Norfolk Southern Corp (NSC) — Q2 2015 Earnings Call Transcript

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 norfolksouthern.com 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 second quarter 2015 earnings conference call. With me today are our Chief Marketing Officer, Alan Shaw; our Chief Operating Officer, Mark Manion; and our Chief Financial Officer, Marta Stewart. Now, let's go straight to the financial results. Our reported second quarter earnings were $1.41 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 undergoes a significant change. Our intermodal volumes topped last year's second quarter record levels. And our merchandise 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 first quarter. Alan will provide more detail on our revenue for the second quarter and outlook for the remainder of 2015. I'm proud to report that our service improved significantly during the second quarter. Our composite service metric, an 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 2012 and 2013. 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 will return with some closing comments before taking your questions.

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 second quarter 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 the economics will continue the momentum of highway conversions to 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 within 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, our coal 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 cost. 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 pursue strategic and innovative solutions in partnership with our customers, allowing NS to capitalize on these market opportunities that 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 opportunity for future growth. Now, let's turn to our second quarter performance. Marta will provide complete quarterly financial results later on the call, but I would like to discuss operating revenue as you can see on slide three. Overall, you will note the negative impact of the declining 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 four, you will note that facing very strong comparisons with second quarter 2014, the 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% to $453 million for the quarter with revenue per unit down 14%. Low natural gas prices depressed Eastern coal burn by 15% in the first two months of the second quarter, which reduced utility coal volume by 23%. A strong dollar and global oversupply led to a 38% decline in export coal volumes. As shown on slide six, coal market conditions will continue to challenge our coal volumes for the remainder of 2015. Natural gas price projections below $3 per million BTU have 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 million 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 million tons per quarter. Moving to our intermodal markets, pricing gains continue to create an improvement in revenue per unit excluding fuel. Domestic volumes 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 eight, 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 in natural gas liquids from Marcellus-Utica shale plays. 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 third quarter and fourth 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, and our international volumes will benefit from organic growth at East Coast ports. Longer-term, truck capacity constraints coupled with the increasing demand in economics will drive highway conversions. In the energy markets, we anticipate more corn and ethanol shipments due to rising levels of gasoline 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 the decline in 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 second 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'd turn the corner with our service and we expected the service composite performance to be near 80% by the end of the quarter. For the month of June, we operated in the mid-90%s 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 first quarter to second quarter, and again from second quarter to third quarter. 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 seven consecutive weeks, which has not happened since July 2014. Our resources have come online as expected and we are consequently seeing our metrics improve in 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 quarter and second quarter where we were replenishing locations where we were shorthanded. We're continuing to fill in shortage areas in the third quarter, 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 SD90MACs. In addition, the 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 for the locomotives left operating. In closing, we're very encouraged that 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 second quarter financials. Slide two presents our operating results where we faced strong headwinds compared with the record-setting second quarter of 2014. As Alan discussed, the effects of sustained lower fuel surcharges and continuing challenges in the coal markets drove operating revenues down $329 million or 11%. Nearly three-quarters of the revenue decline was due to lower fuel revenue, which totaled $119 million for the second quarter and based on current oil price forecast, is expected to be a similar amount for both the third quarter and the fourth quarter. Operating expenses declined by $124 million, which only partially offset the lower revenues resulting in a 20% reduction in income from railway operations and a 70% operating ratio. The next slide shows the major components of the $124 million or 6% net decrease in expenses. Total operating cost benefited from lower fuel prices and favorability in the materials and other categories. Now, let's take a look at each of these areas. As shown on slide four, fuel expense decreased by $153 million or 38%. A lower average price accounted for most of the decline. Reduced consumption added another $5 million of favorability as gallons used were down 1.5% on the 2% decline in overall volume. Materials and other costs shown on the next slide decreased by $13 million or 5%. Lower environmental expenses and favorable personal injury experience totaled $20 million for the quarter. Additionally, material usage, primarily for locomotives, declined by $7 million. Partially offsetting these decreases were increased travel and relocation expenses. Going forward, we expect continued favorability related to locomotive materials in the third quarter. 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 million in the second quarter related to Roanoke relocations, and we expect to incur an additional $30 million over the remainder of the year with the majority of these costs affecting the third quarter. Moving on to purchased services and rents expense, our costs increased by $24 million or 6%. Higher volume-related and service recovery costs, primarily associated with intermodal operations, equipment rents, and joint facilities combined to account for $20 million of the increase, of which we estimate about $5 million was related to the service recovery effort. Expenses associated with software costs were also higher in the quarter. Slide seven details the $9 million or 1% increase in compensation cost. 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 million but will begin to moderate in the second half of the year to around $17 million per quarter. The payroll tax increase was $13 million and should moderate to about $8 million per quarter. The next two items were largely service recovery-related. An increased number of trainees accounted for $10 million 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 million 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 $47 million and driven by the decline in financial results. Next is depreciation expense, which increased by $9 million 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 million or about 5%. Two-thirds of the reductions are related to work on our line of road and one-third is related to equipment. Slide nine presents our income taxes for the quarter, which had an effective rate of 38.1% compared to 37.4% in 2014. The slight increase in the effective rate is principally related to lower returns on corporate-owned life insurance. Assuming normalized returns on these assets in the second half of the year, we expect the full year rate to be about 37.5%. Slide 10 shows our bottom-line results with net income of $433 million, down 23% compared with 2014, and diluted earnings per share of $1.41, down 21% versus last year. Wrapping up our financial overview on slide 11, cash from operations for the first six months was $1.5 billion covering capital spending and producing $587 million in free cash flow. With respect to stockholder returns, we repurchased $765 million of our shares year-to-date and paid $360 million in dividend. 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 third quarter and to some extent in the fourth quarter from lower coal volumes and lower fuel surcharge revenues. On the positive side, we expect service will continue to improve and better service will help us grow. As we pursue growth in a changing mix environment, we're working to improve our train performance by further 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 continue to capitalize on market opportunities that enhance our network capacity and efficiency as with our pending acquisition of rail lines from the Delaware & 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, and 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.

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 – we expect that trend to continue in the second half as well, in the third quarter 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 second quarter would be $25 million. And it turns out that that estimate was pretty much dead on. We – most of that – we estimate that most of that is in compensation and benefits. $15 million of the $25 million is there. I talked about the two major things in that $15 million. And that is the higher-than-usual level of trainees, which we expect some of that to continue into the third quarter and the other one is additional labor hours. The remaining $10 million of service-recovery costs are scattered in various categories in about $3 million to $4 million increments. We have a little bit more fuel than we would have had otherwise. Our equipment rents were impacted by about $3 million due to the velocity, and then purchase services and travel cost. So those are all the components of the $25 million. Going forward, Allison, we think that we will just have about $5 million of that hanging over into the third quarter. 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 second quarter? And do you have any sense of what you're thinking for this in the second half?

Hey, Allison, this is Alan. The split was about three-quarters met, and one-quarter steam thermal coal. And going forward, we've got it down to about 3 million tons per quarter, and it's going to be a function of foreign exchange rates and the two indices that we watch closely, which are the Queensland Coking Coal for met and then the API 2 for thermal.

Okay. Excellent. Thank you so much for the time.

Good morning. It's Alex Vecchio in for Bill. So you mentioned that you expect the domestic utility coal to run about 20 million tons per quarter and you lowered the export coal run rate to about 3 million tons. 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 2015? 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'll 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 think slightly up was 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 fourth quarter?

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.

Hey. Thanks. Morning.

Morning, Scott.

So, Marta, 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 second quarter is the bottom for earnings and we should see sequential earnings improvement from second quarter to third quarter or if maybe from a margin standpoint, we see less of a margin headwind from – in third quarter than we did in second quarter, if you feel comfortable there. And then maybe specifically on the $47 million of lower incentive and stock-based comp, do you have any rough guidance on that for the third quarter and fourth quarter?

Okay. Well, let me start with the second question first. The stock-based comp did have a very large decrease in the second quarter of this year, and that's primarily because of the comp with the second quarter of last year. As you know, that was an all-time high quarter for us and so the accruals that quarter were very high, therefore, the relative comparisons. Going forward into the third quarter and fourth quarter, we think we still will have favorable comparisons in that line item, but they won't be to the degree they were in the second quarter. 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.

Yeah. Volume comps will improve as we get deeper into the 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 five 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. Yeah. I think you put your finger on the issue in the second quarter 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 real cost inflation.

Okay. Thank you, guys.

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 million drag to the $5 million 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 and June. And we think that we'll continue to see improvement as the velocity of the railroad picks up and obviously helps the crew starts. We really, in a big way, reduced our re-crews these last couple of months. We feel that trend will continue.

All right. Very well. And then, lastly, as my follow-up, the other rails have all – as part of their earnings announcements – have been pretty vocal about furloughs and locomotives and 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 so you haven't yet started that? And the same thing on locos, I mean, it sounds like you 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?

Yeah. 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'll help us do that. On the crews 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 this, 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 – and we will probably see – we're beginning to see indications 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 towards 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. 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 second quarter by reducing our capital spending for the year as Marta mentioned now, and we're doing so without hurting the long-term prospects of the enterprise or really disrupting our reinvestment plan. But we certainly can modulate resources and we will if necessary.

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 is – 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% in the second quarter. 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 or how you see that opportunity playing out.

So, we have previously guided to a full year share buyback of $1.2 billion, and we're still on track for that.

Okay. So that's the way we should think about the back half.

That's correct.

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 second quarter. 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?

Yeah. Number one, we are facing pretty difficult comps. Our intermodal franchise grew 11% in the second quarter 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 price is going to look like. We are seeing really strong growth on our internationals 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 that 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 moved into the East Coast ports while it was in the very low-30% will probably move up to 33%, 34%. So there's growth opportunity for our East Coast ports.

I think you alluded to the fact that your relocation cost for Roanoke was $5 million in the quarter. And I think you said you expect $30 million 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 million in the second quarter, we only expect $5 million of those as we work through our higher levels of trainees to remain in the third quarter. So you should expect the others to fall off: the extra overtime, the extra re-crews 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 cost, it should look okay compared to 2Q then?

Yes.

Yeah. Good morning. So, I wanted to focus a little more on seasonality now that you've reported a full quarter with the fuel surcharge headwind, and presumably as steep as it can get with the WTI-based programs with the $64 trigger now at zero. 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, second half is consistently seasonally stronger than the first half for you guys. But the Street consensus is modeling second half versus first half earnings increased at a pretty steep level. It looks like the steepest since 2009. So, just from a high level, do you think – are you looking for an above seasonal outcome in the second half year?

Well, Bascome, 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 third quarter. Fuel surcharge revenue in the third quarter of last year was still running strong, just below second quarter fuel surcharge levels in 2014 – pardon me, just above, so actually, it's a little bit tougher headwind in the third quarter. 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?

Yeah. I think that we are going to see – we'll have better comps in the fourth quarter with respect to volume than we will in the third quarter. And we're still right now exposed to foreign exchange risk and the prices – mainly the commodities that we handle, and we see that with coal and with coal, crude oil, and steel right now.

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 that, 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.

Alan, why don't you comment on that?

Yeah. As we take a look at our second quarter domestic intermodal business, I think the headwinds and the factors that limited our growth are temporary. Number one is the West Coast port issue. As you were probably aware, much of or a high percentage of the volume that comes in the West Coast in 40-foot containers gets re-stuffed into 53-foot boxes and moves transcon, anywhere between 25% and 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 due to service, it limited our ability to grow. And we're working hard, we're improving our service, and we think that will be behind us.

And do you think that some of the pricing initiatives that you guys kind of undertook did 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, it's just the overall healthy environment for pricing and the truck market right now. It's just not growing as much as it did this time last year.

Okay. That's helpful. And then just one last follow-up. Could you break down the domestic utility coal growth compared to the industrial coal outs? Any color here would be helpful. Thank you.

Yes. Certainly, we expect to have the domestic utility at 20 million run rate, and the industrial is obviously running lower than that, but we don't have the exact split at this time.

Thanks for taking my question. Just wanted to get some perspective on service improvements. Can you give us an update on the progress you've made in boosting your velocity and your on-time performance? How does the service trends compare to last year? Are you seeing any improvement?

Yes. I think we've made some nice strides, and everything is heading in the right direction. Train speeds are improving, and our terminal dwell is below where it was last year as well. You’re right to cite those measures as a benchmark for our operations to improve, and we’re on track for that.

Just a quick question on the coal market. Can you provide an update on your expectations on coal production in the back half of the year? Are you still looking for some improvement in coal volumes as we head into fall?

Yes. We still maintain our guidance of 20 million tons on domestic utility coal. However, there are seasonal effects, especially in the winter months that can severely affect those volumes.

Thank you for taking the questions. Jim, could you elaborate on how you see the coal business evolving? There’s been a lot of discussion around the energy transition and the associated changes in demand.

Certainly, the coal business is going to continue to face headwinds, but we do expect stabilization. Our strategic focus is on adapting our services in the best way possible to align with market fluctuations in coal demands. We're enhancing operations to ensure that we remain competitive in both coal and intermodal.