Norfolk Southern Corp (NSC) — Q3 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, 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, Chairman, President and CEO, Jim Squires.

Thank you, Katie. Good morning, everyone and welcome to Norfolk Southern's third 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. Earnings for the quarter were $1.49 per share, which was 17% lower than last year's record of $1.79 per share and included $0.08 per share of expenses related to restructuring initiatives. The results also reflect softness in the commodities markets, most significantly in coal, where our revenues were down 23% in the quarter. Alan, Mark and Marta will cover the various moving parts of the quarterly results momentarily, but before delving into that, let me highlight the progress we made on some longer-term initiatives during the third quarter. First, we began restructuring our Triple Crown Services subsidiary. With the restructuring, Triple Crown will focus on transporting automobile parts while NS will work with other supply chain partners to bring non-auto parts business into our conventional intermodal network. Second, our headquarters consolidation initiative is mostly complete with employees formerly in Roanoke, Virginia now working in Atlanta or Norfolk. This initiative allowed us to combine some functions while reducing management head count and G&A expenses from having three back office locations. It will give us a more cohesive and focused approach. For example, in sales and marketing where all managers not in the field are now co-located. Third, we completed the acquisition of the Delaware and Hudson Railway Company's line between Sunbury, Pennsylvania and Schenectady, New York from Canadian Pacific on September 18. This relatively small-scale but highly complementary transaction gives us full operational control of an important network segment and greatly enhances our ability to serve markets in the Northeast. Implementation has gone very smoothly. These three long-term initiatives are in addition to our ongoing and continual efforts to improve service, asset utilization and returns. In that regard, I'm pleased to report that service improved in the third quarter and we are in good shape moving into the fall season this year with the onset of winter weather just a few months away. As you will hear from Mark, key resources like crews and locomotives are reasonably well-balanced with demand right now, while at the same time we are looking hard at underutilized assets in some parts of our network. Now without further ado, I'll 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. We appreciate you taking the time to join us today. There are four significant factors influencing our 2015 revenue. First, fuel surcharges are the primary driver of the revenue decline we have been discussing since the first quarter. The third quarter marks our largest expected quarterly drop in fuel surcharge revenue with a $255 million decrease. Second, low commodity prices and the strength of the U.S. dollar adversely impacted volumes of coal, steel, frac sand, crude oil and export traffic. We estimate that almost 50% of our revenue base is tied to commodity pricing or foreign exchange rates. Additionally, inventory builds have softened freight shipments since the second quarter. Despite these challenges, international intermodal, automotive and natural gas products all had large gains in the quarter. Third, increased truck capacity, low diesel prices and service levels reduced the pace of highway conversions in 2015. We expect truck capacity to tighten, which coupled with continued improvement in rail service and Norfolk Southern's network reach, will allow us to secure additional demand moving to rail. Fourth, we've employed solid pricing as demonstrated by gains in our revenue per unit excluding fuel overall and for all three primary business groups. We achieved these positive results despite negative mix associated with declines of several commodities previously referenced and increased international intermodal. Our continued focus on pricing has allowed us to improve total revenue per unit excluding fuel each quarter this year despite continued negative mix. During contract negotiations, we focus on both price and the fuel surcharge program for the best overall long-term result for Norfolk Southern recognizing that the average duration of our contracts is in excess of three years. We have emphasized market-based price increases and will continue with this focus reflective of the long-term benefit of rail transportation. The strength of our diverse network including our intermodal and automotive system, transfer terminals and alignment with our short-line partners and the customers they reach gives us the opportunity to continue to provide ripe opportunities for growth. Our service continues to improve and as it does, and as aggregate demand strengthens, thereby negatively impacting trucking availability, we anticipate a return to strong domestic intermodal conversion in tandem with pricing strategies that are sustainable. As our business mix changes, we continue our focus on the bottom line by evaluating our network for opportunities to increase earnings per share. A good example of these strategic structuring efforts is our recently completed acquisition of the D&H South Line, streamlining operations in the Northeast and offering a more service competitive product. Similarly, we recently announced the restructuring of our Triple Crown subsidiary which will reduce revenue beginning in the fourth quarter but is expected to be accretive to our bottom line next year and allows a more efficient use of capital. Turning to the third quarter results on slide three, our revenue declined $310 million primarily due to a combined $342 million decrease in coal and fuel surcharge revenue. Focusing on our coal franchise, revenue declined by 23% due to a decrease in fuel surcharge revenue followed by lower export and utility coal volumes. Utility reductions were driven by materially lower natural gas prices that impacted the dispatch position of coal plants on our network. This, combined with stockpiles above target levels, led to a 10% decline in our utility market to 22 million tons, above our previous guidance of 20 million tons per quarter. Export coal tonnage of 3.5 million tons was challenged by weak macroeconomic conditions, low benchmark prices and the strong U.S. dollar. While risk in this market exceeds that of utility, we continue to guide to 3 million tons per quarter through 2016. Our domestic intermodal volume declined 5% due to network service challenges, lower fuel prices and increased truck capacity. Domestic intermodal pricing remains strong and despite short-term truck capacity increases and softer truck spot pricing, we maintain a long-term projection of continued pricing gains and conversions to rail due to the value of the intermodal product as service improves. Driver availability, hours of service and electronic logging devices have positively influenced pricing, leading shippers to lock in capacity for next year. Our international intermodal volume grew by 9% due to growth at both East and West Coast ports as well as freight shifting from the West to East Coast ports, taking advantage of our network reach and alignment with shipping partners. Closing with our merchandise markets, the strong dollar and low commodity price environment negatively impacted steel, frac sand, crude oil and export grain. Conversely, strong consumer spending assisted with gains in automotive, ethanol, construction materials and plastics. Lastly, volumes of natural gas liquids improved due to increased fractionator activity on our network and domestic grain shipments grew due to regional crop opportunities. Moving into the fourth quarter, we anticipate volume declines in our commodity and export markets. Sequentially, most of these markets will remain flat compared to the third quarter, although steel has the potential for further decline and export coal will likely be closer to our guidance of 3 million tons. These continued declines in commodity prices and the Triple Crown restructuring will lower fourth-quarter volumes compared to last year with the year-over-year rate of decline expected to be similar to that of the third quarter. Next year, we will clear the negative comps in the utility franchise which was influenced by significantly higher natural gas prices and stockpile replenishments in 2014. We continue with our guidance of 20 million tons of utility coal per quarter. As stated earlier, the Triple Crown restructuring will allow Triple Crown to focus on its auto parts business with NS working with our shippers and channel partners to convert as much of their business as possible to the conventional intermodal network although the footprint of Triple Crown differs from our conventional network. As Triple Crown provides a door-to-door retail service, the restructure is expected to negatively impact intermodal revenue per unit although be modestly accretive to earnings next year. Reduced fuel surcharge revenue will continue to be a headwind in the fourth quarter although we will lap this comp after the first quarter of next year. Long-term, we will continue to focus on market-based pricing gains while better aligning our fuel programs with expenses. Despite the headwinds mentioned, our customers understand the value of rail transportation and as service continues to improve, we have the opportunity for market-based price increases and to grow our franchise. We expect growth opportunities in our consumer base markets that include intermodal and automotive as well as housing and construction-related commodities, ethanol and basic chemicals. We also expect the impact of inventory builds which will have a dampening effect in the fourth quarter will lessen by the first quarter of 2016. Norfolk Southern sits at both ends of the economic spectrum, production and consumption. This diversity has helped us during economic downturns and is a continuing strength of our franchise. Today, we are seeing growth particularly in automotive and the international side of intermodal. The strong dollar is a challenge as is macroeconomic weakness overseas which contributes to lower aggregate demand. Regardless, we are well positioned in multiple strategic markets for growth. As we move forward through the fourth quarter and into 2016, we will continue to partner with our customers to pursue strategic solutions that capitalize on market opportunities that create efficiencies and improve network productivity, while generating growth beneficial to the bottom line. Thank you for your attention and I will now turn the presentation over to Mark.

Thank you, Alan, and good morning, everyone. This morning I will update everyone on our operation which continues to trend positively. Specifically, we've seen year-over-year as well as sequential improvements in our service composite, speed and terminal dwell. While we still have work to do, we are encouraged by these results. But first, let's take a look at our safety. Our reportable injury ratio was 1.05 for the first nine months of 2015 as compared to 1.19 for the same period last year. The train incidents for the first three quarters of this year were 143 versus 154 over the same period last year. Grade crossing accidents through September 2015 were 255, down from 286 over the same period in 2014. Turning to our service composite performance, we see services returning at a steady pace. We are optimistic we will continue to experience improvement as our resources are largely in place. With regard to manpower, we have a sufficient crew base. In the third quarter, we added about 200 T&E employees. We have modulated our hiring based on volume and we now expect our T&E count in the fourth quarter to be flat with the third quarter. With regard to locomotives, we have a sufficient number of locomotives to handle our business and furthermore, our locomotive availability continues to improve due to improved velocity. Lastly, our operating plan in connection with our new yard expansion in Bellevue, Ohio is fully implemented and is benefiting us across the system. Turning to the next slide, we see train speed and terminal dwell are improving as well. Our speed for the quarter improved 3% year-over-year and our dwell has improved 6%. These system improvements are important, and it's also important to note we have seen solid improvement on our Chicago to Harrisburg line. This line handles the highest volumes on our system with a heavy concentration of intermodal. Our third quarter premium intermodal speed for this route is nearly what it was in 2013, and recently that speed has actually exceeded 2013 levels. In addition to the efficiencies we're seeing with our improving operation, we're continuing to make strategic reductions associated with our decrease in coal volumes. We have made manpower reductions at our Lamberts Point Coal Pier as well as in the Central Appalachian and Northern Appalachian region which encompass all of operations not just transportation. Furthermore, we continue to make changes to some of our coal routes with the most recent affected lines highlighted on this map. We have also reduced capital spending on branch lines where we've seen lower coal mine production. These contractions to our employee counts and infrastructure have been a result of our continual efforts to match our level of investment to a changing marketplace. With that, I will now turn it over to you, Marta.

Thank you, Mark, and good morning, everyone. Slide 2 summarizes our operating results for the third quarter. As Alan has already discussed, the 10% decrease in revenues was largely related to lower fuel surcharge and to lower coal volume. Operating expenses in total declined by $134 million or 7%. Expenses benefited from significantly lower fuel prices but were unfavorably impacted by restructuring costs. The net result was an 18% reduction in income from railway operations and a 69.7 operating ratio for the quarter. The next slide shows the major components of the $134 million or 7% decrease in expenses. As I just mentioned, fuel was the primary driver of the overall reduction, and favorability in the compensation and benefits category also contributed to the decline. Before we get into the detail of the operating expenses, let's take a look at the effect of the restructuring costs on slide 4. The first column shows the Triple Crown related charges. As Alan described, our Triple Crown Services subsidiary will, beginning in mid-November, be refocused exclusively on its auto parts business. Therefore, the bulk of the road rail equipment used by Triple Crown will be surplus at that time. The $26 million shown as accelerated depreciation is the third-quarter charge for Triple Crown equipment. Turning to the Roanoke closure costs, they totaled $10 million in the quarter and consisted primarily of moving and office space expenses, which are reflected in the materials and other and in the purchased services line item. These costs added $37 million to the quarter and impacted the bottom line by $23 million or $0.08 per share. Going forward, we expect these two items to total $45 million in the fourth quarter with Triple Crown restructuring costs of $36 million and Roanoke office closure costs of approximately $9 million. Now let's take a look at the major expense line items. As shown on slide five, fuel expense decreased by $166 million or 43%, the majority of which was driven by lower fuel prices. Slide 6 details the $26 million or 4% decrease in compensation costs. Bonus and stock-based compensation expenses were lower by $51 million resulting from the decline in financial results. We expect fourth-quarter incentive compensation will be about $20 million lower than last year. Pay rate and payroll tax increases, as we discussed in the second quarter earnings call, began to moderate after July 1 and they were up $17 million and $9 million respectively. And lastly, we continue to run with a somewhat higher level of training and that expense was up $6 million. Next, materials and other cost decreased $3 million or 1%. Material usage, primarily associated with locomotive and freight cars, declined by $10 million. We also had lower derailment expenses. However, these items were partially offset by the aforementioned restructuring costs. As shown on slide 8, depreciation expense increased by $39 million or 17% due largely to the effect of accelerated depreciation of Triple Crown assets and also as a result of our larger capital base. As Jim mentioned, we completed the acquisition of the D&H line during the quarter and this increased our capital base by $215 million. Turning to slide 9, purchased services and rents were up $22 million or 5%, reflecting higher costs associated with equipment rent, engineering expenses and the Roanoke closure. As noted by Mark, velocity and terminal dwell have continued to improve, and we expect these expenses decline sequentially in the fourth quarter. Other income reflected on slide 10 rose by $7 million or 22% aided by $19 million in higher gains from sales of property offset in part by decreased returns from corporate-owned life insurance and lower coal royalty. Slide 11 depicts our income tax accruals and effective rate. The 37.6% third quarter rate is in line with our full-year guidance of 37.5%. Wrapping up our financial overview on slide 12, net income decreased by $107 million or 19%, and earnings per share was down $0.30 or 17% inclusive of the $0.08 of restructuring cost.

Thank you, Marta. As you've heard this morning, further softening in the commodities markets weighed on our third-quarter results and it has tempered our fourth-quarter outlook as well. We now expect fourth quarter volumes will decline versus last year at a rate similar to our third quarter results. This year obviously has been a challenging one. We didn't deliver the kind of improvements you and we expect. But looking to 2016, we are confident that with a reasonably stable economy and our own intense focus on service, returns and growth, we are poised for better results. Thank you for your attention, and we are now happy to take your questions.

Good morning and thanks for your time here. Obviously this is an encouraging set of results and we're certainly pleased to see the improvements on the cost side. I wanted to ask just a first-off question with regard to some of your cautious comments around the nearer-term demand outlook. How do we reconcile that with some of the increased training costs and your head count expectations nearer-term?

Tom, let me answer that first. Obviously we have some short-term headwinds in terms of the trend in commodities and business conditions generally, offset by continuing strength in some of our consumer markets. But our strategy is designed to carry us through economic cycles because it focuses on fundamentals. First, service; excellent service will allow us to increase prices and reduce cost. And second, return on capital because we are a very capital-intensive business and every dollar that we spend must have revenue and profit generation potential. And third, growth. We do want to grow our top line and see opportunities to do so even in a so-so economy. We'll do that first through price increases; second through volume growth, utilizing existing assets; and third and only as necessary, growth through capacity additions. So that in a nutshell is our strategy. We think that will carry us through changing business conditions. Now let's talk about the short-term resource picture. As I mentioned, we view key resources, crews and locomotives as essentially in balance with demand as we see it today. With that said, we are going to be nimble with resources and if business conditions change so will our resource strategy. Now, Marta, why don't you talk a little bit about the specifics around head count trends and other efficiency-related spending?

All right, sure. So Tom, we had earlier guided that we thought we would increase head count about 1,000 for the full year. But as Mark said, we're now up about 800 from the fourth quarter of last year to the third quarter of this year. As Mark said, we now do not think we're going to add that additional 200 for the end of the year so we think we're going to stay flat through this year. And looking into 2016 as Jim just described, we think that's the right level for the company.

And just on that point if I could ask maybe a bit of a longer-term question. As we've looked through your head count and overall productivity, we've seen volumes effectively peak around 2006 and volumes even against last year's levels are still below that prior peak. But your overall head count levels are still at the 2006 levels. And I guess I'm wondering is there something structurally that's changed in your book of business that requires more head count per carload or does this present perhaps an opportunity to improve productivity? And you kind of alluded to the fact that as velocity increases, you potentially have room to be actually driving productivity further. So if you could just maybe elaborate a little bit more about the longer-term outlook for us because as we think about your OR, we certainly think and hope that there is opportunity to continue to drive that down. But one of the areas I've been looking at is just on the labor productivity side and it looks like you have room there to improve. And I just wanted to get your perspective on how do I think about the longer-term opportunity there, carload to employee head count? Thank you.

Sure. Great line of questioning and we are absolutely focused on productivity and as the network velocity continues to increase, we will have opportunities to reduce head count relative to the volume trend. Now, Mark, why don't you comment on that?

Yeah, I'd be glad to and we actually started modulating our hiring on the T&E side particularly back last summer. So we've been hiring more to attrition levels ever since mid-summer and anticipate that will continue to go on, again, based on – dependent on the business volumes. But as our velocity continues to increase, there are just great things that happen with that. And aside from the customer service side which is favorably impacted as well, but those velocity increases really help us on the cost side and it helps us reduce our employment, it helps us reduce our overall asset base. We will have the advantage of picking up more locomotives as a result of that. Our expenses decrease as our asset turns increase. And another thing that we see is re-crews go down and in fact they have been going down. Even third quarter, they were down – re-crews were down 6% and we'll continue to see that trend. Our overtime was down on the T&E side, not overall, but I think we'll continue to see favorable trend on the overtime piece as well. So we'll see that in the fourth quarter. We will continue to see that going into next quarter and even things like our engineering department. As our fluidity improves, as our velocity improves, we can be more scheduled with our engineering department. They get more track time. They get out on the track when they need to be. They don't accumulate the overtime they otherwise would. So in short, improved velocity just drives a lot of good things when it comes to cost reduction.

I appreciate that detail. Thanks a lot.

Good morning. Thanks for taking my question. First, I was wondering if you could talk about the decline in domestic intermodal and particularly relative to your main competitor which saw a 15% increase in the business. So, what I was wondering is if you could quantify or help to frame any potential share losses there and whether you expect to fully recapture those volumes and over what period of time?

Sure. Alan, why don't you take Allison's question on that?

Okay. Allison, the story for our domestic intermodal franchise is one that I highlighted earlier. It's been fuel, it's been truck capacity and it's been a service product that is not conducive to shifts to rail. That's going to get fixed and we're already seeing improvements in our velocity in our intermodal and we're starting to see an uptick in our intermodal volumes. And on the domestic side, certainly on the international side, we've seen great strength this year with more volume through the East Coast and our alliance with our shipping partners who are adding more capacity from the Far East to the East Coast and we expect the same next year. So we feel very good about our intermodal franchise going forward both domestically and internationally.

Okay. And my follow-up question on coal, thinking about the RPU on an ex-fuel basis being up slightly year-over-year, could you talk about some of the dynamics there that pushed that to the positive side of the ledger? Was it mix, was it the lapping of rate cuts on the export side or a shift to fixed/variable contracts?

Sure Allison. Actually we've experienced negative mix within our coal franchise as we had a 37% decline in export, which as you know tends to be longer haul which is effectively a proxy for RPU. So despite that we've gotten increases and it's – increases in our RPU. Although very slight, it is a positive and we're going to hold onto that. But it's a function of our long-term pricing strategy in the coal markets and we feel very good next year because we're not going to have that negative comp in coal with respect to the utility franchise that we did this year.

Okay, thank you.

Hey. A follow-up question on the domestic intermodal side. In terms of the service that you're providing and I think I'm hearing you say that you're not in a position yet where you're offering a truck-like product. Is that harming you more on the length of haul? I mean, are you still very competitive on the longer stuff but it's putting pressure on the shorter length of haul where at higher diesel fuel rates you were becoming more competitive?

John, let me comment on our domestic intermodal strategy briefly and then I'll let Alan address the specifics of your question. We certainly do want to grow our domestic intermodal business and we have a service product that allows us to do that today. Can we be even better and attract even more freight from the highway? Absolutely and that's our goal. Now with that said, our growth strategy in domestic intermodal is a combination of volume growth and pricing. Pricing is absolutely critical in that franchise as it is elsewhere. And so our strategy is to grow that business as with our other businesses through price increases, through volume growth using existing assets to the maximum extent possible and last, through increases in capacity but only where necessary. Alan, what about the specifics of John's question?

John, to your question with respect to if there's a difference between length of haul and our ability to retain business or grow business through fuel, we have not seen that.

I'll get Mark to comment on some of the specific moves we've made in our coal franchise following up on his commentary. But let me just say we have fixed assets in our coal network as we do throughout our company and we are looking hard at which of those is underutilized and we will continue to do so. We have substantial fixed assets devoted to our coal franchise in the form of tracks and freight cars. One thing we can do and have done already is to begin working down the size of our coal car fleet and we can redeploy locomotives. So that's a fungible asset. This is a notoriously volatile market. We don't believe that we've seen the best days of export coal. We think that the commodity cycle eventually will turn and those assets will be fully deployed again. Mark, talk a little bit more about what we're doing in the coal fields.

Yes, more current day, we are actually – we've furloughed or are in the process of furloughing about 150 people and that is across all the departments and operations including transportation, mechanical, engineering. We have, as I mentioned in the remarks, we've got lines that we have more recently either taken out of service or have pulled back on the investment for those lines. We continue to scrub Central App as well as other areas in our coal franchise. But let's also keep in mind that we've got areas in our coal business where we've had some nice activity going on and continue to have promise for the Illinois Basin coal. So it's a bit of a mixed bag but we will continue to scrub that Central App in order to ensure that we are reducing our cost commensurate with the level of activity out there.

Thanks for your time.

Thank you. I wanted to focus a little bit on intermodal. Clearly, you've admitted you needed to get the service levels back up but it seems like that's happening. So that should be a good thing for freight as we head into 2016. However, longer-term, how do you think about investments in that network profitability of that division as it takes over a larger percentage of the business hauled?

It's good business, it's a growth opportunity and it has been the volume growth engine of the company for years and that's likely to continue given secular trends in trucking. With that said, we're going to be very judicious with our investments and make sure that they are revenue and profit maximizing which is one of the foundations of our strategy. That applies to the domestic intermodal business as it does to all other businesses we operate. We should talk a little bit about international intermodal. That's a real bright spot right now. So Alan, why don't you expand on that a little bit?

So as we discussed, it's grown in the upper mid-single digits for the year. We anticipate a continued growth along that level in the near-term future as more volume matriculates over to the East Coast from the West Coast and folks with whom we've aligned are adding capacity into the East Coast and it allows us to build a lot of revenue density in our trains and so it makes for very efficient movement. And so it's – we're excited about that and the growth opportunities and the returns that that provides.

Is there any way to quantify how much of that freight that moved over to the East Coast is sticky and how much either went back or will go back after this year?

Yes, some of it has definitely gone back. There is absolutely no doubt about that but still East Coast volumes are up. And as the Panama Canal widens, we're going to see even more larger ships hitting the East Coast which are going to need to make multiple ports of call to discharge their cargoes. And so that's going to have a benefit for the ports that we serve all up and down the East Coast.

Are we going to see more on dock rail at some of the ports do you think as that business comes in?

At least one of the ports has announced that, an infrastructure plan for that.

Okay. Gentlemen, thank you for your time.

Yeah. Good morning. I wanted to see if – Mark, I think in the past you have talked about productivity targets and I know with big changes in volumes that it's an operating leverage effect. But what do you think the kind of productivity number is that you might achieve this year and how would you frame that opportunity for next year in terms of how you would define productivity? I think in the past you've said something around $100 million. So, I wonder if you could offer some thoughts on that topic?

I'll take that one, Tom. We absolutely have productivity opportunities as we've been through this morning and as the network picks up speed, we will start to throw off a lot of productivity. And we're also working on a number of business process initiatives and capital utilization initiatives that should lead to productivity benefits. All of that should add up to a sizable offset to volumetric and inflationary pressure on our expenses particularly next year when operations are really humming.

Okay. Let's see, and then, in terms of coal, how do we think about the – I think you commented, Alan, that coal stockpiles are above target. I don't know if you could comment on maybe how far above target and whether that's a source of risk to your 20 million tons per quarter view that it's possible a couple quarters you run below that to get the stockpiles down and then you get back to that 20 million tons a quarter. But just some thoughts on coal related to stockpiles.

Yeah, that's a good question, Tom. We've actually seen stockpiles decrease in this quarter even though we exceeded our guidance by about 10%. So while stockpiles do have an impact, it so far has not negatively impacted our ability to hit our targets. Right now, Tom, we're estimating that stockpiles are about 15 days above target. I would say about five days in the South and about 25 days in the North.

Hey, thanks. Another one here on coal. It looks like the tons per car increased significantly in the third quarter up to about 112. Can you give us a sense what's driving that? Has this been the result of changes in the network or is this merely business mix because we haven't been at this level for a long time?

We are always focused on tons per car because we – in the coal network, we are paid by tons. And so any time you can improve the revenue density on a coal train, it's very beneficial for us. One of the factors that impacted the improvement in tons per car immediately in the third quarter was a continued decline in export volume. Metallurgical volume to the ports typically has a lower tons per car than utility volume.

Got it. I guess we should be thinking about something around these levels looking forward given some of the challenges that are impacting the export book of business?

To the extent that mix stays the same, yes. To the extent that we're continuing to work with our producers to get the optimum load level on the number of cars per train, then we'll improve the profitability of the individual trains.

We feel good about it and we feel good about what we've accomplished so far, recognizing we have room to grow. Our RPU ex-fuel has grown each quarter of this year, and our customers are taking a long-term view of this and they are recognizing the long-term value of rail transportation, and frankly, when service is back to where we want it to be, and we're making great strides to get there, then intermodal is a very easy sell even with a tightening between the truck market and intermodal pricing. And lastly, I'll add that we're taking a long-term view of this. And as Jim talked about, we're going to grow via price and we're going to grow via utilizing existing capacity. And any additional investment that would require is going to have to generate an acceptable level of return.

Service led price increases are a key component of our strategy, and that applies to our domestic intermodal segment as well as all other segments of our business.

Yeah. Rob, as you know, spot pricing has gone down in the trucking industry but contract pricing is still up year-over-year. Now it's moderated but it's still up because shippers are concerned about long-term truck capacity. So that certainly plays into the thesis for the value of rail transportation.

Yeah. Thanks and good morning, everybody. I just wanted to ask about coal, specifically related to your 20 million ton per quarter run rate going forward guidance. It would imply something flattish with what you saw in 2015, a little bit more optimistic than the other railroads. Just wondering if you could help us maybe from a bottoms-up perspective how you get there, how much of that might be under contract, because I am contrasting it with some pretty dire commentary from CONSOL and Peabody and other coal companies yesterday and earlier in the week about the outlook for domestic coal. So I'm just wondering, be it mix shift, be it certain contracts you've secured, how you're confident that the coal volumes at 20 million tons per quarter will be flattish in 2016. Some help there would be great.

Okay. So we've – if you think about the current natural gas environment, most of the conversions from coal to gas have already occurred – would have already occurred. So natural gas I know right now is close to $2 per million BTU, but the futures curve for next year is about $2.65 on average, which is pretty similar to where we were in 2012. So we can model our volumes at the plants and the units that we serve versus 2012. We also know that most of the near-term environmental headwinds associated with MATS, we've already been impacted by that and so that's not going to be a headwind going forward. Now longer term, the clean coal plant will potentially have an impact, and we are working with our customers to try to completely understand that and run scenarios within our own planning horizon. But through 2016, based on our conversations with our customers and modeling how their plants performed in 2012, we feel good about our volumes of 20 million tons per quarter.

Understood. I guess my follow-up would be just if you could provide – Triple Crown has had an interesting evolution under the Norfolk umbrella. If you could just refresh us in terms of the rationale for the restructuring, the focus on auto parts and your commentary was interesting on how it would be mildly accretive next year. Can you just help us get from where the thought process was on Triple Crown say a year or two ago to why this restructuring makes sense and tactically what's going to drive that accretion or efficiency or productivity relative to those assets? Thanks.

The strategy involves focusing Triple Crown on what Triple Crown does best, and that's transport auto parts and re-channeling with other supply chain partners non-auto parts business into the conventional intermodal network where those customers and that volume can enjoy maximum efficiencies.

Matt, you'll recall Triple Crown was originally an auto parts network.

Right. So this is just after a little bit of scope creep, it's just doubling down on the core competency of the business...

It's going to improve our capital utilization by re-channeling as much of the other business, the freight all kinds, into our existing intermodal network where we already have the capacity.

Understood. Thank you for the time.