicles, and Intermodal containers, all contributed to the year-over-year decline. In addition, we have a less volume demand and faster asset turns we have returned access leased equipment.
As I mentioned earlier, other expense increased $66 million in the quarter, primarily as the result of $47 million unfavorable comparison. We also had higher cost for property damage state and local taxes and utility costs.
Our third quarter operating ratio of 74.9% is the lowest quarterly ratio we have recorded post merger. Over the last three years, we have taken more than 11 point half of our operating ratio.
As we have discussed before, UP is driving this improvement through both yield gains and productivity. When we talk about yield, it accomplishes both our strong pricing gains as well as the continued expansion of our fuel surcharge programs across all of our businesses.
As legacy contracts renew, we have a combined opportunity of increasing prices through a market rate, as well as adding adequate fuel cost recovery mechanisms. On the productivity side, we must first provide safe transportation product.
But beyond that the efforts of project operating ratio have focus the entire organization on increasing efficiency and eliminating waste. Coming into the third quarter, we knew we had a tough comparison against last year.
So making this next step of improvement gives us great conviction and our ability to drive greater profitability in the future. Moving on the full income statement, third quarter other income was $2 million lower year-over-year, primarily as a result of lower gains from real estate sales.
Year-to-date other income totaled $67 million, making it likely that full year other income would be roughly $90 to $100 million. Quarterly interest expense increased $6 million to $130 million, driven by higher average debt levels in 2008.
Income tax expense increased $31 million in the quarter or 8%. Although, our taxes are higher year-over-year, the effected tax rate is nearly 5 points lower.
Last year our effected tax rate was higher at 41.3% as a result of new tax legislation in the state of Illinois. Our 2008 rate of 36.6% was slightly lower than the expected as result of federal tax audits and state tax law changes, adding $0.03 to our third quarter earnings.
For the fourth quarter, we are planning on a quarterly tax rate of roughly 38%. Net income was a quarterly best $703 million, up 32%.
Earnings per share increased 38% to a $1.38 per share. As a result of our ongoing share repurchase program UP's outstanding share balance declined 4% in the quarter.
This repurchase activity is allowing our earnings growth to outface the rate of net income increases delivering more value to our shareholders. As we approach the end of the year, I’ll give you a quick update on our capital spending.
At this point, we think total capital could be slightly more than $3.1 billion. Adding capital cost as a result of the Oregon mudslide and Midwest flooding were likely push us over the original $3.1 billion capital plan.
Assuming that all of other schedule capital work is completed as plan. In terms of the split between cash, capital and leasing, leased financing is somewhat lower this year at $353 million, primarily as a result of few equipment acquisitions.
During the third quarter we repurchased 5.9 million shares of Union Pacific common stock, returning nearly $445 million in cash to shareholders. Since inception in January of last year, we’ve repurchased almost $2.8 billion worth of stock.
Although we completed the initial 40 million share authorization during the third quarter, we have the new 40 million share authorization that was granted by our board in May. Our repurchase program gives us an opportunity, take advantage of today’s low share price, but of course will balanced this with all other corporations cash need to make sure that we continued to have solid liquidity, especially in light of today’s uncertain credit environments.
In fact, let me spend a next few minutes talking about UP's current debt levels and our liquidity position. Slide 29 illustrate UP's adjusted debt balances at the end of September totaling $12.7 billion or 44.7% adjusted debt to capital ratio.
This is inline with our targeted mid 40s, debt to cap ratio and is consistent with our continued commitment to maintaining a solid BBB, BAA2 investment grade quarter rating. Since the end of September, we issued an additional $750 million of 10-year notes, which adds to that debt balance.
We then have $500 in debt maturities rolling off within the next four months. Between the proceeds from the recent issuance and the cash already on our books, our liquidity remains strong.
We won’t either additional equipment financing this year, as our program is already completed. So we continued to be well positioned to meet key cash need.
And finally our liquidity position is enhanced by a $1.9 billion credit facility. We have not drawn on this facility and we have no plans to grow on it.
But we’re glad to have it as an emergency backstop in these volatile times. Looking out to our fourth quarter expectations, it will again comedown to our business volumes and diesel fuel prices.
As has been the cash all year, these two drivers are really the swing factors in the quarter. As Jack discussed our fourth quarter volume expectations are for about a 5% decline.
Quarterly volumes are currently running a little softer and we expect to see continued downward buyers in November against strong 2007 loadings. But the month of December has an easier comparison, as a result last years winter storms.
I mentioned earlier that our outlook calls for diesel fuel prices to average $2.95 per gallon for the quarter, which is still in oil at $80 or so per barrel the rest of the year. Refining spreads are at historic highs following some of Gulf disruptions.
So, we are not seeing the full benefit of our diesel fuel prices from the lower crude oil. We continued to see volatility in the crude oil market as investors speculate about the state of the global economy.
But at the downward trend we have seen over the last couple of months continues that could provide an upside opportunity for earnings. Conversely, a fuel prices spike as we did last year; it was clearly pressure the low end of our earnings estimate.
We also expect to continue the productivity momentum, we have demonstrated throughout 2008. In a challenging marketplace we have to be cost comparative and we are working daily to align our operating expenses with the business demand.
Given these expectations fourth quarter earnings should be in the range of a $1.25 to $1.35 per share or growth of 34% to 45%. With this, we are raising our full year 2008 expectations of $4.50 to $4.60 per share or year-over-year growth of 30% to 33%.
Union Pacific is demonstrating substantial earnings power in the phase of economic softness and high fuel prices. And we look forward to closing out record year for our company.
With that, I will turn it back over to Jim.
Jim Young
Thanks, Rob. Before, we open it up for your questions; I’d like to share our initial jobs in 2009.
At this point, it’s clear the business demand will remain soft. Our volume outlook flat to down 2% assumes a pretty weak first half of 2009 with some strengthening in the second half.
Legacy contract renewals provide support to our core pricing plans, which remains steady at 5% to 6% for 2009. Our productivity opportunities are ongoing, we will continue to balance our network resource with the business demands driving increased efficiency and service reliability.
And as Rob discussed, our liquidity in balance sheet are in good shape. At this point, despite a tough economic environment, we expect to achieve low double-digit earnings growth in 2009.
Of course, there are number of moving parts that will continue to play out over the next several months, but early read on the year is still positive. Our commitment to our employees, customers and shareholders is operate a safe, efficient and profitable railroad regardless of the economic environment.
So, with that let's open it up for your questions.
Operator
(Operator instructions) Our first question is from Tom Wadewitz with JP Morgan. Please proceed with your question.
Tom Wadewitz – JP Morgan
Hi. Yeah.
Good morning. Jim and Rob, I just jumped over from the UPS had their call going on, so I apologize, if I’m going to ask you something, you’ve talked about in detail.
The forecast you guys going forward, it is lot of resiliency to the business despite some weakness in the economy. But, what do you think, I guess the room for prices in that forecast, but who is the drivers of price in that forecast, either to the upside or to the downside?
I mean, you think pricing can come in may be better than you’re expecting in the five to six and do you feel like that the volume side, may be on the downside, it is pretty conservative with that due to 2% or is there some risk that might be worse than that range?
Jim Young
Yeah. Tom, the wildcard here really is consumer and where and what happens in the economy.
As we stated here not assuming real strong year, and will manage accordingly. I think we are going to be very cautious in terms of what we look out and our spending and we’re going to be very aggressive in our operating productivity.
We have mitigated fuel here with our fuel surcharge program, but we’re still not recovering 100%. So, you see a continued falloff in fuel, you might have a little bit of upside there.
But I just talk, we are going in to end of year with that pretty uncertain, we are going to really watch our cost and be prepared, if we see little uptick to get it to the bottom line.
Tom Wadewitz – JP Morgan
You productivity trend has been very impressive and it seems like perhaps even if you worse in 2% volume, even if you are down 4% or so. You might be able to getting in to the earnings range you are talking about is that.
Is it fair to think that, may be you have some upside from productivity to offset it, if volumes did come a little worse than you are expecting?
Jim Young
Well, Tom, again I feel good about our productivity. We have got, as Dennis mention, we are still – even we had – with the quarter we had, we are still reaccrue over 7% of our trains, that’s good opportunity and again.
The question will became one on, if you have more series falloff in volume demand, what is that mean for fuel prices, I mean they generally correlate each other, so you could have some upside there. We also have – I think, something a little bit different – we seen in prior years, which is our attrition.
Historically, when you had a short falloff in volume, in other way you took labor cost out of lot cases was to do or buyer program. Even with the slowing economy we are still have a good attrition, which will take advantage, if our volume falls.
Tom Wadewitz – JP Morgan
Okay. And the last one, I will pass on, you had very strong focus on return and I think, a lot of discipline on taking rates up, you got the legacy contracts.
Are you seeing anything at all from your primary competitor if that would indicate a little increased focus on getting some volume in the weakness, or do you think that the competitive dynamic is still pretty similar to what it’s been over the last year or two years even though the volume (inaudible) of more challenging?
Jim Young
Tom, I have to concentrate on new specific here. We are very focused in understanding where our returns are, the markets we should playing in, and we’re offering good service, we are going to keep the pressure on our attainment terms of making certain minimum returns, I don’t we look at our business, we could lose that.
We’d loss some and off both in terms of business that didn’t meet our return expectations, but we’re going to be focused right on our business and it continued to increase the return to capital.
Tom Wadewitz – JP Morgan
Okay. Great, well congratulations on this strong results, they are very impressive.
Jim Young
Thanks, Tom.
Operator
Our next question is comes from the line of Adam Lawson of Morgan Stanley. Please ahead with your questions.
Adam Lawson – Morgan Stanley
Hi, gentlemen. Thanks.
Jim Young
Good morning.
Adam Lawson – Morgan Stanley
When I look at the productive trends, I understand it was hurricane in the quarter, but outside of fuel, it looks like the unit costs performance on a GTM basis was not nearly as good as see in the past few quarters here. It looks like if you adjust for some of the onetime item that was probably a little over 4% versus flat over the previous year's quarters.
Are just more of a normally or is it, how do we think about that, how the productivity gains becoming harder to obtain?
Jim Young
As you lose volume, Adam, you're not going to match the 100% in terms of unit costs. I assume you're taking fuel out of that equation?
Adam Lawson – Morgan Stanley
Right.
Jim Young
That's in here. I would also take a look at what's happening with unit cost in the revenue ton-mile basis.
You actually revenue ton-miles were up 1%. You get a little bit better look out there.
But again, in our business, if you have a sharp falloff in volume, you're going to have little pressure in unit costs. I will keep this in mind though.
We still see good productivity opportunities going forward next year, and we will manage our cost as accordingly as we see volume. It's just tough to get them out quickly when you see a sharp falloff.
Adam Lawson – Morgan Stanley
Fair enough. And in terms of the mix impacted, it seemed like it was pretty big in the quarter.
And I know some of that is just the commodity mix, but it seemed like there was some ton mile whether it was willing to fall or tons per car that really were a big benefit, too. Can you give us any sense of whether that's just because of the hurricane or can some of that continue going forward?
Jim Young
I'll let Jack answer that one.
Jack Koraleski
I think when you look at it overall, you'll see that with our intermodal businesses was being soft when you see the bulk businesses increasing, when you see what, the export business and things like that you can see that shift kind of manifesting itself into a very favorable mix in the quarter. I think the fourth quarter, our grain business is going to be a little softer here, because of the shifts in some of our wheat and things like that across the country, but coal's going to continue to be strong.
Steel's kind of softening up a little bit, so you may see that mix impact decline a little bit. You won't see quite as pronounced as what we saw in the third quarter.
Adam Lawson – Morgan Stanley
Just last one and then I'll back it on here. In terms of CapEx for 2009, it seems like, I mean, clearly everybody's worried about volume trends.
I think, Jim, you sort of hinted at it. Is there any thought about, hey, maybe we pulled back some of the growth here, we got permitting issues anyway like but things like double tracking the sunset quarter.
Does that make sense in this kind of environment?
Jim Young
We're going to take a hard look at our capital. What we need to make certain we do here is not lose sight of the long-term opportunities, which I absolutely over there.
We'll take a hard look at it. Where we see maybe the slope of the line on growth isn't as strong here in the next several years, we will take a hard look at it.
I do have a minimum commitment here on locomotives. I got the last year of a three-year program, I got a one-year commitment on locomotives, 125 locomotives that quite honestly right now I don't need.
But part of that's our velocity that we’re generating here, but we going to take a hard look at capital for '09
Adam Lawson – Morgan Stanley
Thanks a lot. Nice quarter, guys.
Jim Young
Thanks.
Operator
Our next question is coming from Edward Wolfe with Wolfe Research. Please go ahead with your question, sir.
Edward Wolfe – Wolfe Research
Thanks. Good morning.
Jim Young
Good morning, Ed.
Edward Wolfe – Wolfe Research
Can you talk a little bit about the visibility into the legacy contracts? I know, you talked about what's coming up in '09.
Is there some visibility or some that you just have pretty far apart and you have confidence that are going to go away that have a profitability standpoint it helps, but that's in your volume? Or what you see pretty much, there's nothing that's obviously not going to be resigned in '09 as it comes up?
Jim Young
Jack?
Jack Koraleski
You know, Ed, most of our legacy deals of '09 are done. We have probably no more than 2% coming up in the year itself before year-end, and the majority of that is going to be coal business.
We have lost some business, and the reason we've lost it, because in the old deals that we've done, we did winner take off, and we ended up with some business that quite honestly don’t fit our franchise very well. So we've lost some of that, but we're fine with the legacy deals that we've renegotiated money they're lot being place.
We saw the pricing, we got fuel recovery, we've got good escalations and we're feeling quite positive about our legacy business.
Edward Wolfe – Wolfe Research
Thank you. If I'm repeating something, again, like Tom said, I was on UPS.
A little bit, I apologize. Can you talk about coal expectations?
I saw what you talked about Colorado and Utah. Can you talk about the PRB and your sense of demand for coal going into '09 as well as your sense for the little amount of export coal that you're doing?
Jim Young
Let start with PRB, right now we see demand still continuing to be quite strong. We're encouraged by inquiries and test moves going to the east.
We're also very excited. We had the head of our coal team out in Prague at the coal Trans conference.
The developing world of looking for opportunities for Powder River Basin coal and places like Japan where they don't want to be totally tied to Australia, and then some of those other places. Indonesian coal has the same kind of burn characteristics, so those are other markets.
So we’re pretty pumped about the export side of the business. Domestically right now, our customer base is about where they want to be in terms of where they are for the year.
They're not really over supply. We have a couple that probably have too much where we also have couple of very large input to take all of the coal we can get them.
So in terms of the overall our knowledge of stock files and working with customers, we’re in pretty good step there. And we think it's going to play itself in the 2009 as well.
As I said, we did have a couple of losses from this year just in terms of the fact that our franchise is probably as good as the other folks are. That'll play itself out will be fine.
The disappointment for us with Colorado, Utah, we went into the year, thinking Colorado Utah would be a plus 4% or 5% kind of an idea as the export demand heated up. But they've run into really tough mining conditions.
They're working really hard to say that. So I think we'll probably be leading more in the 2% or 2.5% kind of world for that export.
Business out of Colorado Utah, That's also very strong demand. That's that 11,000, 12,000 btu kind of coal that Japanese steel makers and things like that would be happy to have a source.
So we're working with the mines and doing everything we can to help support them in terms of delivering that coal to market. We think outlook for coal’s very strong we think it’s going to continue next year as well.
Edward Wolfe – Wolfe Research
In the zero to negatives to total volumes, what's the total coal prognosis? I'm guessing it's above that?
Jim Young
We think coal's going to be relatively flat year over year.
Edward Wolfe – Wolfe Research
Can you talk a little bit about I think it was Jim in your general comment where's you talked about you expect for '09 that there'll be some strengthening in the second half. What’s that based on?
Is that just hope more than anything at these points?
Jim Young
Well, we always have had some hope, I guess. At the end of the day here, we're not expecting a real strong recovery.
This is going to be a sharp job. We just believe you get towards that latter part of the year.
We'll probably see a little bit of an uptick. So don't read into that that is a strong recovery.
You also have cycle and comps. I'm not certain how much lower our lender and construction business can get, it's down almost I think from the peak probably 60%.
You look at your autos, finished vehicle business, were down 25% this quarter. Running an annual vehicle sales rate.
I think is around $11 million or $12 million that out there. So again, don't think of it as a sharp uptick, we're just simply looking at probably some uptick.
Edward Wolfe – Wolfe Research
Fair enough. There is buyback slow down in your mind at some point?
If the credit market uncertainties continue or are you pretty comfortable with the pace you're on?
Jim Young
I’m very comfortable where at. Again, our liquidity positions in good shape, we had access to the capital markets.
A little bit higher cost than what we wanted in terms of what we're paying, but the business is generating good cash. We've got flexibility, terms of our capital spend next year, but you know with the stock sitting at $57 a share, we're going to continue to buy stock.
Edward Wolfe – Wolfe Research
The real safety act now that we know what the beast looks like, have you had a chance to look at, you know, between positive bank control, reduced limbo training, where do you think are the areas that are going to impact you? Are there offsets in product?
How do you think about these costs going forward?
Jim Young
Dennis, you want to take that one?
Dennis Duffy
Yeah, Ed. We don't think there's going be a major impact to us on the real safety bill.
The limbo time issue is one that will have to continue to work with the organizations on, maybe possibly restructure some of our crew districts. That's not going to be a major impact to us.
Obviously, the puts thing is going to be a challenge to us. The funding on that is gone nab critical.
We'll take a very measured approach to that in terms of priority. We have our two pilots already in place that will be running to fruition in '09.
One of them up in the coalfield, the other one's up in Washington in dark territory. So that's going to help us really get a good gauge on the benefits here.
We think there's benefits to be derisive from the fuel standpoint. Additional capacity and certainly safety.
We'll look at the labor situation sometime in the future. Bottom line on rail safety, we're going have to learn the interpretations for sure.
We're all about doing that right as we speak. We don't see a major impact at this point.
Edward Wolfe – Wolfe Research
Thanks a lot for the time, everybody. That's helpful.
Operator
Our next question is coming from the line John Barnes of Boston Company. Please go ahead with your questions.
John Barnes – Boston Company
Good morning, gentlemen.
Jim Young
Good morning, John.
John Barnes – Boston Company
You guys have made impressive moves there with volumes down 5%, fuel consumption down nearly 10. I was wondering if you could tell us when's going on there and when's driving that?
Jim Young
We have a multifaceted approach. We talked a lot about fuel.
It's not just a new phenomenon. Fist off, we'll start off with we have employee recognition program called fuel masters which are professional engineers gauge themselves against a golden run in our recognized commensurate league.
It's been very successful. Our engineers have really internalized the challenge of fuel consumption and have really helped us realize some of those savings.
We have a fuel conservation speed that we put in, the optimum speed that we allow our trains to run at. We take advantage of gravity where we can.
Again, the engineers have been very significant with that. We put a maximum speed out there, 50 miles per hour.
Our contribute processing, technology has been very influential. We think there's about 4 to 6% btu trains on a fuel consumption savings.
Then raising the percent of our ton-miles from about 30% up to over 55% now that our handle with DPU. We're gone ma continue that trend into '09.
Obviously, our shutdown policies that's system wide all crafts and we've been successful in driving it there. So I would say a good use of technology, our new locomotives, the age of our fleet operating practices of our engineers have been the key drivers in the fuel conservation.
John Barnes – Boston Company
Keep up the good work.
Dennis Duffy
If I could just add one other comment to that. That is the mix affecting the third quarter certainly benefited us as well.
John Barnes – Boston Company
Thank you.
Operator
Our next question is coming from the line of Ken Hoexter of Merrill Lynch.
Ken Hoexter – Merrill Lynch
Thank you. Can you quantify the third quarter?
Jim Young
Rob?
Rob Knight
You don’t, because we're not recovering 100% of fuel, higher fuel prices still are a negative on us, but it's – there was a slight – you know, basically if you look quarter over quarter, we recovered. The lag effect helped us out where it was about a push.
The cots versus the recoveries in the quarter alone were about a push.
Ken Hoexter – Merrill Lynch
Jim, you mentioned that 70% of your pricing is locked, and then I think jack threw in all of the contracts were pretty much locked in for '09. So I just wanted to dig into I presume then the 30% that was left is the stuff that renews annually like grain.
What would be your expectation for the remaining portion? Do you think you see pressure if we get a little on the volume side?
Jim Young
You know, Ken, the market's going to determine how effectively we can be on the price side. We're going to have some of those markets that we will do very well in pricing.
We'll have some other places like in the lumber world and places like that where it'll be a little bit tougher, but we're still thinking overall it's going to average out into that 5 to 6% range.
Ken Hoexter – Merrill Lynch
Okay. And then on the grain, the Ag market, you know, looking at the articles we've seen obviously hitting how farmers are pulling back on some plantings.
Just wanted to get your outlook from what you're hearing from your customers.
Jim Young
Well, you know, we're in a position right now if you look at our fourth quarter year-over-year, the big difference is going to be export wheat. We had a great program last year and the United States wheat crop was excellent and others were soft.
This year, the Baltics, Eastern European, Australia all had solid wheat programs. Harvests were good.
That's going to get softer for us. The other thing we're seeing right now in our grain markets is because of the high feed prices, there's been a reduction in the head count – oh, the head count in the animal count for things like poultry and cattle.
That is impacted to some extent as well. I think it's still early to say what the total market outlook for next year.
We're thinking we could be down a little bit from our record setting pace here in 2008. We don't expect it to be a heck of a lot.
There's always the upside that crop conditions around the world, what happens with the value of the dollar, those kinds of things could turn that around and turn it into a positive for us. So we're just watching carefully.
We're going to have the capability to move it, and we think ethanol's going to continue to do well for us. We had a couple more plants come online.
We think that'll be some upside for us. We think it'll be okay.
Ken Hoexter – Merrill Lynch
Rob, I take it from the shift of guidance for the near term there's nothing you're changing on your 2012 targets at this point, there?
Rob Knight
That is correct.
Ken Hoexter – Merrill Lynch
Great. Thanks for the time.
Operator
Our next question will be coming from the line of David Feinberg of Goldman Sachs. Please go ahead with your questions.
David Feinberg – Goldman Sachs
Good morning.
Jim Young
Good morning, Dave.
David Feinberg – Goldman Sachs
I just wanted to confirm, I think you address this earlier. Quick question in terms of your legacy contracts.
One of your previous slides from the previous quarter. It's 3% of your legacy contracts that are set to reprice in '09, that correct?
Rob Knight
You know, Dave, where I am right now, I still have 2% to go in '09.
David Feinberg – Goldman Sachs
Okay. And then trying to understand the $750 million debt issuance from a few weeks ago.
Was the goal of that to take care of your own financing needs? It struck us a little interesting that you were in the market during such a tumultuous time?
Jim Young
No. It wasn't to take care of our '09 needs.
David Feinberg – Goldman Sachs
And at this point, based on the slides that we saw, it looks like you as you highlight it, you have substantial liquidity on hand. To feed all of your debt maturities through '09, correct?
Rob Knight
Yes. Assuming we meet our plan.
One of the things we do have is about a $250 million term on debt due early February time frame. So we're well position for that at this point in time.
Jim Young
We're in good shape, Dave.
David Feinberg – Goldman Sachs
Maybe one last question following up on I think it's Ed's question on share repurchase, is there a stated plan in terms of how much free cash flow or how much of the operations you plan to return to shareholders through a combination of the dividend and share repurchase program or is it more based on quarter by quarter-by-quarter assessment over the stock prices?
Rob Knight
We're opportunistic and we haven't given a number on that. So we take advantage of the opportunities.
David Feinberg – Goldman Sachs
Thank you very much.
Operator
Our next question is coming from the line of (inaudible). Please proceed with your questions.
Unidentified Analyst
Good morning. How's your pension funding doing?
Jim Young
Rob?
Rob Knight
We do not have a requirement to fund our pension plans, so we're in good shape there, but of course like all other pensions, we felt the impact of the market. So we'll take a look at it at year-end and if there's a need to put additional cash into the fund, we'll take a look at that.
Unidentified Analyst
Do you have any sense where that would be a significant requirement?
Rob Knight
No significant requirements. Running down about 15% right now.
Maybe that's 100 million or so. We'll take a look at what the needs are.
At end the question.
Jim Young
We've been putting cash in over the last several years and it's pretty healthy.
Unidentified Analyst
It is pretty healthy. Fantastic.
Regarding domestic intermodal that has shown amazing resiliency. What’s driving that?
Jim Young
A lot of that it S. a great service.
I think our intermodal customers are looking at the performance of our key intermodal lane and particular some of the lanes our new partnership with the Shreveport Gateway. They're seeing trucking because of highway congestion.
Our EMP box fleet is being a real opportunity for us. We're working hard to within their confidence and business.
It's going quite well.
Unidentified Analyst
I would expect that as the economy weakens a domestic intermodal might be going down. On the other hand, you might be winning business from trucking.
Do you have a sense for the pitfalls of one stringing than the other?
Jim Young
I think it's good service and winning business from the highway that's going to carry the day for us.
Unidentified Analyst
So you would expect that intermodal domestics would still be coming ahead in spite of a weakening economy?
Jim Young
I do.
Unidentified Analyst
And lastly, for the coal, you mentioned that you were expecting flat year – is that flat growth for '09 on coal or is that the fourth quarter?
Jim Young
I think there's a chance it's going to be flat growth for '09 and we will completely offset any volume loss that we had from those legacy deal conversions that I talked about earlier.
Unidentified Analyst
All right. Okay.
Those were the questions. Thank you very much.
Operator
Our next question will be coming from the line of Randy Cousins of BMO Capital Markets. Please proceed with your question.
Randy Cousins – BMO Capital Markets
Good morning.
Jim Young
Good morning, Randy.
Randy Cousins – BMO Capital Markets
In terms of your guidance for the fourth quarter, you obviously talked about car loadings and I think to some extent, jack, you answered the question. If car loadings are going to be down 5%, it looks like the length of your haul has increased over the course of the year.
If we're down 5 in car loads, request we have flat RTM.s?
Jim Young
You know, Randy, quite honestly, I think the relationship you saw in third quarter it will not hold where you had 5% reduction in carloads, 1% increase in Reeve knew 10 miles. I don't expect revenue ton-miles to be down at the same leave as carloads.
Again, your automotive business is not going to recover. Intermodal business will be weak.
On the other side, our coal business still should continue to be strong. There won't be one for one, but you'll still have revenue ton-miles will not be off the same effect as carloads.
Randy Cousins – BMO Capital Markets
In a somewhat related question, the GTMs were down three but the RTMs were up. Are you getting more back haul business?
What is happening there that the total work goes down but the revenue work goes up?
Jim Young
You know, Randy, I think, it's mix when you look at it.
Randy Cousins – BMO Capital Markets
Okay. Could you guys comment on you've got a strong Mexican franchise, what's happening with your Mexican business?
Is it growing, it strengthening? What's happening there?
Jim Young
Mexico in the third quarter was down a little bit in volume, 5 to 7% and revenues were up around 16, 17%, and it kind of follows the path of the rest of our business, you know, certainly our automotive franchise, our largest franchise in Mexico and of course with the automotive suffering. That's the primary reason fort downturn.
Still had solid grain movements to and from Mexico. We think that will continue and that's how it's going to play out.
Randy Cousins – BMO Capital Markets
Last question, there's been a run-up on the US dollar. Do you guys see the change in exchange rate impacting your business in any way, shape, or form?
Particularly the chemical business.
Jim Young
Long term it will have an impact. Our exports in second quarter are up about 4%, 5% in exports this quarter were down.
I think 5% or 6%, 7%, something like that. I don't think the short-term fluctuation will show up.
Long term obviously it will have some impact.
Randy Cousins – BMO Capital Markets
Thanks a lot. That's it.
Jim Young
Okay, Randy.
Operator
Our next question will be coming from the line of Gary Chase with Barclays. Please proceed with your questions, sir.
Brandon Oklanski – Barclays
Good morning, this is actually Brandon Oklanski. I'll keep this brief, but could you give us any idea of how much mix really impacted the fuel consumption?
On the GTM basis, it looked like you got significant gains in fuel efficiency.
Jim Young
You know, Brad, I don't – it's not quite clear to me. Again, the trend has been pretty consistent for several quarters.
This wasn't a one-quarter kind of aberration when you look at the improvement that's out here. And a lot of the things Dennis mentioned on technology, the incentives are driving, including new locomotives.
Again, when you look at a new locomotive today, compared to what we retire, there's a substantial improvement in fuel consumption.
Brandon Oklanski – Barclays
Does this have anything to do with maybe the mix of a lot less intermodal on a GTM basis?
Jim Young
Absolutely. No question about it.
It's not clear to me. I think it's not a huge impact in the mix or the mix impact doesn't have a huge impact on the consumption rate but it's clearly there.
Brandon Oklanski – Barclays
Okay. And then I guess looking at your 4q guidance, I know you mentioned that the lag impact was essentially flat for 3q but with fuel sitting here today at about 67, 68, you know, we're modeling a pretty significant gain just in the lag impact.
Any way you can give us an idea what that could be in the fourth quarter?
Jim Young
Rob?
Rob Knight
Again, if fuel goes down, that lag would benefit us. If it spikes back up like we saw last year it could hurt us.
If I gave the guidance of $2.95 for the quarter, if fuel stayed where it is today that might give us a positive of I'll say a nickel. That gives you relative spread on that.
Brandon Oklanski – Barclays
I'm sorry if you guys have already mentioned this, but do you have – have you given us an idea of how much business is actually rolling over in 2009?
Rob Knight
We haven't.
Brandon Oklanski – Barclays
What does that mean, rolling over? How much business are you recontracting in '09?
Jim Young
As I look at my contract base, we got about 45% to 50% of our business tied up in long-term, 25% or so in one-year deals and 30% in tariff and so the long-term contracts are fairly much done for the year in 2009. Those will take effect January 1st for the most part.
Those are all completed. Many of the one-year deals are completed at this point as they were in the third and fourth quarter kinds of negotiations here.
Though my contractual business is pretty well locked in place for ’09 right now. Again I have about 2% of legacy that will expire between January 1 and December 31 of ’09, most of that at the end of the year.
Unidentified Company Speaker
Okay. And then on the business, that isn't rolling over so the contracts that are staying in place from '08 to '09, what types of escalation factors can we expect or are built into those contracts right now?
Jim Young
It's everything from the RCAP to the RCAP without fuel, with fuel surcharge on the ones that we have renegotiated with the new ones, and then a variety of them have fixed percentages.
Unidentified Company Speaker
Okay. Thanks a lot, gentlemen.
Jim Young
Thanks.
Operator
Thank you. Our next question is coming from the line of John Larkin with Stifel Nicolaus.
Please proceed with your question.
John Larkin – Stifel Nicolaus
Good morning, gentlemen.
Jim Young
Good morning, John.
John Larkin – Stifel Nicolaus
I had a question about EMP program in your domestic intermodal operation, looks like that really grew pretty dramatically during the quarter. I think you shot up to 29%.
What is the state of that fleet? Are you upgrading it, expanding it, reducing it?
You know it's quite interesting you have a fairly different strategy than brand x has with regard to your own container equipment.
Jim Young
In our EMP fleet we consider that to be a real opportunity working with the IMC community particularly the non asset owners. That's where we're targeting that market.
If you look at our fleet today I think going into the year we had like 19,000 containers, hopefully by the end of the year, we’ll probably exit at around 21,000 – 21,500, something like that with a few retirements in and out. It's a great product offering particularly now with the domestic service that our operating team has provided.
It's catching on a lot in terms of people taking a look at it and comparing that with truck and other options that they have. And we continue to think it's going to be a great market opportunity for us.
John Larkin – Stifel Nicolaus
So you're actually adding, what, 2,000 boxes to the fleet over what time period?
Jim Young
This year, I think what we did is we probably added 3,500 and took out, you know, 1,500 retirements, I think, is how since we ended up buying 53 footers and retired some 48 footers.
John Larkin – Stifel Nicolaus
Do you own the chassis as well?
Jim Young
Yes, we do.
John Larkin – Stifel Nicolaus
All right, and the IMC is responsible for ranging the drayage, is that correct?
Jim Young
You know, we can work both ways with them. We can offer to take that on and provide door to door service and they become just a sales agent for us.
We’ll just do ramp to ramp and allow them to do however they would like to deal with the direct door-to-door ramp to door thing performance.
John Larkin – Stifel Nicolaus
Okay. And the growth in that business didn't seem to have much of a negative impact, excuse me, on the so-called legacy domestic intermodal business.
Is that looking to grow also?
Jim Young
Legacy intermodal business, domestic intermodal business also grow as well.
John Larkin – Stifel Nicolaus
Interesting, okay. To the extent there's still an efficiency gap between what I'll call the old S.P.
and the old Union Pacific, how many more years of capital expenditure and hard work will it take before that gap is completely close to where you'd like to see it?
Jim Young
We've made a good progress in terms of getting that property in better shape. There's still a few years left out here when you look at some of the areas, but again, you can improve your velocity as we have seen in the overall network without having all of your properties starting to move up.
And we still have some opportunities. We are looking at them, but again our long-term guidance we said in a low 70s operating ratio and the kind of financials, that'll be part of that equation long term.
John Larkin – Stifel Nicolaus
If it takes say another two or three years to get that gap completely closed the way you would like to see it ultimately, does that imply that at the conclusion of that process that perhaps your CapEx may drop down a little bit relative to, say, revenue?
Jim Young
It would when you look at it. Again, there's a certain amount of catch up that's in here.
I don't see anything substantial when you look at it. Part of it, again, you have to separate maintenance, property that wasn't maintained to expansion and a good example is double tracking the sunset corridor.
Obviously we would have liked to have that double tracked several years ago but that’s not going.
John Larkin – Stifel Nicolaus
There might be some small amount of incremental free cash flow to apply to share repurchases and increased dividends and that sort of thing. Then one last question regarding the grain business.
There's been a big drop in the drive off rates here over the last couple of months. Has that shifted any traffic from the T.M.W.
down to the gulf and has that had an impact on your traffic flows and/or revenue outlook?
Jim Young
Probably the most dramatic thing for us has been the bean harvest and so we’ve been moving a lot of soybeans from the current harvest down to the Gulf and that’s been to our benefit. That's probably the place where we've seen it the most.
John Larkin – Stifel Nicolaus
Okay. But there's still a fair amount moving to the P.N.W.
as well?
Jim Young
We are not a big player in the P.N.W. So you know, we will follow wherever the grain wants to move, we will take advantage of the P.N.W.
but right now, it's the Gulf business that's kind of on a solid, steady foot for us.
John Larkin – Stifel Nicolaus
How about range of the river? Has there been an increase or decrease in that business?
Jim Young
It's kind of hard flat, kind of hard to tell with all of the disruptions we've had with hurricanes and things like that as to how much of that plays out, but it's not growing substantially.
John Larkin – Stifel Nicolaus
Thank you very much. That's very helpful.
Operator
Thank you. Our last question will be coming from Jason Seidl.
Please proceed with your question.
Jason Seidl
A couple of quick things here. One of your Eastern counterparts yesterday in the conference call talked about they were getting more positive about pushing through that 25% expansionary tax credits.
I was wondering if you guys can give your thoughts on that.
Jim Young
Well, Jason, where we're getting more prospective the next round of stimulus coming out of the hill and infrastructure strikes a cord with every member of Congress and if you believe we have a – I’d call it a crisis in the infrastructure in the US and you look out the next five, ten years, I think it's a good opportunity here. We'll see what happens.
What I remind members is capital flows in terms of returns, and if this helps maybe increase returns, we may accelerate a little bit of capital. But I wouldn't take it to the bank yet when you think about it.
It's great jobs, investment in America when you think about where you're putting your money, and you know, we're prepared if it happens to probably do some things but we'll see.
Jason Seidl
Okay. Jim, on the outlook for '09, you mentioned potentially going down to about negative two on the volume side.
Is that assuming a little bit of economic slippage from here, or is that some sort of a steady in the economy right now?
Jim Young
We look at first half next year. You're going to see negative industrial production, negative GDP.
I'm not – we kind of look at it right now, it's probably about the run rate you're at right now going forward. Then again, some pickup towards the end.
But we're prepared to manage our business in a very tough economy next year.
Jason Seidl
Okay. My last one here on the call.
You touched a little bit on maybe export demand for some of the western coal. What are the ports that are moving out of?
Jim Young
Today it's Vancouver. I guess it's called St.
Roberts. We've also moved some off of Richmond and also moved some off of Long Beach.
Jason Seidl
Are there any other potential options for you on the west coast?
Jim Young
You know, we're looking for options. We are talking to all the ports and looking for some potential to see what would make most sense but at least at this point in time, those are kind of the three front-runners.
Jason Seidl
Okay, guys I appreciate your time as always.
Operator
Thank you. I would now like to turn the call back over to Mr.
Jim Young for closing comments.
Jim Young
Well, thank you for attending the call here. As we had indicated we are looking at a pretty tough economy going forward here but I’m confident that we can run our business in a tough economy and deliver for our shareholders.
So, again we will talk to you again in about three months.
Operator
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.