Greetings. Welcome to Norfolk Southern Corporation Second Quarter 2015 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Katie Cook, Director of Investor Relations. Thank you, Ms. Cook. You may now begin.
Thank you, Rob, and good morning. 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 norpersouthern.com in the in the Investors section. Additionally, transcripts and downloads of today's call will be posted on our website. Please be advised that during this call, we may make certain forward looking statements.
These forward looking statements are subject to a number of risks and uncertainties, and our actual results may differ materially from those projected. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important. Additionally, keep in mind that all references to reported results excluding certain adjustments, that is non GAAP numbers, have been reconciled on our website in the Investors section. Now it is my pleasure to introduce Norfolk Southern's CEO and President, Jim Squires.
Thank you, Katie. Good morning and welcome to Norfolk Southern's Q2 2015 earnings conference call. With me today are our Chief Marketing Officer, Alan Shaw our Chief Operating Officer, Mark Mannion and our Chief Financial Officer, Marta Stewart. Now let's go straight to the financial results. Our reported second quarter earnings were $0.41 per share, 21% lower than last year's record results.
The decrease was largely due to lower coal volumes and lower fuel surcharge revenues. These are challenging conditions, but there's some good news as our business mix volumes were up for the quarter as well despite pressure in the steel market. Moreover, revenue per unit excluding fuel surcharges was positive for merchandise as well as for intermodal, which was even more positive than the Q1. Alan will provide more detail on our revenue for the Q2 and outlook for the remainder of 2015. I'm proud to report that our service improved significantly during the Q2.
Our composite service metric and internal measure we use to assess network performance is approaching 80%. And this quarter, we will continue progress toward the higher service levels achieved in 20122013. We remain firmly committed to continued service improvement, and Mark will share the latest on our service and operations outlook. Marta will wrap up the presentations with a full review of our financial results. Before getting into the specifics, let me emphasize that we are confident in our long term strategy and our prospects for growth and strong financials.
We have a solid franchise and the right team in place to execute our strategy to be a top performer in the industry. On that note, I will turn the program over to Alan, Mark and Marta and we'll return with some closing comments before taking your questions. Alan? Thank you, Jim, and good morning to everyone. I'll begin by providing context to our long term focus from a sales and marketing perspective.
And then I'll review our Q2 performance and our outlook for the balance of the year and beyond. With our diverse portfolio, we are well positioned to capitalize on the broad structural changes in the U. S. Economy. Our extensive intermodal network and strategic corridor investments have enhanced our position in truck competitive markets, where demographics and regulatory action will constrain truck capacity, highway congestion will increase and economics will continue the momentum of highway conversions rail.
Within the energy arena, we benefit from the movement of crude oil to the East Coast refinery complex as well as increased natural gas drilling the Marcellus Utica region, driving inputs of sand and pipe and outputs of natural gas liquids. While reduced commodity prices have tempered 2015 growth, this will continue as a significant market for us. Similarly, franchise, which has been impacted by lower market prices this year, will remain an important part of our business. In manufacturing, the United States has substantially improved its cost competitiveness in terms of wages, productivity and energy costs. While foreign exchange is impacting some production, the overall picture for U.
S. Manufacturing is still one of expansion and NS is well positioned to benefit as our service region covers 65% of the manufacturing in the United States. In housing, recent data is supportive of the view that home sales and new home construction will be growth areas with expectations for housing starts to be up more than 10% this year and continued growth projected for 2016 and beyond. Our team will focus excuse me, our team will pursue strategic and innovative solutions in partnership with our customers, allowing Enes to capitalize on these market opportunities and generate revenue growth. Improved service will provide increased capacity on our network and enhance the value of our product, aiding our efforts to convert additional highway freight to rail and achieve market based pricing gains that we expect to exceed the cost of rail inflation.
Additionally, we will endeavor to reduce volatility from fuel surcharge structures. As previously discussed, we have near term headwinds, notably from declining coal and fuel surcharge revenues. However, we will lap these comps, which coupled with the strength in the markets just referenced affords us great financial results later on the call, but I would like to discuss operating revenue as you can see on Slide 3. Overall, you will note the negative impact of the decline in fuel and coal revenue. However, the positive aspect is that volume and revenue per unit excluding fuel increased for both merchandise and intermodal.
On slide 4, you will note that facing very strong comparisons with Q2 2014, overall volume declined 2% with growth in intermodal and merchandise driven by increased consumer spending, energy outputs, stronger housing starts and automotive production. These gains were more than offset by a 21% decline in coal. As expected, coal faced a particularly tough comparison against prior year volume, which I will talk about more on the next slide. Coal revenue declined 33 percent to $453,000,000 for the quarter with revenue per unit down 14%. Low natural gas prices depressed eastern coal burn by 15% in the 1st 2 months of the second quarter, which reduced utility coal volume by 20 3%.
A strong dollar and global oversupply led to a 38% decline in export coal volumes. As shown on slide 6, coal market conditions will continue to challenge our coal volumes for the remainder of 20 15. Natural gas price projections below $3 per 1,000,000 Btu has impacted coal burn and current stockpile levels will present headwinds for utility deliveries. We continue with our guidance of a run rate of roughly 20,000,000 tons per quarter. Export coals are challenged due to foreign exchange rates and global oversupply and we believe our run rate will fall to an estimated 3,000,000 tons per quarter.
Moving to our intermodal markets, pricing gains continue to create improvement in revenue per unit excluding fuel. Were effectively flat against last year's strong comps due to West Coast port issues impacting transcontinental freight coupled with temporary headwinds associated with rail service performance and increased truck capacity. Our international units grew 8% in the quarter benefiting from West Coast port issues as some vessel traffic shifted to the East Coast, a conversion we expect to continue. While current truck capacity and lower fuel prices have limited near term growth in the market, Contract rates in the truck market continue to climb. This environment, particularly as our service product continues to improve bodes well for intermodal pricing moving forward.
Moving on to merchandise on Slide 8, volume grew 1% in the second quarter. Excluding fuel, revenue per unit also increased as solid pricing partially offset the negative effect of fuel surcharges. Metals and construction volume was down 6% for the quarter, driven by global oversupply in the steel market and the impact of low natural gas prices on drilling inputs. Aggregates were up due to construction growth in the Southeast. Our agriculture volume decreased 1%, primarily due to reduced volumes of fertilizers and wheat, while ethanol volumes grew from greater gasoline consumption.
A 13% gain in chemicals volume was due to crude by rail as well as year over year growth of natural gas liquids from Marcellus Utica shale place. Automotive volume was up 2% with stronger vehicle production. Finally, paper and forest products volume was up 2%, resulting from a rise in consumer spending and the housing recovery. Let me close today with an overview of our expectations. In the near term, foreign exchange rates and low commodity prices will negatively impact coal, crude oil and steel volumes.
Combined with the overhang of fuel surcharges and despite expected continued improvement in core pricing, we expect 3rd and 4th quarter revenues will trail last year. Even with these shorter term challenges, our diverse franchise presents rich opportunities for volume and revenue growth in key markets through the balance of 2015 and beyond. We expect growth within our intermodal markets. International volumes will benefit from organic growth at East Coast ports. Longer term truck capacity constraints coupled with increasing demand and lane consumption as well as project related growth.
And our natural gas liquids market will see continued strength from fractionators in the Marcellus Utica region. With North American light vehicle production projected to be up 3% year over year, we expect continued growth in automotive volumes. Lumber, plastics, basic chemicals, aggregates and consumer goods will all benefit from increased housing starts and construction activity. As we cycle the near term challenges from declining coal and fuel surcharge revenues, we are well positioned for and excited about our prospects moving forward. Thank you for your attention.
And I will now turn the presentation over to Mark for an update on operations.
Thank you, Alan, and good morning, everyone. I'd like to update you this morning on the state of our railroad, which has shown nice improvement. But first, I'll update you on safety. We continue to strengthen our safety process through the engagement of our people and the ownership they take for safety. The safety of our employees, our customers' freight and the communities we serve have been and will continue to be at the core of everything we do.
Our reportable injury ratio for the 2nd quarter was 0.96 and stands at 1.04 for the first half of the year. This is down compared to the first half of last year, which was 1.23. As you see, our train accident rate is up slightly year over year, while our crossing accident rate was down slightly. Now let's take a look at our service. We told you on the last call that we June, we operated in the mid-90s and actually achieved a composite performance of 79% on June 30.
Looking at the graph on the right, you can see the improved performance from 1st quarter to 2nd quarter and again from Q2 to Q3. Clearly, we're trending in the right direction and our customer service is reflecting that. Nevertheless, we're not satisfied with where we are, and our team is working hard to further increase our composite performance and reach a higher velocity. Train speed and terminal dwell are improving as well. Our speed of 22.5 miles an hour for the week ending July 10 was our highest speed in over a year.
Our weekly dwell numbers have been below 25 hours for 7 consecutive weeks, which has not happened since July 2014. Our resources have come online as expected and we are consequently seeing our metrics improve a predictable pattern. As the momentum continues through the second half of the year, our focus will be on further improving our service levels and maintaining the right resource balance. Turning to the next slide with regard to crews, we've come a long way to ramping up areas where we were short. On the slide, you can see a net increase in conductors in the first and second quarters where we were replenishing locations where we were shorthanded.
We are continuing to fill in shortage areas in the Q3, but new hiring is tapering back to a normalized level. Hiring going forward will be in line with attrition. On the locomotive side, we've almost completed the receipt of the SD-ninety MAX. In addition, improvement in system velocity has been another driver in our higher locomotive availability. This is allowing us to store some of our locomotives, which will lead to a surge fleet and better reliability to the locomotives left operating.
In closing, we're very encouraged our resources are coming in balance with our business volume and our operating metrics are trending favorably. We're tightening our belt as we move through the second half. Increased velocity will help us make more efficient use of manpower as well as locomotives and our car fleet. We look forward to continued improvement in our customer service through the rest of the year. Thank you.
And now I'll turn it over to you, Marta.
Thank you, Mark, and good morning. Let's take a look at our Q2 financials. Slide 2 presents our operating results where we faced strong headwinds compared with the record setting Q2 of continuing challenges in the coal markets drove operating revenues down $329,000,000 or 11%. Nearly 3 quarters of the revenue decline was due to lower fuel revenue, which totaled $119,000,000 for the 2nd quarter and based on current oil price forecast is expected to be a similar amount for both the 3rd and the 4th quarters. Operating expenses declined by 100 and from railway operations and a 70% operating ratio.
The next slide shows the major components of the 124,000,000 dollars or 6% net decrease in expenses. Total operating costs benefited from lower fuel prices and favorability in the materials and other categories. Now let's take a look at each of these variants. As shown on slide 4, fuel expense decreased by 100 another $5,000,000 of favorability as gallons used were down 1.5% on the 2% decline in overall volumes. Materials and other costs shown on the next slide decreased by $13,000,000 or 5%.
Lower environmental expenses and favorable personal injury experience totaled $20,000,000 for the quarter. Additionally, material usage primarily for locomotives declined by $7,000,000 Partially offsetting these decreases were increased travel and relocation expenses. Going forward, we expect continued favorability related to locomotive materials in the Q3. However, it will be fully offset by the impact of the costs associated with the closure of the Roanoke, Virginia offices. We incurred approximately $5,000,000 in the 2nd quarter related to Roanoke relocation and we expect to incur an additional $30,000,000 over the remainder of the year with the majority of these costs affecting Q3.
Moving on to purchase services and rent expense. Our costs increased by $24,000,000 or 6%. Higher volume related and service recovery costs primarily associated with intermodal operations, equipment rents and joint facilities combined to account for $20,000,000 of the increase of which we estimate about $5,000,000 was related to the service recovery effort. Expenses associated with software costs were also higher in the quarter. Slide 7 details the $9,000,000 or 1% increase in compensation costs.
Although a relatively small net variance, it was comprised of a number of significant items as listed on the slide. The first two increased pay rates and higher payroll taxes were as we previously discussed front end loaded this year. The pay rate increase totaled $27,000,000 but will begin to moderate in the second half of the year to around $17,000,000 per quarter. The payroll tax increase was $13,000,000 and should moderate to about $8,000,000 per quarter. The next two items were largely service recovery related.
An increased number of trainees accounted for $10,000,000 of additional wages. As Mark mentioned, we have turned the corner on our hiring efforts and trainee expenses should begin to decrease in the second half of the year. Additionally, we incurred $6,000,000 in higher labor hours as crew starts were up notwithstanding the drop in volume. Partially offsetting these costs were lower incentive and stock based accruals, down
down
$9,000,000 or 4% reflective of our larger capital base. With regard to capital spending for the remainder of the year and given the lower than expected volumes, we have trimmed back our 2015 capital budget by $130,000,000 or about 5%. 2 thirds of the reductions are related to work on our line of road and 1 third is related to Slide 9 presents our income taxes for the quarter, which had an effective rate of 38.1% compared to 37.4 percent in 20 14. The slight increase in the effective rate is principally related to lower returns on corporate and life insurance. Assuming normalized returns on these assets in the second half of the year, we expect the
the
with net income of $433,000,000 down 23% compared with 20.14 and diluted earnings per share of $1.41 down 21 percent versus last year. Wrapping up our financial overview on slide 11. Cash from from operations for the 1st 6 months was $1,500,000,000 covering capital spending and producing 5.87 $1,000,000 in free cash flow. With respect to stockholder returns, we repurchased 765,000,000 of our shares year to date and paid 3.60 $1,000,000 in dividends. Thank you.
And I'll now turn the program back to Jim.
As you've heard this morning, we expect continued pressure in the short term, particularly in the Q3 and to some extent in the 4th from lower coal volumes and lower fuel surcharge revenues. On the positive side, we expect service will continue to improve and better enhancing and innovating our supply chain integration with customers and employees and by leveraging technology. And we're committed to coordinating service capacity and capital investment along with pricing and volume growth to maximize returns for our shareholders. In addition, we'll In addition, we'll continue to capitalize on market opportunities that enhance our network capacity and efficiency as with our pending acquisition of rail lines from the Delaware and Hudson Railway Company. And as we do so, we are committed to reinvesting in our franchise and returning cash to our shareholders.
In sum, we have strong prospects for future growth. Intermodal and merchandise growth, increased consumer spending, rebounding housing markets and improved manufacturing activity all support an optimistic longer term outlook. While we do face challenges in the short term, in 2015, we have a strong legacy of success and we're confident we're taking the right steps to continue creating value for our customers, the communities we serve, our employees and of course our shareholders. Thank you for your attention. I'll turn it back to the moderator so we can take your questions.
Thank you. We'll now be conducting a question and answer session. Our first question is from the line of Allison Landry with Credit Suisse. Please go ahead with your questions.
Good morning. In terms of the service performance, when do you expect to have the network back in balance? And could you quantify for us the impact of the inefficiencies in the second quarter?
Good morning. It's Jim. Let me take a first stab at that. We've made significant improvements in service in the second quarter. Velocity and terminal dwell are both trending favorably and we're making a lot of headway on our internal composite service metric as well.
So we continue to expect that trend to continue in the second half as well in the third and through the fourth quarter. And that will continue to be our goal to push service ever higher. Mark, would you like to comment next?
Only to say we've made a lot of progress. I mean, if you think about it, what we've accomplished so far, we're about 90% of the way toward our what has been our historical high in the past and we have every intention of getting all the way there. So
Marta, why don't you comment on the resource implications in the second half?
Yes. We had estimated that our service related costs in the Q2 would be $25,000,000 and it turns out that that estimate was pretty much dead on. We most of that is in compensation and benefits, dollars 15,000,000 of the $25,000,000 is there. I talked about the 2 major things in that $15,000,000 and that is the higher than usual level of trainees, which we expect some of that to continue into the 3rd quarter and the other one is additional labor hours. The remaining $10,000,000 of service recovery costs are scattered in various categories in about $3,000,000 to $4,000,000 increments.
We have a little bit more fuel than we would have had otherwise. Our equipment rents were impacted by about $3,000,000 due to velocity and then purchase services and travel costs. So those are all the components of the $25,000,000 Going forward, Allison, we think that we will just have about $5,000,000 of that hanging over into the Q3 and that is primarily as Mark described as we work our trainees into our regular qualified fleet. We still will have a slightly elevated level of training.
Okay, great. Thank you. And just my follow-up question, what was the split between export met and thermal coal during the Q2? And do you have any sense of what you're thinking for this in the second half?
Allison, this is Alan. The split was about 3 quarters met and one quarter steam thermal coal. And going forward, we've got it down to about 3,000,000 tons per quarter and it's going to be a function of foreign exchange rates. And the 2 indices that we watch closely, which are the Queensland coking coal for that and then the API 2 for
question is from the line of Bill Green with Morgan Stanley. Please proceed with your questions.
Good morning. It's Alex Vecchio in for Bill. So you mentioned that you expect the domestic utility coal to run about $20,000,000 per quarter and you lowered the export coal run rate to about 3. You also talked a little bit about some other commodities. But when we kind of take it all together, can you give us a sense of what's embedded in your expectations for total volumes on a year over year basis in the back half of twenty fifteen?
Do you think 4Q volumes might be positive on an easier comp? Or should we be expecting kind of volume declines to persist for the balance of the year?
We see some fundamental growth in many of our markets, which we expect to continue into the second half of the year. The overhang we're going to see is the fuel surcharge revenue that Marta referenced, which is going to kind of mask the core pricing gains and the volume growth that we're seeing in other markets.
Okay. Do you have a
sense for like how the total carloads might track though in the back half?
We expect that it will be up over last year.
Okay. That's helpful. And then just specifically on the lowered expectations for 4Q revenues to be actually down year over year instead of I slightly up with your prior expectation. Is that entirely attributable to either the export coal and fuel surcharge? Or are there other areas that kind of contributed to that slightly lower outlook on the Q4?
Good question. The other primary driver of that would be reduced crude oil volumes and you can see that very easily as you take a look at Brent and WTI pricing.
Okay, great. Thanks very much for the time.
Our next question is from the line of Scott Group with Wolfe Research. Please proceed with your questions.
Hey, thanks. Good morning. Good morning, Scott.
So Marty, you guys have been giving a little bit more transparency, which has been helpful. Wondering if you have a comfort kind of telling us that 2nd quarter is the bottom for earnings and we should see sequential earnings improvement from 2nd quarter to 3rd quarter Or if maybe from a margin standpoint, we see less of a margin headwind from in Q3 than we did in Q2, you feel comfortable there? And then maybe specifically on the $47,000,000 of lower incentive and stock based comp, do you have any rough guidance on that for the 3rd Q4?
Okay. Well, let me start with the second question first. The stock based comp did have a very large decrease in the Q2 of this year and that's primarily because of the comp with the Q2 of last year. As you know that was an all time high quarter for us and the accruals that quarter were very high, therefore the relative comparison. Going forward into the 3rd and 4th quarters, we think we still will have favorable comparisons in that line item, but they won't be to the degree they were in the Q2.
And then moving on to the rest of the year kind of overall and I think it's really driven by the things Alan discussed with coal and crude. But we expect that some of the comps will get a little bit easier otherwise. And so we do expect a somewhat of an improvement going into the back half.
Yes, volume comps will improve as we get deeper into second half of the year.
Okay. That's helpful. And then maybe one last one for Jim or Alan. Just big picture as I think back the past I don't know, 5 years or so, you guys have seen some of the better volume growth in the industry, but yield growth has lagged the other rails. Do you see that changing or the focus changing where you start to get more pricing and maybe sacrifice a little bit of volume going forward?
Scott, it's Jim. I think you put your finger on the issue in the Q2 in particular and for the balance of the year, albeit the next couple of quarters ought to be less worse. And so, yes, we certainly are going to lean into revenue per unit growth. The encouraging thing about even the second quarter was outside of coal growth in revenue ex fuel surcharge impacts. And we would expect that to continue for the balance of the year.
So we're seeing that positive trend in overall mix. And we're going to continue to push on that along with core pricing. We're satisfied with the level of core price increases that we have experienced so far this year. And we're going to continue to push that based on market conditions at a rate better than rail cost inflation.
Okay. Thank you, guys.
Welcome.
Our next question is from the line of John Barnes with RBC Capital Markets. Please proceed with your questions.
Hey, good morning. Thank you for taking my question. A couple of things on the service side going back there for just a second. You talked about crew starts still being up in the quarter despite carloads being down on a year over year basis. Are you getting towards a better ratio of crew starts to carloads?
And is that where you start to see that improvement from say that $25,000,000 drag to the $5,000,000 drag on the efficiency cost?
Mark, why don't you take that one? Okay. I'd be glad to. We are seeing improvement, particularly as we got into the latter part of May June and we think that we'll continue to see improvement as we as the velocity of the railroad picks up. It obviously helps the crew starts.
We've really in a big way reduced our re crews these last couple of months. So we feel that trend will continue.
Earnings announcements, have been pretty vocal about furloughs and locomotives in storage. You didn't provide really near the degree of color around that. Is it that you haven't really started the furlough plan yet? Is it that you're still winding through and dealing with the service or you haven't yet started that? Or on the same thing on Locos, I mean, it sounds like you've put some in storage, but can you give us a feel for maybe the numbers in storage and where you stand on just resources kind of in the pipeline?
Yes, sure. I'd be glad to. First of all, on the locomotive side, we have begun storing we're at about 50 locomotives in storage right now and we're going to be able to continue storing. I'd like to see us get up in the 200 range, not sure just how quickly we can do that, but that's the plan. And again, as the velocity improves, it will help us do that.
On the cruise side, we haven't furloughed because we haven't had the need to furlough. We're trying to be really measured and balanced as far as the hiring goes. And we're getting as I indicated in the remarks, we are reaching that point where we are about at a balance and we are tapering off on the hiring now. But we will probably see we're beginning to see indications in select in just very few select spots where there would be a possibility of furlough going forward. But I don't think it's going to be a big number.
And if you look back through history, our number on the furlough side just hasn't been quite as high as what some of the other railroads experience. So we'll see how it goes, but I don't think we're going to have a big furlough number. We're trying to hire the right number of people.
I would characterize our resource plan in the second half as one of stabilization. And you heard Mark say earlier that we're trending toward attrition based hiring in the second half. Similarly, we're starting to put locomotives up. We have a few more units coming online, but very few. So and we can pivot on resources if we have to.
If we see the trend in car loadings moving against us, then we can obviously pivot quickly in resources. And we demonstrated that in the Q2 by reducing our capital spending for the year, as Marta mentioned now. And that we're doing so without hurting long term prospects of the enterprise or really disrupting our reinvestment plan, but we certainly can modulate
Our next question is from the line of Chris Wetherbee with Citigroup. Please go ahead with your questions.
Hey, thanks. Good morning, guys. Can you maybe comment a little bit more about pricing? You kind of highlighted that sequentially. I think we saw a bit of a step up in the pricing dynamic.
I just wanted to get a rough sense
of sort of maybe how big what the magnitude of that was and maybe how you think about sort of the opportunity? How much more do we have as we go through this year? Does it still feel like sort of the underlying businesses where you are getting growth are still relatively ripe for that?
Thanks, Chris. I will let Alan address that. Certainly, Chris. We are seeing market based pricing that is generally above rail inflation. And the good point for us is that we're seeing it in our growth markets.
We're seeing it in intermodal where our RPU was up ex fuel was up 3 percent in the Q2. And we expect that kind of growth to continue. There's a latent demand for rail capacity out there and the prices that we're putting out into the market are holding and we expect that
to continue.
Okay. That's helpful. And then when
you think about the buyback in the second half of the year, you've stepped forward I think in the first half so far and bought back a decent amount of shares. I guess when you think about sort of the second half outlook, should we expect more of the same? Just want to get a rough sense at these levels for how you see that opportunity playing out?
Marta, why don't you take that one?
So we have previously guided to a full year share buyback of $1,200,000,000 and we're still on track for that.
Okay. So that's
the way we should think about the back half?
That's correct.
Okay. Thanks for the time. I appreciate it.
Thank you.
Our next question is from the line of Jason Seidl with Cowen and Company. Please go ahead with your question.
Thank you very much and good morning everyone. I wanted to touch on intermodal a little bit. You referred to it obviously as one of your growth markets and obviously it's done well over the last couple of years. Wanted to ask, have you guys lost a little share back to the trucking market? We've seen some of the major truckload carriers add a little capacity out here and the East is a little bit more competitive.
We'll let Alan address the specifics of the volume trend in the Q2. But let me just say intermodal will continue to be one of our growth opportunities. Truckload diversions in general both intermodally and in our merchandise sectors as well. And the other really encouraging thing about the intermodal revenue trend now is the increase in revenue per unit as Alan mentioned earlier. Alan?
Yes. Number 1, we are facing pretty difficult comps. Our intermodal franchise grew 11% in the Q2 of last year. And so we posted growth on top of that. Truck capacity as you noted has improved, but it still trails demand and you can see that empirically in the fact that truckload pricing continues to move up, which gives us not only a good outlook for what our volumes are going to look like long term, but also what our pricing going to look like.
We are seeing really strong growth in our International segment where our customers are shifting more volume to our East Coast partners. So that's a bonus for us. And long term, we feel really good about our intermodal market with respect to growth opportunities in both volume and in pricing.
And that stuff has shifted to the East Coast. How sticky
do you think that business is going to be for Norfolk? Some of it is. Certainly, there will be some that moves back to the West Coast, which is only natural. But the percentage of volume moving to the East Coast ports, while it was in the very low 30s, we'll probably move up to 33%, 34%. So there's growth opportunity for our East Coast ports.
Perfect. And a little follow-up here for Marta. Marta, I think you alluded to the fact that your relocation cost for Roanoke was $5,000,000 in the quarter and I think you said you expect for $30,000,000 for the remainder of the year at most in 3Q. If you exclude those relocation costs in 3Q, how should we look at sort of your margins on a sequential basis for the railroad?
I think the and Mark can speak more to has spoken more to how the system we expect the fluidity to improve. So I think the main thing that you will see is that those service recovery costs that we quantified at $25,000,000 in the second quarter, We only expect $5,000,000 of those as we work through our higher levels of trainees to remain in the Q3. So you should expect the others to fall off the extra overtime, the extra recus that he spoke about that sort of thing. Those we do not expect to continue in the second half.
Okay. So sequentially if we exclude the Roanoke costs it should look okay compared to 2Q then? Yes. Fantastic. Thank you for your time as always.
Thank you. The next question is coming from the line of Bascome Majors with Susquehanna. Please bear with your questions.
Yes, good morning. So I wanted to focus a little more on seasonality now that you reported a full quarter with the fuel surcharge headwind presumably as steep as it can get with the WTI based programs with the 60 $4 trigger now at 0. The volume trend on a year over year basis seems to be stabilizing. The service levels are improving as you talked about earlier. So looking forward, the second half is consistently seasonally stronger than the first half for you guys.
But the Street consensus is modeling a second half versus first half earnings increase at a pretty steep level. It looks like the steepest sense of 'nine. So just from a high level, do you think are you looking for an above seasonal outcome in the second half here?
Well, Bantam, as we said earlier, we do expect second half results to be less worse than we experienced in the first half. However, we still do face some significant headwinds, particularly in the Q3. Fuel surcharge revenue in the Q3 of last year was still running strong, just below 2nd quarter fuel surcharge levels in 2014, pardon me, just above. So actually it's a little bit tougher headwind in the Q3. In addition, we do have the extra Roanoke related expenses we flagged.
In other areas of expenses, we would expect a more favorable trend. Alan, would you like to comment? Yes. I think that we are going to see we'll have better comps in the Q4 with respect to bond than we will in the Q3. We're still right now exposed to foreign exchange risk and the prices the commodities that we handle.
And we see that with coal, crude, oil and steel right now.
All right. Thanks for the color guys.
Thank you. Our next question is from the line of Rob Salmon with Deutsche Bank. Please go ahead with your question.
Hey, thanks. If I could turn the discussion a little bit back to the intermodal side of the business, particularly the domestic side. How much do you think in terms of the volume growth deceleration was
a result of some of
the pricing initiatives, service not being quite where you guys wanted, although it's continuing to get better as well as just some softer broad based demand that we saw last quarter?
Allen, why don't you comment on that? Yes. As we take a look at our Q2 domestic intermodal business, I think the headwinds and the factors that limited our growth are temporary. Number 1 is the West Coast port issue. And as you're probably aware, much of the or a high percentage of the volume that comes in the West Coast and 40 foot containers gets restuffed into 53 foot boxes and moves TransCon anywhere between 25% 40%.
That would show up normally in our domestic volumes, but did not this quarter. So that was a limiting factor, particularly early in the quarter. And then while we didn't lose business to truck duty service, it limited our ability to grow. And we're working hard with improving our service and we think that will be behind us.
Okay. And do you think that the some of the pricing initiatives that you guys kind of undertook did that have an impact one way or the other in terms of the domestic volumes?
No. We see that truckload pricing is actually up this year. Our customers are increasing their pricing. And so just overall healthy environment for pricing in the truck market right now. It's just not growing as much as it did this time last year.
And would you expect pricing as we look out to next year to be as in line with kind of what you're experiencing this year? Or would you expect that to potentially improve given the better proposition? Or are you a little bit cautious about some of the more balanced supply demand in the truckload marketplace?
I'll address that long term. We feel that the fundamentals are there for long term for increased demand for highway to rail conversions. We are taking a long term view of this as our customers when we sit down and we figure out our relationship going forward and the need to ensure rail capacity and pricing.
Thanks so much for the time.
Our next question is from the line of Matt Troy with Nomura Securities. Please go ahead with your question.
Thanks. Good morning, everyone. Just wanted to ask a question about intermodal and specifically the peak season. We've heard mixed messages across the freight ecosystem about an inventory build in retail. We've certainly heard that from retail potentially impacting volumes in June.
Some folks expressing optimism, if you will, about a peak season perhaps being a little bit later, but it's just that optimism. I was just wondering based on the hard and real conversations you're having with your customers, what's your sense for the traditional peak? I know it's flattened in the last several years, but is it something that we should expect to see emerge in Q3? Is the initial read that it will be somewhat disappointing? I just wanted to get a sense of what your planning was given the resources on the network and your conversations with customers?
Thanks and good morning, Matt. Alan, what's your sense of peak? Well, as Matt had noted, it's relatively flattened out and been spread over the entire year over the last couple of years. Generally peak for us has been associated with international volumes that largely shows up in August September. And as we've noted our international volumes are really healthy right now.
We've got
a good
franchise. Customers are shifting more international volume to the East Coast ports. So, there's opportunity for growth for us in August September in our international franchise.
Okay. And then that international share gain, obviously contributing to that, just I'm wondering if you could help us from a mix perspective. Is that comparable in terms of length of haul versus when you're getting handoff traffic from the West Coast carriers? Is it mix negative and that it might be a little bit shorter? Or is it moving further inland and actually into West Coast markets?
Just wondering about that share gain and just what it meant from a mix implication on that Newport volume that had been diverted?
Yes. I wouldn't say it's negative. It does allow us to generate more revenue density on a train. And to the extent that we can provide more efficient service associated with that then it certainly makes it more truck competitive.
Okay. Got it.
Thank you, everybody.
Our next question comes from the line of Ken Hoexter with Bank of America. Please go ahead with your question.
Great. Good morning. Alan, just a little bit on coal again. Just you've seen accelerating downtick on your volumes overall, total volumes almost 4% quarter to date. So is there anything dragging coal down further given you're down about 20% quarter to date?
I get the 3,000,000 ton outlook on international and that accelerates to down, I don't know, 40%, 45% year on year. But are we seeing something on the domestic side? Maybe you could address on the utility side a little
bit? Ken, I think we're still going to hold firm with our projection of 20,000,000 tons domestic. That will be and that's over the next 18 months to 24 months. So it's going to be subject to weather conditions and just general demand. But no, we really haven't seen anything right now in the domestic that is any more alarming than what we've already guided to.
But you are seeing an accelerating down I mean, right? We are seeing an acceleration on the downside?
For the 1st couple of weeks of this quarter, our domestic volumes are down versus last year. But we still feel good about 20,000,000 tons for the quarter.
Okay. And then on the domestic side, I just want to revisit the individual lanes. Can you talk about growth on the Crescent versus the Heartland and kind of where you're seeing that? Are you primary growth drivers right now are on Crescent and on
primary growth drivers right now are on Crescent and on Heartland.
Can you provide us the updates like you used to on percentages? Or do you no longer provide that level of
detail? We've seen Crescent and Heartland quarter volumes along with other targeted quarter volumes rise in line with the trends that we have seen in the last couple of quarters, if I recall. So for example, Crescent was up 6% in the quarter, better than the overall domestic intermodal trend. Heartland was up
2%. Okay. Just if
I can follow-up on the first one, Alan, just to let it go at this. But if we are at 20,000,000 tons on domestic, I just want to understand is utility and steel and industrial or are you talking 20,000,000 utility alone?
Ken that would be 20,000,000,000 utility alone.
Okay. So then you're just if you get the 3,000,000 tons and 20,000,000 utility, okay, just there's a quite a large differential between where you're trending now. So you're looking for a pretty big snap up in the last months of the quarter, I guess, then?
Yes.
Okay. All right. Thanks for the time.
Our next question is from the line of Justin Long with Stephens. Please go ahead with your question.
Good morning. This is actually Ryan Cauley on the call for Justin. So just wanted to talk about the negative mix impact we're seeing from coal, particularly with intermodal being the largest driver to carload increases for the rails. If this trend doesn't really have an end in sight, are there structural changes or pricing efforts where we could see you get more aggressive in order to mitigate this negative mix impact?
Well, we certainly did see an effect from mix at a high level in the Q2. And with coal being down as much as it was, that creates a challenge for us in terms of improving margin and growing the bottom line. With that said, our longer term outlook is for coal volumes to stabilize. Now we've guided down on the export side of the business for the foreseeable future. Now that's been a historically very volatile part of the business.
But the good news is we think that we have seen and are at the bottom in terms of utility coals. Now the volume may vary from quarter to quarter depending on weather in particular, but we think $20,000,000 is a reasonable run rate at least for the next 12 to 18 months or so. So that would imply stabilization. We'll wait and see. Eventually, we will see supply come out of the global market and we should see a boost to export coal volume as well.
And that will help with the mix. In the meantime, we're going to grow intermodal and we will grow merchandise volumes. It's one of 3 parts to our overall strategy: grow the top line through pricing based on market conditions at a rate better than rail inflation grow volume, particularly intermodal and merchandise volume profitably and secondly, we're going to work on return on capital by prioritizing capital spending in favor of revenue growth opportunities and and better returns on capital as well.
Thanks. And if I could just follow-up real quick on that. I mean, so some of the rails have talked about this incremental margin framework of around 50% longer term. Is that the right way to think about your business once we start to see volumes increase on a year over year basis? And if so, is that incremental margin framework only achievable in a coal environment that's at least flat or stabilized?
We do believe 50% incremental margin is a reasonable goal going forward. Now that certainly would certainly if coal volumes do in fact stabilize.
Great. Thanks for the time.
Thank you. Our next is from the line of Cherilyn Radbourne with TD Securities. Please proceed with your question.
Thanks very much and good morning. I was just wondering if you could offer some thoughts on where you think headcount will end the year versus last year?
Marta?
Okay. So previously in our January and our April calls, we guided to the fact that we thought we would increase 1,000 in total from the Q4 of last year average and we still think we're on that run rate. So if you look at the Q4 of last year to the Q1 of this year, we were up 500. Then sequentially, the Q1 to the 2nd quarter, another 100. So net, we're up 600 through June 30.
So we expect that in the 3rd and 4th quarters we'll be up an additional 400.
Okay. That's helpful. And then I think you have indicated that it's your intention over time to convert to on highway diesel based fuel surcharge programs. Just wondering if you can provide any update on your progress year to date on that?
I'll let Alan address that. That is a goal. We recognize that there has been a bit of a mismatch in having our revenue fuel surcharges based on WTI with expense obviously based on diesel prices. So Alan why don't you talk about our plan for reducing some of that ETI base to a non highway diesel. We're going to shift the benchmark from BTI base to a non highway diesel.
We're going to approach that with our customers as individual contracts expire. The average duration of our contract is a little bit over 3 years. So it is going to take some time to make a meaningful shift in that. And we are also committed during that time period not to sacrifice market based pricing for a premature shift in the fuel surcharge program.
Okay. Thank you. That's all for me.
Our next question is from the line of Ben Hartford with Robert W. Baird. Please proceed with your questions.
Yes, thanks. Martin, real quick, could I get your perspective on the dividend? I noticed Friday, the announced dividend for 3Q was flat relative to 2Q. It looked like that was the first time that has been the case sequentially 2Q to 3Q since 2009. Can you talk about some of the components that drove that decision not to raise the dividend sequentially?
Maybe just provide perspective on what you expect the dividend policy to be going forward?
Well, our dividend policy just overall stepping back, our dividend policy long term is to is a 1 third payout ratio. So in the past, we have sometimes raised the dividend in July and sometimes not. So that's not really a departure from what we've done over the years. You're correct that the last couple of years we have raised in January July. So we feel comfortable with the $0.59 We feel comfortable where we are with our payout ratio.
And then the future, of course, will be guided by our future profitability.
Okay. That's helpful. Thank you.
Our next question is from the line of David Vernon with Bernstein Investment Research. Please go ahead with your question.
Great. Thanks for taking
the question. Alan, maybe just to could you talk a little bit about the core pricing trends in the fuel business sort of ex fuel? That number was just down a lot, a a bit more than it has been in the past. I'm just wondering if that was all fuel decline or if you're also seeing some negative mix or some possible price declines in there?
Could you repeat that?
Well, as you think about the coal pricing ex fuel?
Coal?
Yes. Okay. Yes, there were we did see a decline
in our pricing with respect to coal. A lot of that has to do with mix change. As you know export tends to be a longer haul move for us than utility. So a 38% decline in export coal volumes in the quarter is going to have a disproportionate impact on our overall RPU ex fuel.
So it's predominantly mix. There wasn't another step down in export rates or any pricing action on the utility coal business in the quarter?
I would say it was it's predominantly mix. We're looking at each of our individual moves individually with our customers and applying market intel and analytics to figure out what drives the best results for our shareholders.
Okay. And then I guess as you think about the volume guidance for the back half of the year, I think you said you're expecting overall volume to be up
year over year.
In light of the accelerating coal headwind and crude maybe moderating, are you expecting a pickup in economic activity? Or is there something specific that you can point to that would give you confidence on the volume growth? Or is it just a case of the comps moderating?
Yes. And let me be clear that's more towards the Q4 of the year than the Q3. We've got some heavy comps. Also in the Q3. Last year, we handled over 24,000,000 tons in the Q3 of the year to our utility market, which may going back to Ken's question previously, maybe one of the reasons he's looking at some pretty hefty negative comps in our coal market.
So comps will improve for us. We still see strength in many of the markets that we talked about with respect to intermodal, housing, energy related the NGLs out of the Marcellus and Utica and automotive.
Okay. So the but from an economic perspective, you're sort of still expecting kind of flow steady growth. You're not expecting you're not hearing anything that would tell you that there's like a reacceleration or anything in the back
half? No, we're not. The overhang of the oil and gas
industry is weighing on manufacturing, but consumer spending is up, but nothing extraordinary.
All right. Thank you.
Thank you. Our next question is from the line of Tom Wadewitz with UBS. Please go ahead with your questions.
Yes. Good morning. Jim, I wanted to ask you a question. It's, I guess, notable, you did lower the CapEx number this year. And I know that sometimes that's tricky to do when you're in the company is going to be a little more aggressive in terms of managing the company is going to be a little more aggressive in terms of pairing back on CapEx versus maybe what we've seen over the last 8 years or so, 10 years.
Is that a fair way to look at it? And if so, how would you think about 20 16, 2017 CapEx? Could those fall a bit from where we're at this year?
Good morning, Tom. Let me comment first on the 20 16 midyear reduction. We did make the decision to reduce capital somewhat this year. I wouldn't make too much of it. It was a rather modest 5% reduction, but we saw an opportunity and we jumped on it.
We're trying to be disciplined with our capital spending and as I said, target revenue growth with our CapEx and profit margin. Going forward, we will try to manage capital spending ex PTC down to about 15 to 17% of sales. Now that may take a while. That's a big change from reinvest in core assets on a steady state basis. But we will going to reinvest in core assets on a steady state basis.
But we will also be mindful of the need to drive returns through better capital turnover as well. And that means prioritizing capital toward revenue growth.
Right. So that doesn't sound like a big change, but maybe somewhat of a tweak in terms of the way you look at CapEx?
Right. Exactly.
Okay. And then as a follow-up and I think Jim this is probably for you and for Alan. What about on pricing? Is there also room for not a major change, but a little bit of a tweak where you say we're going to be a little bit more focused on price versus volume whereas in the past we've been looking at both price and volume, but maybe a little bit more focused on volume?
Well, I wouldn't say we've held back in terms of our pricing emphasis in the past. So no real change there either, but we are determined to raise prices in line with market opportunities and market conditions at a rate better than rail inflation. That is our goal. We recognize that that's a vital part of growing our top line. Alan, you want to comment on that?
Yes. I would say that looking forward, particularly in our growth markets, price and volume are not mutually exclusive. We're investing long term. Our customers are see the same issues in the trucking industry that we do. And they're looking for long term partnerships.
Okay. So no real change in price versus volume for you guys versus the prior team? Obviously you're part of the prior team, but I'm just saying given your you could tweak things on the margin given your new positions.
Listen, we want both. We want both pricing and volume growth and we think we can get both. We're going to lean into pricing. We recognize that's a critical part of growing the top line, but we see lots of volume growth opportunities out there as well. Truck conversions will continue to be central to our volume growth strategy and that means intermodal, but also carload.
So yes pricing, yes volume growth.
Right. Okay. Thank you. Appreciate it.
The next question is coming from the line of Brandon Oglenski with Barclays. Please go ahead with your question.
Hey, good morning. Thanks for taking my question here. Alan, I hate to harping on this, but it does look like in the last 5 weeks or so, and this is really near term by the way, but your volume run rate has definitely stepped below 150,000 units per week. So from our perspective, it looks like things are sequentially deteriorating and I know you're calling for sequential improvement. So is there something about the last 6 or 2 months that we shouldn't be that concerned with that will come back in your network as we go through the
Q4 this year? No.
I would say we are keeping a very watchful eye on it. And a lot of the decline that we've seen over the last 4 to 6 weeks as you've noted has been associated with our export coal franchise, which we previously discussed.
Okay. Appreciate that. And Jim, I guess following up on that line of questions there. Norfolk has seen pretty good volume growth the last 5 years under WIC. And obviously, the OR was flat.
I know you had a lot of coal headwinds through that period. You did say that you think coal markets are at a bottom, but I feel like we've had that conversation on this call for 3 or 4 years now where we think things have bottomed, but then natural gas prices go lower or another external shock happens in the coal and we're again facing that same headwind. I'm sure it's not lost on you that your OR is now probably the highest amongst the major railroads here that are publicly traded. So what can investors expect from U. S.
C. O? Are we going to aggressively attack the OR with cost reductions even if coal doesn't stabilize from here?
You bet. I mean, we absolutely are determined to lower our operating ratio and think we have the ability to do so. And let me just reiterate our strategy here. It's a 3 part strategy. The first thing we're going to do is grow the top line.
Now that will obviously be easier if coal volumes stabilize, but we're determined to grow volume and pricing. And secondly, we are going to push on return on capital by prioritizing capital spending around revenue growth, recognizing that it is in capital turnover where we have lagged in the past few years. And third, service is the key to all of this. And I'm really pleased to report that we saw service and network improvements in the second quarter. We expect those to continue in the second half.
So the way we look at it, there's been progress evident on all fronts in terms of the top line growth with the exception of coal, which faces clear near term headwinds. We did see growth in merchandise and intermodal revenue ex fuel surcharges. So that's very positive. Secondly, in terms of return on capital, it's a longer term story, but we demonstrated our willingness to take a look at our capital spending plan in the Q2 and we will continue to do so in line with our previous comments. And third, service is the key to it all and we saw service improvements in the second quarter, which we expect to persist in the second half.
Thank you.
Our next question is from the line of Brian Ossenbeck with JPMorgan. Please go ahead with your question.
Thank you and good morning. Thanks for taking my call. So on the strength of the merchandise, I just wanted to ask for a bit of characterization of the NGL market opportunity out of the Marcellus and Utica. It looks like chemicals was clearly a good area for carload growth this quarter. How early do you think you are in that in pursuing that opportunity?
Are there other fractionators or other facilities coming online? And maybe if you from a mix perspective, if you could characterize kind of the length of haul relative to the overall portfolio? Alan, why
don't you tackle that one? Sure. There is additional capacity being coming online in the fractionator area also with current fractionators expanding. And so we continue to see growth in that. The length of haul is really no different from what else we're handling.
I will tell you in the chemical arena, the other headwind we are facing though is crude oil. And that's been another decline for us in the last couple of weeks. So back to the earlier question of what's changed in the last 4 to 6 weeks of effectively export coal and crude oil.
Okay. Thanks. And then just one quick follow-up on coal and maybe just to answer some of the questions about the possibility for it to improve in the Q3 and beyond. Where the inventory levels at the utilities, I think in the past quarter was around 70 days for the South, which is right around target. The North was a little bit above where average was.
If you could just update us
with those numbers? Yes. On average, our the utility stock files are about 20 days above target, about 25 days up in the north and 15 days in the south.
Okay.
And then south target is 70% or so and the north is 50% roughly?
Right.
Okay. All right. Thanks a lot for the color.
Thank you. The next question is from the line of Jeff Kauffman with Buckingham Research. Please go ahead with your questions.
Thank you very much. Hi, guys. Quick question. I want to go back to the question you had on length of haul and mix in the coal franchise. I understand the export tends to be longer haul coal and that would be a mix impact.
But when I'm running the algebra, it looks like your length of haul was down almost 7%, 8% the coal franchise. I'm just doing basic math dividing revenue ton miles by tons. Can you talk about some of the other mix elements going on? Because I thought the story was we're sourcing more out of Illinois, a little less out of Central App. In theory, that should have been additive to length of haul.
So could you discuss a little bit more what's going on with mix in the coal area?
Yes. We did have some spot moves in the Q2 of last year that were longer length of haul. And our utility south network tends to be a little bit longer length of haul than our utility north.
Okay. So that was the primary driver of the mix differential. And does that continue into 3Q? Or was that more of a second quarter effect?
Well, it depends upon are you comparing it sequentially or are you comparing it year over year?
Let's go year over year.
Then I would say that that does continue into the Q3. Okay.
And then Ken Hoexter's question similarly. You identified the $20,000,000 as just being domestic utility, the $3,000,000 being export. So really no change in your view in terms of coke, iron ore or domestic industrial?
Correct, which also to your point tends to be a shorter length of haul.
Right and fewer tons per car. Guys thanks.
Welcome.
Yes. Thank you. The next question is from the line of Cleo Zagreb with Macquarie. Please go ahead with your question.
Good morning. Can you hear me all right?
Yes. Good morning, Cleo.
Good morning. My first question relates to merchandise deals. We've seen it down 10% year over year in a continuation of the Q1, perhaps down low single digit fixed fuel. Can you help us understand any change in trend there in terms of mix and same store sales into the second half and maybe next year? Thank you.
Cleo, actually RPU excluding fuel surcharge in the merchandise segment was favorable in the Q2?
I was referring to revenue per ton mile, what people may also call yield.
Revenue per ton mile. Well, let me just say that our expectation is that we will see a continuation of core pricing, same store sales pricing at a rate in line with market conditions and better than real inflation. And so that's a trend that you saw when looking at it at the level of RPU ex fuel surcharges in the Q2. And as we've said, we expect that to persist, especially in merchandise, but also in intermodal in the second half. Alan, did you want to add anything to that?
Yes. I would say there were some mix impacts. We've seen declines in steel, which we've commented on and frac sand, which tend to have a higher RPU for us. So there's a negative mix impact there.
Okay. And those maybe should stabilize into year end? Should enter some kind of normalized comps next year?
These mix impacts come and go. There is no longer term negative mix trend underway that we can see. There were certainly some mix noise in the Q1, a little bit in the Q2 as well. But overall, we saw progress where it counts and that's in revenue per unit growth excluding the effects of fuel surcharges outside of coal.
I appreciate it. And then my follow-up relates to the coal outlook longer term. You said you saw some stabilization 12 to 18 months out. But as we look to gas capacity additions coming on in 2017 2018, do you see a need to potentially adjust your network ahead of that? Or you do not see those as representing a big threat to coal volume domestically?
Thank you.
The outlook gets cloudier the further we go out. And looking beyond 12 to 18 months, we certainly do see the potential for further incursion of gas on our network due to new gas fire generation. And yes, we will and we are currently looking at our coal related assets. Those would fall into a couple of buckets. Our coal car fleet, we had several years ago plans to replace coal cars pretty aggressively.
We've basically been able to eliminate that from our capital budget given the trend in coal volumes. Our coal track network is certainly under review as well. And we have other coal facilities that we're taking a look at looking out even beyond the 12 to 18 months.
Greatly appreciate it. Thank you.
Our next question is from the line of Tom Kim with Goldman Sachs. Please go ahead with your question.
Hi, good morning. Thanks. I had a couple of questions on Intermodal. Guess just first off on the international side, we obviously have seen that the big benefit with the West Coast port disruptions effectively being resolved. And I guess as we look forward to the second half of the year, what do you think a reasonable growth rate for international intermodal should be?
I mean, would it be safe to assume something close to GDP is sort of reasonable?
Typically, we've said that international will grow at 1 to 1.5 times GDP to the extent that there's a greater shift towards East Coast ports. Certainly at least in near term, we have the opportunity for growth that's above that.
Okay. That's really helpful. And I guess, as we look a little bit further forward and supposedly the Panama Canal expansion should be completed first half next year. I would think that this should drive more business to the Gulf in East Coast, but I'm wondering what's your perspective around the puts and takes around the intermodal side of the business? Thanks.
Did you say Gulf and the East Coast?
Yes, the U. S. Gulf and the East Coast.
Yes. We've already seen a shift as many of these vessels are using the Suez Canal to hit the East Coast and the West Coast labor disruption shifted even more. So Panama Canal could certainly help. We don't think that it's going to be a threat to our international franchise.
Okay. That makes sense. Just to clarify then, so you're basically assuming that the share shift has effectively been done given that some of the big line has already been moving capacity through the Suez?
Suez? Yes. I would say much of it has been done. There is still some that's being implemented right now, which is why we're seeing pretty strong growth in our international franchise.
All right. That's very helpful. Thank you.
Thank you. At this time, I will turn the floor back to Mr. Jim Squires for closing remarks.
All right. Well, thank you, everyone. We appreciate your participation in today's call and we look forward to speaking with you next quarter.
Thank you. This concludes today's teleconference. Thank you for your participation and you may now disconnect your lines at this time.